CVR Energy Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2023

Key Takeaways

  • CVR reported Q1 net income of $259 million, EPS of $1.94 and EBITDA of $401 million, driven by elevated gasoline and diesel crack spreads in refining and record‐high fertilizer volumes.
  • The Board authorized a $0.50 per share dividend for Q1, reflecting an annualized yield near 7%, maintaining CVR’s peer-leading dividend profile.
  • Management has hedged roughly 25% of its 2023 gasoline and diesel production via crack-spread swaps—positions currently in-the-money—to underpin margins through Q4 2023.
  • The renewable diesel unit processed ~22 million gallons in Q1, with a planned catalyst change and a late-Q3 pretreatment unit (PTU) startup expected to boost margin capture by ~30%.
  • In the fertilizer segment, plants ran at a record 105% ammonia utilization in Q1, benefiting from pre-sold output, and demand is expected to stay strong into the spring planting season.
AI Generated. May Contain Errors.
Earnings Conference Call
CVR Energy Q1 2023
00:00 / 00:00

There are 9 speakers on the call.

Operator

Greetings, and welcome to the CDR Energy, Inc. 1st 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 Financial Planning and Analysis, Investor Relations. Thank you, sir. You may begin.

Speaker 1

Thank you, Christine. Good afternoon, everyone. We very much appreciate you joining us this afternoon for our CVR Energy First Quarter 2023 Earnings Call. 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 First Quarter results, let me remind you that this conference call may contain forward looking statements as that term is defined under federal securities laws.

Speaker 1

For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward looking statements. You are cautioned that these statements may be affected by Factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release. As a result, actual operations or results may differ materially from the results discussed in the forward 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 Are included in our 2023 Q1 earnings release that we filed with the SEC and Form 10 Q for the period and will be discussed during the call.

Speaker 1

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 1st quarter consolidated net income $259,000,000 and an earnings of per share of $1.94 EBITDA for the quarter was $401,000,000 Our strong quarter results for the quarter were driven by high gas And diesel cracks in the refining segment and record high production volumes in the fertilizer segment. We are pleased to announce that the Board of Directors has authorized the Q1 dividend of $0.50 per share, which will be paid On May 22 to shareholders of record on the close of the market on May 15, our annualized Dividend yield of approximately 7% based on yesterday's closing price remains best in class among independent refiners. In our Petroleum segment, combined total throughput for the Q1 of 2023 was approximately 196,000 barrels per day And light product yield was 100% on crude oil processed.

Speaker 2

We began the planned coker turnaround at Coffeyville at the end of February And work was completed in early April. Benchmark cracks remain elevated During the Q1 with Group 3,211 averaging $34.16 per barrel. The distillate crack remained above gas crack in the Q1, although gas cracks have improved significantly recently. While the incentive in the group is still to operate refineries in max distillate mode, we have the ability to swing production from distillate to gasoline by Approximately 5% to 10% of economics dictate. Rim prices declined slightly in the 4th quarter from the Q4, but remained stubbornly high at $8 per barrel.

Speaker 2

On our last earnings Call, I highlighted that we filed petitions with the 5th Circuit seeking judicial review of EPA's ridiculous and misguided Denial of Wynnewood Small Refinery Exemptions for 2017 through 2021. I'm pleased to announce that the 5th Circuit recently ruled to stay Wynnewood's compliance obligation after noting EPA's June 2022 small refinery exemption denial was likely contrary to law. Small refineries across the country have filed similar lawsuits with compliance days being granted so far for certain small refineries in the 5th, 11th and DC circuits. As we have stated many times in the past, the RFS regulation was written to protect Small refineries like Wynnewood from disproportionate economic harm caused by absurdly high RIN prices. And we will continue to fight for our rights that we believe Wynnewood is entitled to.

Speaker 2

We continue to increase throughput rates at our Wynnewood Renewable Diesel Unit in the quarter, processing Approximately 22,000,000 gallons of vegetable oil feedstock. The Jobo spread improved by approximately $0.30 per gallon From the Q4 and the combination of higher throughput volumes and improved turbo spread drove improved results for the Q1 of 2023 relative to the Q4 of 2022. As a reminder, our renewable diesel business is currently reported in our Corporate and Other segment. In the Fertilizer segment, both Facilities ran well during the quarter with record consolidated ammonia utilization of 105%. Fertilizer prices declined during the Q1.

