CVR Energy Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 31, 2023

There are 7 speakers on the call.

Operator

Greetings, and welcome to the CVR Energy, Inc. Third Quarter 2023 Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

Operator

It is now my pleasure to introduce your host, Richard Roberts, Vice President of FP and A and IR. Thank you, Mr. Roberts. You may begin.

Speaker 1

Thank you, Camilla. Good afternoon, everyone. We very much appreciate you joining us this afternoon for our CVR Energy Third Quarter 2023 Earnings With me today are Dave Lamp, our Chief Executive Officer Dane Newman, our Chief Financial Officer and other members of management. Prior to discussing our 2023 Third Quarter results, let me remind you that this conference call may contain forward looking statements at that term as defined under federal securities laws. For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward looking statements.

Speaker 1

You are cautioned that these statements may be affected by important We undertake no obligation to publicly update any forward looking statements, whether as a result of new information, future events or otherwise, except to the extent required by law. This call also includes various non GAAP financial measures. The disclosures related to such non GAAP measures, including reconciliation to the most directly comparable GAAP financial measures, included in our 2023 3rd quarter earnings release that we filed with the SEC and Form 10 Q for the period and will be discussed during the call. With that said, I'll turn the call over to Dave.

Speaker 2

Thank you, Richard. Good afternoon, everyone, and thank you for joining our earnings call. Yesterday, we reported Q3 consolidated net income of $354,000,000 And earnings per share of $3.51 EBITDA for the quarter was $530,000,000 Our solid results for the quarter were driven by continued strength in gas and diesel crack spreads along with significant decline And the price of RINs at the quarter end. We are pleased to announce that the Board of Directors has authorized a special dividend of $1.50 per share. This is in addition to the regular dividend, 3rd quarter dividend of $0.50 per share, both of which will be paid on November 20 to shareholders of record At the close of market on November 13th, our year to date declared regular and special dividends total $4 per share For a total cash return to shareholders approximately 13%.

Speaker 2

In our Petroleum segment, combined total throughput for the Q3 2023 was approximately 212,000 barrels per day and light product yield was 98% on crude oil processed. Overall, our refineries operated well during the quarter with minimal unplanned downtime. We also completed the repairs of the gasoline hydrotreater Which was impacted by a fire in the second quarter. Benchmark crack spreads remained elevated during the 3rd quarter with Group 3211 averaging $39.10 per barrel. The 3rd quarter average RIN price declined from the 2nd quarter, but remain stubbornly high at over $7 per barrel.

Speaker 2

As we discussed in previous calls, we have filed Lawsuits and received a stay in the 5th Circuit Court of Appeals related to the denial of Wynnewood Small Refinery Exemptions for 202021, and we have recently received a stay for 2022 as well. In early October, we were pleased to have our day in court as we presented oral arguments in front of the 5th Circuit related to EPA's denial of small As we have continuously stated, the RFS regulation was written specifically to Tech small refineries like Wynnewood from disproportionate economic harm caused by RFS, and we continue to fight for the rights that we believe Wynnewood was entitled to. Our Winningwood Refinery is the poster child for disproportionate economic harm in the industry as we believe Our relative cost of compliance with RFS is higher than almost all other refineries. For the Q3 of 2023, we achieved record throughput rates at the Wynnewood Renewable Diesel Unit, Processing nearly 24,000 barrels 24,000,000 gallons of vegetable oil feedstock in the quarter. The HOBO spread widened from the Q2 with increased soybean oil prices.

Speaker 2

However, we generated another positive Another quarter of positive contribution from the RD unit due to increased throughput volumes and improvement in the California diesel price in the quarter. As a reminder, our Renewable Diesel business is currently reported in our Corporate and Other segment. In fertilizer segment, both facilities ran well during the quarter with a consolidated ammonia utilization rate of 99%. Nitric and fertilizer prices reset in July, after which prices steadily rose through the summer, driven by a combination of strong demand and reduced supply, as well as a result of planned and unplanned outages across the industry. We believe market conditions have firmed in the Q4 and we'll have a good order book on for the fall.

