Par Pacific - Q2 2024

Transcript

Operator (participant)

Good day and welcome to the Par Pacific Q2 2024 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal "Conference Specialist" by pressing the star key, followed by zero. After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press the star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note that this event is being recorded. I would now like to turn the conference over to Ashimi Patel, Vice President of Investor Relations. Please go ahead.

Ashimi Patel (Head of Investor Relations)

Thank you, Cole. Welcome to Par Pacific Q2 Earnings Conference Call. Joining me today are Will Monteleone, President and Chief Executive Officer; Richard Creamer, EVP of Refining and Logistics; and Shawn Flores, SVP and Chief Financial Officer. Before we begin, note that our comments today may include forward-looking statements. Any forward-looking statements are subject to change and are not guarantees of future performance or events. They are subject to risks and uncertainties, and actual results may differ materially from these forward-looking statements. Accordingly, investors should not place undue reliance on forward-looking statements, and we disclaim any obligations to update or revise them. I refer you to our investor presentation on our website and to our filings with the SEC for non-GAAP reconciliations and additional information. I'll now turn the call over to our President and Chief Executive Officer, Will Monteleone.

William Monteleone (President and CEO)

Thank you, Ashimi, and good morning, everyone. Q2 Adjusted EBITDA was $82 million, and adjusted net income was $0.49 per share. These financial results reflect strong reliability and crisp planned maintenance execution. Notably, the Billings turnaround planning and performance was excellent. In addition, our retail and logistics segments continue to deliver steady earnings. The completion of the Billings maintenance positions us to push utilization rates in the Q3 in order to meet market demand. Each of our markets is short refined product in the summer months, requiring long-haul imports to balance supply and demand. Shifting to the broader refining environment, global product inventories are approaching the lower end of the 5 year range. The combination of elevated utilization rates and relatively flat refined product demand have allowed for modest inventory restocking. Margins have responded and are near mid-cycle levels in most regions.

Regional dynamics in PADD-4 have largely returned to typical premiums versus the Gulf Coast. However, the Southern Rockies has been slightly less attractive as excess Midcontinent inventories have pressured markets like Denver and Rapid City. Our retail brands continue to gain market share with same-store fuel and merchandise sales growth of 1.3% and 1.8%, respectively. The retail team is focused on growing food service gross margin, enhancing systems to better manage in-store costs, and building a pipeline of remodel and new-to-industry sites. Our young brands continue to be well received in the local markets we serve. On the strategic front, our growth initiatives are progressing. Billings reliability initiatives are delivering encouraging early results. In Hawaii, our renewable hydrotreater conversion is on budget, and the renewable fuel cogeneration project is progressing towards a potential power purchase agreement with Hawaiian Electric.

On the financial side, we further reduced our cost of debt capital, and we repurchased more than $65 million of our stock. Our balance sheet remains strong, affording us the flexibility to both opportunistically repurchase stock and pursue our strategic objectives. In closing, we are focused on safe and reliable operations and crisp project execution. While the margin environment is moderated, focus on these key areas will allow us to generate strong free cash flow and healthy returns through the cycle. I'll now turn the call over to Richard to discuss our refining and logistics operations.

Richard Creamer (EVP of Refining and Logistics)

Thank you, Will. The refining segment Q2 combined throughput was on plan at 180,000 barrels per day. In Hawaii, throughput was 81,000 barrels per day, and production costs were $4.50 per barrel. Refinery operations performed well, delivering 99% operational availability. With Hawaii's consistent throughput and strong catalyst performance, we will be extending the scheduled 2025 turnaround into 2026. Shifting to Wyoming, throughput was a new record of 19,900 barrels per day, and production costs were $7.08 per barrel. This represents great work by the Wyoming team to sustain nameplate capacity throughout the quarter. Moving to Washington, Q2 throughput was 41,000 barrels per day, and production costs were $3.66 per barrel. The Washington team did an excellent job of safely restarting in April, following their planned outage in March.