Speaker 2

However, we posted another quarter of strong results since we sold more than half of our first quarter production In the Q4 of 2022 before prices began to decline. We continue to expect healthy demand for fertilizer in the planting season due to strong grain prices and farmer economics. Now let me turn the call over to Dane to discuss our financial highlights.

Speaker 3

Thank you, Dave, and good afternoon, everyone. For the Q1 of 2023, our consolidated net income was $259,000,000 earnings per share was $1.94 and EBITDA was $401,000,000 Our 1st quarter results include an unfavorable inventory valuation impact of $20,000,000 a positive mark to market on our estimated outstanding RIN obligation of 56,000,000 And unrealized derivative gains of $31,000,000 Excluding the above mentioned items, adjusted EBITDA for the quarter was $334,000,000 Adjusted EBITDA on the Petroleum segment was $210,000,000 for the Q1 Our first quarter realized margin adjusted for inventory valuation, unrealized derivative gains And RIN mark to market impacts was $18.99 per barrel, representing a 56% capture rate on the Group 3, 211 benchmark. RIS expense for the quarter excluding the mark to market impact was $95,000,000 or $5.36 per barrel, which negatively impacted our capture rate for by approximately 16%. The estimated accrued RFS obligation on the balance sheet was $582,000,000 at March 31, representing 363,000,000 RINs mark to market at an average price of $1.60 As a reminder, Our estimated outstanding rent obligation excludes the impact of any small refinery exemptions. Direct operating expenses in the Petroleum segment were $5.90 per barrel for the Q1 compared to $5.57 per barrel in the Q1 of 2022.

Speaker 3

The increase in direct operating expenses was primarily due to higher repair and maintenance expenses related to the coker turnaround at Coffeyville, offset somewhat by lower natural gas costs. Adjusted EBITDA in the fertilizer segment was $124,000,000 for the Q1 With strong production for the quarter offsetting the decline in nitrogen fertilizer prices relative to the Q1 of 2022. The partnership declared a distribution of $10.43 per common unit for the Q1 of 2023. As CVR Energy owns approximately 37% of DVR Partners common units, we will receive a proportionate cash distribution of approximately 41,000,000 Cash provided by operations for the Q1 of 2023 was $247,000,000 and free cash flow was 213,000,000 Significant uses of cash in the quarter included $98,000,000 of net RIN purchases, dollars 53,000,000 of capital and turnaround spending and $29,000,000 of cash interest, in addition to $70,000,000 paid for the non controlling interest portion of the CVR Partners 4th quarter distribution and $50,000,000 paid for the CBI 4th quarter dividend. Total consolidated capital spending was $59,000,000 which included $42,000,000 in the Petroleum segment, dollars 4,000,000 in the Fertilizer segment and $12,000,000 on the pretreatment unit for the RDU.

Speaker 3

Turnaround spending in the Q1 was $40,000,000 For the full year 2023, we estimate total consolidate Capital spending to be approximately $200,000,000 to $226,000,000 and turnaround spending to be approximately $60,000,000 to 65,000,000 Turning to the balance sheet. We ended the quarter with a consolidated cash balance of $601,000,000 which includes $121,000,000 of cash in the fertilizer segment. Total liquidity as of March 31, excluding CVR Partners, was approximately $734,000,000 which was comprised primarily of $479,000,000 of cash and Availability under the ABL facility of $255,000,000 Looking ahead to the Q2 of 2023, for our Petroleum segment, we estimate Total throughput to be approximately 195,000 to 210,000 barrels per day. Direct operating expenses are ranging between 90,000,000 100,000,000 and total capital spending to be between $35,000,000 $45,000,000 For the Fertilizer segment, we estimate our Q2 2023 ammonia utilization rate to be between 95% 100 percent direct operating expenses to be approximately $50,000,000 to $55,000,000 excluding inventory impacts and total capital spending to be between $7,000,000 $12,000,000 For Renewables, we estimate Q2 2023 total throughput to 22,000,000 gallons for the quarter due to a planned catalyst change. Direct operating expenses for the 2nd quarter are expected Between $6,000,000 $8,000,000 With that, Dave, I will turn it back over to you.