Speaker 2

Let me turn the call over to Dave to discuss our financial highlights.

Speaker 3

Thank you, Dave, and good afternoon, everyone. For the Q3 of 2023, our consolidated net income was $354,000,000 earnings per share was $3.51 and EBITDA was 5.30 1,000,000 Our 3rd quarter results include a reduction to quarterly RINs expense due to a mark to market impact on our estimated outstanding RFS obligation of 174,000,000 A favorable inventory valuation impact of $91,000,000 and unrealized derivative losses of 48,000,000 Excluding the above mentioned items, adjusted EBITDA for the quarter was $313,000,000 and adjusted earnings per share was $1.89 Adjusted EBITDA in the Petroleum segment was $281,000,000 for the Q3, driven by strong product cracks in the Mid Con. Our Q3 realized margin adjusted for inventory valuation, unrealized derivative losses and RIN mark to market impacts was $20.73 per barrel, representing a 53% capture rate on the Group 3 211 benchmark. Realized derivative losses of $44,000,000 or $2.28 per barrel Reduced our capture rate by approximately 6%. RINs expense for the quarter, excluding the mark to market impact was $90,000,000 Or $4.64 per barrel, which negatively impacted our capture rate for the quarter by approximately 12%.

Speaker 3

The estimated accrued RFS obligation on the balance sheet was $413,000,000 at September 30, representing R367,000,000 mark to market at an average price of $1.12 As a reminder, our estimated outstanding Direct operating expenses in the Petroleum segment were $5.39 per barrel for the 3rd quarter, compared to $5.53 per barrel in the Q3 of 2022. The decrease in direct operating expenses was primarily due to lower natural gas and electricity prices and higher throughput volumes, somewhat offset by increased personnel costs, partially related to stock based compensation expense. Adjusted EBITDA in the Fertilizer segment was $32,000,000 for the 3rd quarter, With strong production and reduced operating expenses for the quarter, offsetting the decline in nitrogen fertilizer prices relative to the Q3 of 2022. The partnership declared a distribution of $1.55 per common unit for the Q3 of 2023. As CVR Energy owns Approximately 37% of CVR Partners' common units will receive a proportionate cash distribution of approximately 6,000,000 Cash provided by operations for the Q3 of 2023 was $370,000,000 and free cash flow was 318,000,000 Significant uses of cash in the quarter included $151,000,000 paid for the CDI's 2nd quarter regular and special dividends, $67,000,000 for cash taxes and interest $52,000,000 of capital and turnaround spending $28,000,000 paid for the non controlling interest portion of the CVR Partners' 2nd Total consolidated capital spending was $51,000,000 which included $26,000,000 in the Petroleum segment, $8,000,000 in the fertilizer segment $16,000,000 on the pretreatment unit for the RDU.

Speaker 3

Turnaround spending in the Q3 was approximately 2,000,000 For the full year 2023, we estimate total consolidated capital spending to be approximately $200,000,000 to $225,000,000 and turnaround spending to be approximately $55,000,000 to $65,000,000 Turning to the balance sheet, we ended the quarter with a consolidated cash balance of $889,000,000 which includes $89,000,000 of cash in the Fertilizer segment. Total liquidity as And availability under the ABL facility of $251,000,000 Looking ahead to the Q4 of 2023, for our $5,000,000 $105,000,000 and total capital spending to be between $40,000,000 $45,000,000 For the Fertilizer segment, we estimate our Q4 20 23 ammonia utilization rate to be between 90% 95%, direct operating expenses to be approximately 55 $60,000,000 excluding inventory impacts and total capital spending to be between $10,000,000 $15,000,000 For Renewables, we estimate Q4 2023 total throughput to be approximately 15,000,000 to 20,000,000 gallons, direct operating expenses to $6,000,000 $8,000,000 and total capital spending to be between $13,000,000 $17,000,000 With that, Dave, I'll turn it back over to you.