Finally, I'm pleased to report that the Billings executed one of their largest turnarounds on record, successfully meeting all health, safety, and environmental targets, and, as Will stated, finishing on schedule and on budget. The plant restart went well and has met or exceeded all operational objectives. Given the turnaround downtime in Billings, Q2 throughput and production costs were 38,000 barrels per day and $16.18 per barrel. We do have planned maintenance of the Billings coker in the Q3, and Shawn will cover those financials. Looking to the Q3, we expect throughput in Hawaii between 78,000 and 82,000 barrels per day, Wyoming between 18,000 and 20,000, Washington between 38,000 and 41,000, and Billings between 55,000 and 59,000, resulting in system-wide throughput between 190,000 and 200,000 barrels per day. I'll now turn the call over to Shawn to cover the financial results.

Shawn Flores (SVP and CFO)

Thank you, Richard. Q2 adjusted EBITDA and adjusted earnings were $82 million and $29 million, or $0.49 per share. The refining segment reported adjusted EBITDA of $60 million compared to $81 million in the Q1. In Hawaii, the Singapore index averaged $12.49 per barrel, and our landing crude differential was $5.08, resulting in a combined index of $7.41 per barrel. Hawaii margin capture was 136%, including a product crack hedge gain of $12 million and continued margin support from elevated clean product freight. Looking ahead to the Q3, we expect the Hawaii crude differential to land between $6.25 and $6.75 per barrel, and we have hedged approximately 10% of our Q3 sales at an average crack of $18 per barrel. In Billings, our U.S. Gulf Coast index averaged $17.93 per barrel.

Gross margin capture was 94%, reflecting seasonally strong clean product differentials in the Upper Rockies and benefits from our lag cost of crude differentials. Offsetting the improved margin backdrop was an approximate $25 million impact from the crude unit turnaround activities, driven by reduced clean product sales and higher purchase product. Looking ahead to the Q3 in Billings, clean product premiums to the Gulf Coast remain strong, trending slightly above Q2 levels quarter to date. Cost of crude differentials in the Q3 are expected to increase by approximately $5 per barrel, reflecting tighter heavy and light crude differentials during the Q2. As a reminder, feedstock costs in Billings will typically lag prompt crude pricing by one quarter under our FIFO inventory accounting. Q3 operating costs will reflect an incremental $7 million to 8 million related to the maintenance activities on the coker unit.

In Wyoming, capture to the Gulf Coast index was 82%, reflecting softer premiums in the Southern Rockies. Local demand continues to strengthen into the Q3, and clean product spreads to the Gulf Coast have returned to typical summer levels. Lastly, in Washington, the PNW index averaged 22.54 per barrel in the Q2. Margin capture was 21%, driven by narrow heavy crude differentials and lower secondary product margins. Looking ahead, quarter to date, heavy crude diffs have widened $3 per barrel, which is expected to provide more immediate benefits to Washington under LIFO accounting. Prompt secondary product margins have also improved with the recent decline in flat price. The logistics segment reported Adjusted EBITDA of $26 million in the Q2 compared to $28 million in the Q1, down slightly due to reduced pipeline throughput related to the Billings turnaround.

Our retail segment reported adjusted EBITDA of $19 million during the Q2 compared to $14 million in the Q1. Strong retail performance was driven by expanded fuel margins and continued growth in same-store fuel volumes and merchandise revenue. Corporate expenses and adjusted EBITDA were $23 million in the Q2 compared to $29 million in the Q1. Reduced costs were driven by lower renewable development activity and employee costs. Net cash used in operations during the Q2 totaled $5 million, including a $61 million working capital outflow related to a temporary increase in inventories and deferred turnaround expenditures of $29 million. Excluding these items, cash from operations was $85 million during the Q2. Cash used in investing activities totaled $35 million, including $37 million of capital expenditures, partially offset by a $1.5 million annual tax distribution from Laramie.

Moving to financing activities, we recently completed the working capital refinancing in Hawaii, replacing the legacy inventory intermediation with a combination of borrowings under the expanded ABL and a crude-only intermediation. In connection with the refinancing, total intermediation liabilities decreased by $412 million, offset by an increase in ABL funding of $420 million. As previously announced, the Hawaii refinancing is expected to reduce funding costs by approximately $10 million per year. We continued our opportunistic approach to share repurchases with $66 million during the Q2 and $116 million year to date through August 5th. Since completing the Billings acquisition last June, we have repurchased a total of 5.6 million shares, or equivalent to 10% of our current shares outstanding. Total liquidity as of June 30th was $520 million, made up of $180 million in cash and $340 million in availability.