Speaker 2

Thank you, Dane. In summary, we had another strong quarter driven by solid And we saw improved results in our Renewable Diesel business as well. As we look at the underlying fundamentals driving our business, we remain cautiously optimistic about the near term outlook. Starting with refining, 2023 got off to a strong start with the highest first quarter average crack spreads in recent history. While high diesel cracks drove much of the strength in the Q1, diesel has softened somewhat, but This has been somewhat offset by increased gas cracks.

Speaker 2

Turnaround activities across the industry We're high in the Q1, leading to inventories of refined products in the U. S. To fall below 5 year Average levels. In the Mid Con, inventories for gas and diesel are low for this time of year and product liftings have been strong, particularly for diesel or with agricultural demand pulling hard during the planting season. Refined Products volumes across our racks are up approximately 5% compared to the Q1 of 2022, which allows us to blend additional biofuels and increase our internal RIN generation.

Speaker 2

Premium gasoline margins Averaged $0.36 a gallon in the Q1, which helps our capture rates as approximately 15% of our gasoline production is premium. Given the elevated crack environment early in the year, the Board authorized a hedging program allowing us To enter into crack spread swaps for up to 30% of our expected gasoline and diesel production for Q2 through Q4 of 2023 and all of 2024. We began putting these hedges on in early January and We currently have crack spread swaps locked swaps locked in for approximately 25% of our 20 23 expected production and approximately 7% of our 2024 expected production. We currently are in the money on those hedges, which are partially or which Was partially reflected in our unrealized dividend derivatives gain of approximately for the Q1. On the crude oil side of the equation, inventory has increased closer to 5 year averages levels, which can also attributed to elevated turnaround activity so far in 2023.

Speaker 2

Heavy crude spreads are narrowing, which along with The decline in diesel crags have been hurting coker economics recently. Shell oil production in the United States continues to grow slowly, And we have seen our volumes in our gathering systems increase to nearly 140,000 barrels per day in March Due to increased drilling activity, although the Brent TI differential has narrowed some recently, exports of Midland WTI are continuing at record levels, which we believe should be supportive of the sustained Brent TI spread. Turning to fertilizer segment. Nitrogen fertilizer prices declined in the Q1, in part due to a significant decline in natural gas prices in Europe, Asia and the U. S.

Speaker 2

Grain prices remain strong and farmer economics are attractive and this should bode well for nitrogen fertilizer demand in spring. Since the turnarounds completed at both of our facilities in the Q3 of 2022, the plants ran well with high utilization in the Q1. Over the next 2 years, we plan to invest some additional capital in the fertilizer plants intended to further improve their reliability, lower their carbon footprint and prepare for potential capacity expansions in 1 or both facilities. We are also continuing to evaluate the potential Transaction to spin off our GP and LP interests in CVR Partners, and I look forward to providing you additional details at the appropriate time. Finally, in Renewables, we continue to ramp up production on the renewable diesel unit at Wynnewood processing over 22,000,000 gallons of feedstock in the Q1.

Speaker 2

We are completing our 2nd planned catalyst change and we are expecting to see significant improvements in renewable diesel yield with this new The new catalyst install. Construction of the PTU is progressing and we are currently expected expecting an in service date to late Mid to late Q3 of 2023. With the addition of the PTU, we expect See renewable diesel margin capture improved by approximately 30%. Looking at the Q2 of 2023, quarter to date metrics are follows. Group 3 211 cracks have averaged $32.32 per barrel With the Brent TI spread at $3.96 per barrel and Midland WTI differential at $0.66 per barrel over WTI.

Speaker 2

The WTL differential has averaged $0.04 per barrel under WTI and the The ACS differential has averaged $15.31 under WTI. Prop fertilizer prices are approximately $500 for ammonia and $300 per ton for UAN. As of yesterday, Group 3 211 cracks We're $25.96 Brent TI was $3.65 and WCS was $15.09 under WTI. RINs were approximately $1.50 per barrel were $7.81 per barrel. We continue to strive to operate our plants in a safe, reliable and environmentally responsible manner and to explore opportunities to grow our renewables business.