Speaker 2

Thanks, Dane. In summary, we had another solid quarter driven by strong results in our refining segment, along with a positive Contribution from the Fertilizer segment as well as the Renewable Diesel business. As we look ahead to the Q4 and Starting with refining, crack spreads remained elevated in the Q3 of 2023 with gas and diesel cracks both increasing relative to the Q2. Although U. S.

Speaker 2

Refining product demand is down in general, Gasoline inventories are roughly in line with 5 year averages and distillate inventories are over 12% below the 5 year average. Reduced refining capacity in the United States, ongoing turnaround activity and a string of unplanned outages during 2023 Have all helped keep refined product inventories in check. Exports of gasoline and diesel have also continued to be strong, time of year as demand slows after the summer and supply increases with the RVP change. Distillate cracks Sold off early in the 3rd in Q4, but rebounded quickly as winter approaches. Container shipments have increased recently for the first time this year, although rail and truck shipments remain lower.

Speaker 2

The potential for a cold winter in Europe and the increase in natural gas prices continued to present some upside For diesel cracks in the near term, in addition to the significant geopolitical risks we are currently experiencing. As we have discussed in previous earnings calls, we continue to watch the start up of new refining capacity around the world, although many of these projects are delayed. Turning to crude oil. Shell oil production continues to increase in the U. S.

Speaker 2

And we have reached a new quarterly record for Crude oil gathering volumes in the Q3 of approximately 150,000 barrels per day. Export of crude out of the U. S. Have averaged over 4,000,000 barrels per day for the 1st 9 months of 2023, and the Brent TI differentials remained range bound At $3 to $4.50 per barrel. WCS differentials have widened with delays in the new pipeline takeaway We continue to make progress on some of the refined products that we have discussed in previous calls.

Speaker 2

As an update for the alkylation project at the Wynnewood refinery, have ordered long lead equipment and are on target for completion in 2026. In addition to the benefits of eliminating the use of HF acid Catalyst at Wynnewood, this project is expected to increase our alkylation capacity by 2,500 barrels per day, which should result in increased Premium gasoline production. Regarding our diesel yield improvement projects, we have completed engineering work at Wynnewood and confirmed our initial estimates. We plan to complete tie ins during the Wynnewood spring turnaround 2024 turnaround. Our overall plan is to increase distillate yield from the 2 refineries by approximately 6,000 barrels per day over the next 2 or 3 years, which would increase our total distillate yield on crude throughput by approximately 3%.

Speaker 2

In the fertilizer segment, nitrogen fertilizer prices have increased since the summer reset in July. With harvest nearly complete, we expect a strong fall ammonia application this year and have a good book of orders. Looking ahead to 2024, grain market conditions remain steady and bode well for nitrogen fertilizer demand, And we believe prices for the spring pre price season should be favorable. Geopolitical risk continues to present a wildcard for the nitrogen fertilizer business as well, with meaningful fertilizer production capacity residing in countries across the Middle East and North Africa. Finally, in Renewables, construction on the PTU is progressing and we expect the unit to be complete in the Q4 of 2023.

Speaker 2

Over the past few months, RIN prices have fallen dramatically, primarily due to EPA setting an RVO for D4 RINs way too low In the face of all the renewable diesel capacity that has been ramping up and should be coming online over the next couple of years. With deep work prices at these levels prompt, renewable diesel margins are breakeven. We continue to explore opportunities to modify our renewable diesel unit at Wynnewood to shift a portion of production from renewable diesel to sustainable aviation fuel, And we continue to have discussions with various parties interested in securing an offtake of sustainable aviation fuel. We also Continue to develop a potential renewable project with the option for sustainable aviation fuel production at our Coffeyville location. The Board recently authorized spending for scope definition and a detailed cost estimate, which enables us to have more in-depth discussions with potential partners.