With a strong balance sheet, we are well positioned to advance our strategic growth priorities while maintaining an opportunistic approach to share repurchases. This concludes our prepared remarks. Operator will turn it to you for Q&A.

Operator (participant)

Thank you. At this time, we will now begin the Q&A session. If you would like to ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we'll pause momentarily for the first question. Our first question today will come from Neil Mehta with Goldman Sachs. Go ahead.

Adam Wijaya (Energy Sector Specialist)

Good morning, team, and thank you for taking my questions. This is Adam Wijaya, on for Neil Mehta. Wanted to first get your thoughts on Singapore margins, and a key area of focus in our recent conversations that's centered around more disappointing Asia demand and, as a result, Singapore margins. It looks like, based on the spot market indicators, we've seen a tick up in margins over recent weeks. So what are you guys seeing in terms of real-time demand, and then how do you see that margin environment evolving over the coming months? Thank you.

William Monteleone (President and CEO)

Sure, Adam. Good morning. So I think on the Singapore front, you know, we're probably hovering between $11 to $13 a barrel for the Singapore 3-1-2, and I think those are levels we'd characterize as mid-cycle. You know, I think on the supply side, you're looking at levels where the simpler refining fleet in Asia is up against negative gross margins. So I think you have some supply-side support with respect to where the clean product margins are, and I think, importantly, where secondary products are trading, like fuel oil and naphtha. I think, importantly, I think you've seen limited exports of refined product out of China, despite some of the concerns on the demand side. And ultimately, I still think you're seeing the world operated in a connected fashion where barrels are arbitraging between Asia and Northwest Europe.

So again, I think that's the net driver of ultimate refining throughput in the Northeast Asian market. And, you know, no major changes, and with elevated freight impacting both inputs and the cost of arbitrage, I think the supply side has limited incentive to ratchet rates up further.

Adam Wijaya (Energy Sector Specialist)

Got it. Okay, that's super helpful. And then I guess my next question is just on capital returns. The buyback number came in really strong this quarter, which is good to see, and good to see continued progress on the buybacks thus far into Q3. So I wanted to get the team's updated thoughts on capital returns expectations in the context of the current refining margin environment, then also where the share prices as well. Thank you.

William Monteleone (President and CEO)

Sure, Adam. So I think on the share repurchase cadence, I think we'll remain opportunistic in how we think about it. And ultimately, our approach is going to be influenced by our cash generation, our outlook, the share price relative to our view of intrinsic value, and ultimately our liquidity position. So we'll continue to look at all those factors and ultimately work to deliver a share repurchase cadence that I think is consistent with driving maximum shareholder returns.

Adam Wijaya (Energy Sector Specialist)

Got it. Super helpful. Thank you.

Operator (participant)

Once again, if you would like to ask a question, please press star then one. Our next question will come from John Royall with JPMorgan. Please go ahead.

John Royall (Executive Director)

Hi, good morning. Thanks for taking my question. My first question is on Billings. You've got the 2024 work now behind you, and it sounds like it went quite well. Can you talk about the work you have scheduled for 2025 and how it compares in scope and in cost to this year's work?

William Monteleone (President and CEO)

Sure, John. I think as we've messaged, our intent with Billings is really over the course of 2024 and 2025 to turn around every major unit in the refinery. And again, the major work that was completed this year was a first step in the right direction. I think ultimately, when you look at our expected amortized turnaround cycle in Billings, it's about $120 million over a roughly 4 to 5 year period. And so again, I think you can expect for us to spend the total amount between 2024 and 2025 in that range. And there's probably an incremental $10 million to 20 million of work that we're focusing on to ensure that we get a solid runtime out of the cat-cracker, which is the major focus area for 2025.

John Royall (Executive Director)

Great. Thank you. And then just sticking with the Rockies region, I was hoping for a little more color on the drivers of the crack basis between Rockies and Gulf Coast and how that's improved and maybe your expectations for the second half. And in particular, Will noted the Southern market not doing quite as well. If you can just give some more detail on that bifurcation you're seeing there, that'd be helpful.