Speaker 2

We will continue to focus on maximizing free cash flow, which underpins our peer leading dividend yield. 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. Manav Gupta, your line is live.

Speaker 4

Hi. Congrats on the hedging strategy. Very smart move on your part. Again, would this mean that going ahead for the rest of the year, We would find it difficult to model your capture rate because the hedges you have put in would definitely be in the money and Giving you propping up margins as we go along. Would that be the right way to think about it?

Speaker 2

I think that's right, You don't know what our strike price was or what we bought them at, but Leave it to say that, we're at it's going to affect our results materially in the Q2 and probably the 3rd 4th.

Speaker 4

Perfect. My quick follow-up, Dave, here would be, once your PTU is up and running And you have this catalyst change also done. Should we assume that by the Q4 of this year, We see a competitive margin capture out of you, your system, I don't know, maybe $0.75 or $1 but whatever that number is, but should we assume your renewable diesel results get Lot more competitive with the benchmarks out there once you are done with the catalyst change as well as the PTU coming online late 3Q?

Speaker 2

Yes, I think that's a good assumption. The PTU should add, as I had mentioned, about 30% on our capture rate. Today, we're running in the low 20s on capture and we think that will bring us up to 50. The catalyst change Itself has two elements to it. Run length, we're predicting to be probably 2 or 3 times better than what we've been getting so far.

Speaker 2

And it also improves the distillate yield substantially. So that will move Capture up also.

Speaker 4

Perfect. Congrats on a good quarter and congrats on the very smart hedging strategy.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Neil Mehta with Goldman Sachs. Please proceed with your question.

Speaker 5

Yes. Dave, you've got a unique perspective on what's going on in the industrial economy, just given where your assets Seth and your higher distillate leverage, I just love your perspective on the individual end markets of demand and Where do you see some of the stuff trending?

Speaker 2

Well, Neil, I think if you look at the Mid Con, it's It's kind of a little bit different than what the rest of the United States looks like. I mean, we're at low levels. If you look back 5 years, we're very low on inventory on gas, which is extremely unusual this time of year. So it tells me demand has been good. And in fact, if you look at it, liftings in the Magellan system are very similar to what they've always been, Even pre COVID, post COVID, all the way through.

Speaker 2

On distillate, again, distillate has been Extremely strong. The basis has been in the teens over the NYMEX for most of the quarter. Sometimes it hit as high as $0.35 which tells me that there was a lot of turnarounds going on and a lot of interruptions In the Q1 from our competitors and other refiners in the system. Even though we had a turnaround that It was a even though it was a fairly small turnaround, it's just the coker, we still were cut back on rates And still had a very, very good quarter. I think in general, trucking volumes are down.

Speaker 2

I think all the data shows that. And from an industrial standpoint, it's not real strong. I mean, all the indicators are there that the market Somewhat down on distillate and that's the main reason we employed some of the hedges we did just because we saw that coming. And still there's 2,000,000 barrels of refining capacity around the world that's about to come on. The U.

Speaker 2

S. Looks to me to be about flat New startups and shutdowns, but it's the rest of the world that's where the incremental capacity is going to come from. And a lot of those are export refiners. So, it's even though our demand is strong, I think the world is seeing a bit of a slow.

Speaker 5

Helpful perspective. The follow-up is just on the dividend, Dave. It's been a couple of quarters now where it's been $0.50 The share and the implied dividend yield on the stock is now close to 8%. You haven't been afraid to move that up and down, but just

Speaker 2

Well, I think I don't think that will change unless we restructure corporation a little bit. If we do the spin I think we'll have to look at the dividend again because that's just the effect of doing the spin off. But we're a cash machine. That's what we're here for. And we give out either be a regular or special.

Speaker 2

We don't do many stock buybacks because we just don't think that's really necessarily in the best interest of our shareholders. And we're going to give it back as dividends or specials.

Operator

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 question. So maybe just a follow-up on that last discussion on dividends. Maybe you could just give us some updated thoughts on the potential for specials. I think Dave referred to the specials from last year as kind of one offs on The prior conference call and correct me if I'm mischaracterizing that, but you did have over $200,000,000 of free cash in 1Q, including The UAN tax payment and you've locked in some hedges in the future.