Speaker 2

Although the prompt market for renewable diesel is not favorable, we continue to believe there will be a place in the market for renewable diesel and sustainable aviation fuel. And we believe our Coffeyville location is strategically advantaged in the heart of the ag belt. Looking at the Q4 of 2023, Quarter to date metrics are as follows. Group 211 cracks have averaged $31.96

Speaker 1

per barrel

Speaker 2

With the Brent TI spread of $2.98 per barrel, the Midland differential at $0.72 per barrel over WTI, Fertilizer prices are approximately $700 per ton for ammonia and $2.85 per ton for UAN. As of yesterday, Group 3, 211 cracks were $22.43 per barrel. The Brent TI was $5.14 per barrel and WCS was $26.02 under WTI, We're in through approximately $4.80 per barrel. We continue to strive to operate our plants in a safe, reliable In a responsible environmentally responsible manner, we continue to explore opportunities to grow our renewables business. We also continue to focus on maximizing free cash flow, which underpins our peer leading dividend yield.

Speaker 2

With that, operator, we're ready for questions.

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Manav Gupta with UBS. Please proceed with your question.

Speaker 4

Hi, guys. My first question is more on the RIN side. Right now, the way you are positioned, what EPA has done It's actually benefiting you. We've seen that in the RFS revaluation, D4 is dragging D6 down. So in a way, you are very well positioned for what EPA has done in the near term.

Speaker 4

If you look and try and expand your renewable diesel capacity meaningfully from these levels, Then in a way, you are countering what EPA has done for you in terms of the RFS Obligations. So I'm just trying to understand these two balancing forces where a lower RIN is actually good for you, but You do want to grow your renewable diesel franchise, in which scenario you would like to see a higher value of the RIN For a higher margin, so if you can help us understand those dynamics.

Speaker 2

Well, Manav, we've always said that it was important for EPA to disconnect D6 is from D4s. And if you really look at if you're really attempting to do something about climate change, the Renewable diesel is the molecule that makes a difference. The ethanol blend of gasoline does really little To do anything to reduce carbon emissions. So, it's still our position that EPA should have disconnected these 2. And there's several Motion moves are in the works to try to make that happen, but they also should have increased the D4 And more in line with what the industry is building and is planning to come online.

Speaker 2

So, I think it's just a misguided program still and So, something has to break to fix it.

Speaker 4

So, in an ideal world, Dave, you would like a D4 obligation to be set like $8,000,000,000 or $9,000,000,000 and a D6 to be set at $13,000,000 $13,500,000,000 that would be the ideal scenario which you are hoping for, right? And SRE is allowed.

Speaker 2

Right. And frankly, E15 should be allowed too. You can argue whether it's 13.2 on the D6 or it's something higher like 14, but it certainly isn't 15, Which is above the Glenwall. And the demand of gasoline is up in question going forward, and EPA has to be flexible with that.

Speaker 4

Perfect. My quick follow-up is, as you mentioned this in the comment that the gasoline is down seasonally and the And your RVP has increased. So I'm just trying to understand, in your system, sir, have you seen any real signs of concern Of weaker gasoline demand, which could have an impact going ahead or you believe what we are seeing right now is just basically seasonal and some overproduction And should correct itself as we move along next 3 or 4 months.

Speaker 2

Well, in our markets, Manav, it's our demand Really, and I've said this since about 3 months into the pandemic, our demand really didn't move much, and it still hasn't. If you look at the seasonal liftings out of the Magellan system, they're almost right on spot to where they've always been, Even pre pandemic. So, I don't I attribute a lot of that to the growth in Oklahoma. Oklahoma City, if you've been there recently, is really a growing place. So is Kansas City to some degree.

Speaker 2

And those are the main markets we serve, Tulsa also. And our liftings at our racks So, actually up compared to the pandemic. When I'm talking about the U. S. Demand, I'm really talking about the whole U.

Speaker 2

S. And that's where we're seeing the main part of the decline.

Speaker 4

Thank you so much, sir.

Speaker 2

You're welcome.

Operator

Thank you. Our next question comes from the line of Matthew Blair with Tudor, Pickering and Holt. Please proceed with your question.

Speaker 5

Hey, good morning, Dave. On WCS, what do you think is widening out differentials to that 2620 That you mentioned. And what's your outlook next year with the Trans Mountain expansion? What kind of impact do you think that will have on this?