Shawn Flores (SVP and CFO)

Sure. So I think ultimately, you know, the Southern Rockies has a fair amount of interconnectivity with the Midcontinent. And I think, you know, our observation would be in, you know, June and July while you typically expect to see significant railborne imports into the Southern Rockies. You know, ultimately, we didn't see the spreads that you would typically expect in those markets. As you've moved later into July into August, I would say it's beginning to normalize to higher levels. That would be more consistent with railborne imports into PADD 4 to balance supply and demand during peak demand season. The Northern Rockies, again, I think, has more principally served by rail. And ultimately, demand seasonality is more pronounced, I think, in the Northern Rockies. So I think those are the biggest factors that are driving the distinctions and differences.

Ultimately, I think we're seeing good demand across our system. You know, ultimately, you're still seeing demand well in excess of supply in the summer periods.

Operator (participant)

Thank you. And our next question will come from Jason Gabelman with TD Cowen. Please go ahead.

Jason Gabelman (Director and Equity Research Analyst)

Yeah, good morning. Thanks for taking my questions. I wanted to go back to Billings. And it sounded like I just wanted to confirm there was going to be some work on the Coker in Q3 2024, if I heard correctly. Was that part of the initial plan for this year, or was that related to something you perhaps saw while you had the asset down in Q2 2024 and had to expect that to impact capture in Q3 2024?

Shawn Flores (SVP and CFO)

Sure, Jason. So this is consistent with our plan. It impacts OpEx, not CapEx and turnarounds. And again, this is largely due to the typical maintenance cycle lengths on our fluid coker. So ultimately, this is something that is going to be a 9 to 18 month interval. And we did accelerate the downtime based on some performance, but I wouldn't say it was a material reduction in the planned runtime. So again, this is a really 9 to 18 month impact. And so I think you should really spread out those costs over that time frame and think about it as an amortized cost for running that unit.

Jason Gabelman (Director and Equity Research Analyst)

Okay. And then, you know, you have exposure to West Coast cracks, both from Washington and then what you export from Hawaii to the West Coast. Can you just remind us on specifically Hawaii what that exposure is and how that impacted your results in Q2 and kind of how you're thinking about that impacting your results in Q3?

William Monteleone (President and CEO)

Sure. You know, Jason, I don't think it'd be appropriate to specifically provide a percentage on our, you know, contract index exposure, but I would tell you that, you know, Hawaii does have a smaller percentage influence by the Pacific Northwest and Los Angeles markets. So again, I think Singapore is the main factor, and that's why the index for Hawaii is set based on Singapore. That said, we are observing, you know, really the unusual weakness in the West Coast margin environment that's reflected in our PNW index, especially for summer periods. Again, I think that has more to do with influx of refined product imports in the May time frame that, when you look at them on a standalone basis, appear to be very uneconomic given where the market's trended. And again, that's a very difficult arbitrage to capture value.

And ultimately, you know, when you look forward, the quantity of imports appears to be reducing, particularly on the gasoline side of the equation. That said, I think the West Coast is in a challenging environment given the material increases in renewable diesel into the market and the marginal barrel of conventional petroleum diesel being exported consistently. So again, I think, you know, we're in a good position as a low-cost operator in Washington and ultimately are well positioned with our Hawaii business to capture opportunities when they emerge.

Jason Gabelman (Director and Equity Research Analyst)

Okay, great. If I could just sneak one more in, you know, as you've observed Billings and gone through the first major turnaround, how do you think about M&A moving forward? It sounds like you're still growing the retail business. There's been some public activity from one of your peers there. Are you still a buyer of retail and just broadly on the M&A environment?

William Monteleone (President and CEO)

Sure. So I think, you know, we've grown our business over the years through an active M&A program. And ultimately, I think it's one of our core competencies. That said, I think we're disciplined and thoughtful on value at all times. And I think we'll continue to weigh really the opportunity for us to redeploy capital to repurchase our shares as well as additional retail store development and really the opportunities to invest in organic projects inside of our existing refining fleet to improve the efficiency of our operations. We'll weigh all those pieces and evaluate the opportunity set and I think try and make the most thoughtful capital allocation decision. So again, I think it will remain dynamic. I would say ultimately the M&A market is still highly influenced by the last 24 months, which I think makes it difficult for a buyer and seller to agree on value.