Speaker 2

Sure. Well, I think seasonally WCS usually softens in the winter a bit. You get more diluent Injected into it, but a lot of it was just built inventory that built in Hardisty And backed up the system to some degree. What's interesting is Trans Mountain has been delayed, but the cost of that thing and what the tariff is It looks like to me that the tariff to go to the Gulf Coast is going to be the same as going to the West Coast And there were something very close to that. So, I don't know that it will have A huge impact other than it does increase the takeaway capacity and does open the spigot for some more projects up there If somebody would invest in them.

Speaker 2

The second part of your question was?

Speaker 5

I think you touched on it. My follow-up is on the product crack hedges, If I caught that right, I think it was a 6 percentage point headwind to capture in Q3. Should we expect just kind of based on where the future scripts are now, should we expect that that impact would probably be less in the 4th quarter Just with lower gasoline cracks rolling through?

Speaker 3

Yes. So our open positions are around 15% for the Q4 and then About 15% throughout 2024, but it would be a fair assumption if the market holds where it is, the bulk of the impact is behind us.

Speaker 5

Sounds good. Thanks so much.

Speaker 2

You're welcome.

Operator

Thank you. Our next question comes from the line of John Royall with JPMorgan. Please proceed with your question.

Speaker 6

Hi, good afternoon. Thanks for taking my questions. So Dave, you gave an update on the court situation for the Wynnewood SREs, which was very helpful. Do you have a timeline in mind for when you think you could have a final answer there? And if you get to the point where you feel like it's You can't really fight it anymore.

Speaker 6

Do you then start to close out your RIN short?

Speaker 2

Well, it's Difficult to always predict what a court will do, and this case has no exemption from that. There's 2 parts to the case. First is the venue that the court has to decide, which whether it Stay in the 5th Circuit or go to the DC Circuit. We think we're optimistic that they'll Keep it, but you never can be sure. The second part of the case is the merits of the EPA's argument I'm denying all small refinery waivers and we feel very good about that piece.

Speaker 2

The question is how long will it take them To rule and then how will they rule? A lot of times in these cases, they just rule to remand it back to EPA to fix. We really are going to fight to try to get more definition on that should we win. That limits what EPA can do If you look at history, they've just kind of invent something new to deny it again, and we're back in court. So, It's very difficult to predict timing, but hopefully before the end of Q2 next year, we should have a ruling One way or the other, at the latest.

Speaker 2

So, then your second part of your question was, would we liquidate? Whatever we do here is going to be a structured settlement because none of those RINs from the past years are available anymore or will be by that time. And somehow it would have to be negotiated what it would be should we lose. Pretty optimistic that we won't. So, that case may never come to be.

Speaker 6

Understood. That's very helpful. Thanks, Dave. And then you got a question on WCS diffs. I just had another differential question.

Speaker 6

This one's on Brent WTI, Which I think you addressed a little bit last quarter, but specifically Cushing inventories are meaningfully lower today And I think below 5 year ranges, but we haven't really seen a significant narrowing of Brent to BTI. So any color on Why you think Brentwood TI is where it is and how you think about that going forward will be helpful?

Speaker 2

Yes. I think I've always said that Continued growth in shale oil is important for the Brent TI to maintain its position in this range bound Between $3 $4.50 that we mentioned. And it's really to force the barrel offshore. It Requires that kind of differential to make up for shipping and wherever the destination point is to be competitive in the world market. And that's what's driving it to us.

Speaker 2

So, as show oil matures and continues to slowly grow, which is probably the best scenario, There's still plenty of takeaway capacity. We think that bodes well for the Brent TI.

Speaker 3

Great. Thank you.

Speaker 2

You're welcome.

Operator

Thank you. We have reached the end of our question and answer session. And now I'd like to turn the floor back over to management for closing comments.

Speaker 2

Again, we'd like to thank you all for your interest in CBR Energy. Additionally, I'd like to thank our employees for Our hard work and commitment towards safe, reliable and environmentally responsible operations. We look forward to reviewing our Q4

Operator

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.

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CVR Energy Q3 2023
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