That said, given the outlook, you know, I think you're likely to see a more rational framework emerge as, you know, concerns of or the return towards mid-cycle environment becomes more evident.

Jason Gabelman (Director and Equity Research Analyst)

Got it. Makes sense. Thanks for the color.

Operator (participant)

Our next question will come from Matthew Blair with TPH. Please go ahead.

Matthew Blair (Managing Director of Refiners, Chemicals, and Renewable Fuels Research)

Thank you and good morning. On the refining side, could you talk about WCS availability on the West Coast with TMX starting up? And for your Washington refinery, is that still entirely sourced by rail supply arrangement, or have you started running some of these TMX WCS barrels at Washington?

William Monteleone (President and CEO)

Sure, Matthew. Thanks for the question. So we are seeing increasing availability of Canadian grades along the West Coast. And I think ultimately in Washington, we do have the capability to receive waterborne cargoes. And so we do have a great logistics system there that affords us the flexibility to both deliver rail as well as waterborne. Ultimately, I think the WCS market, or the availability of Canadian crude, is beginning to impact ANS pricing and, you know, broader West Coast crude alternatives. We are seeing, you know, lighter Canadian grades offered. And I think that's, you know, presenting a new opportunity for our Hawaii business. Again, I think that's going to be dynamic over time. I think the winter period will be a good test as, you know, really the first cargo's loaded in May. And you've seen volumes increase as we've gotten to June.

But I think that's a dynamic factor. The Trans Mountain barrels are learning to offer in based on a typical waterborne trade cycle, which is different than the inland market trade cycle.

Matthew Blair (Managing Director of Refiners, Chemicals, and Renewable Fuels Research)

Sounds good. And then in Hawaii, we thought the capture trend was pretty encouraging. I think the release mentioned a tailwind from the fuel oil lagged contract. But could you talk about some other drivers here? I guess in particular, any benefit from your product crack hedging in Hawaii and any benefit from the pretty robust clean product tanker market? Thanks.

Shawn Flores (SVP and CFO)

Hey, Matthew. It's Shawn. You know, Q2 capture in Hawaii was 136%, so well above our 100% guidance. I called out the $12 million crack hedge gain. We also called out in the release the $2 million price hike benefit. So I think when you back out those sort of tailwinds that are working in our favor in Q2, capture is about 110%. I think that sort of delta, the 110% versus the 100%, is really reflective of the elevated clean product rate that we're continuing to see.

Operator (participant)

Great. Thanks for your comments. Our next question will come from Manav Gupta with UBS. Please go ahead.

Manav Gupta (Senior Equity Analyst)

Sorry, if I missed this earlier, I just wanted a little bit of update on your Hawaii's renewable project. Like, what's the progress over there? You were conducting an initial engineering design on the cogeneration facility. Any updates you could provide over there?

Shawn Flores (SVP and CFO)

Sure, Manav. So the project there remains on track. Again, as a reminder, it's a $90 million capital project that we're targeting to bring online in the second half of 2025. And ultimately, I think major equipment has been ordered. We've completed at least two of the feedstock tanks that will be necessary. And again, are working on and have major bids in hand from critical vendors and providers to begin executing that. And, you know, are awaiting one or two critical permits, but I think feel confident on the timeline there to receive and move ahead with those items. So feel good about where that project is. And on the renewable cogeneration project, again, moving through the power purchase agreement negotiation with Hawaiian Electric. And that's something that is targeted to be completed, I think, by the end of this year.

And so I think from there, we'll have, you know, firmer estimates on our engineering and ultimately the power purchase agreement timeline and can make a final investment decision.

Manav Gupta (Senior Equity Analyst)

Thank you so much. I'll turn it over.

Operator (participant)

This will conclude our question and answer session. I'd like to turn the conference back over to Will Monteleone for any closing remarks.

William Monteleone (President and CEO)

Great. Thank you all for joining us today. We're pleased with the strong operational performance of each of our teams and in particular the well-executed turnaround activities. Have a good day.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.