Speaker 6

And so any updated thoughts on the propensity to pay out some of that with the special going forward?

Speaker 2

Well, I think the specials, as I mentioned before, was really around a unique set of market conditions. I've been in this business a long time and I've never seen cracks where they were for a pretty sustained period of time in 2022. And that's why we did specials. We didn't think about raising the regular up to that because we didn't think it was sustainable. And I think the same situation is here.

Speaker 2

As you know, we're going to take it quarter by quarter and the Board looks at it very closely. We're managing cash to levels we think we need to avoid using our revolver unless we absolutely have to. And that's just the point of view we have. So specials will come and go if the market's remarkable And we have the cash on the balance sheet to dividend out, we will.

Speaker 6

Great. That's helpful. And then on the monetization of the tax credits at UAN, how do those work in general? And How do you how do they impact future cash flows at UAN in terms of what you're giving up? And then following the $19,000,000 payment in 1Q, Hugh, how should we think about the potential for future payments and timing there?

Speaker 3

Yes, I'll take this one. So really what We had in place previously was an existing CO2 sales contract with a counterparty, and we ended up contributing that sales contract To a JV with the same counterparty, and it results it allows the tax equity investor to claim those credits that we're Receiving for the sequestration activity. So what occurred is the contract was deemed a value of $46,000,000 We put that as deferred revenue on our balance sheet and recognize an equity method investment of $46,000,000 The Cash receipt of $19,000,000 it was $18,000,000 net of fees was really just the first payment in a string of payments we expect to receive Associated with the JV and that payment drew down some of the equity method investment. On a go forward basis, We will recognize that deferred revenue off our balance sheet into other income for our fertilizer segment, Call it $1,000,000 $1,500,000 each quarter. And there will be periodic payments each quarter as well as opportunity for Milestone payments annually.

Speaker 3

There will be a difference between what's going through income and what we receive in cash. But obviously, from the CVR Partners' perspective, they'll take that into consideration when they are looking at their cash available.

Speaker 6

Thank you. Welcome.

Operator

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

Speaker 7

Hey, good morning, Dave. You mentioned the benefits on premium gasoline rolling through your system. Could you talk about the drivers for these wide octane spreads? And do you think that's sustainable for the rest of the year?

Speaker 2

Well, the group is kind of a is a little bit unique in terms of premium. It's Sort of gets real long or gets real short. It's just happened to be very short in the Q1. And what usually cures it is a big shipment coming up from the Gulf via Explorer Into the back into Tulsa, into the back of our markets. And that just doesn't happen very much this year.

Speaker 2

Either they had better Sport markets are something off the Gulf and even though they are, it was pretty wide that the shipments just didn't come. So, it kind of played into our hand. We have the ability to make quite a bit of premium if the margin is there. And we use our CCR reformers to make that material And it just happened to be available at the time. It could go anywhere from I've seen as low as $0.07 to all the way to $0.55 In fact, we saw some $0.50 spreads in the Q1.

Speaker 7

Okay. And as a follow-up on that, are you fully compliant on the Tier 3 low sulfur gasoline specs? Are you in the market having to buy those credits?

Speaker 2

No, we're fully compliant. We actually sell some credits occasionally.

Speaker 7

Okay. Sounds good. And then what are your thoughts on this E15 blend waiver for the summer? Do you think that will have a material impact on either gasoline demand or D6 RIN production?

Speaker 2

Well, it's going to make some more D6s, I think for sure, but you got to remember that only 5% of the convenience stores even offer E15, so it's limited in its reach into the market. And I don't know who buys it for what reason, but the typical discounts $0.02 $0.03 It's not like it's a burn burner. And if you include the mileage deduction you get with it, it's probably a loser for most people. But I don't expect it to do a whole lot.

Speaker 7

Great. Thanks for the commentary.

Speaker 1

You're welcome.

Operator

Our next question comes from the line of Paul Cheng with Scotiabank. Please proceed with your question.

Speaker 8

Hey, guys. Good afternoon. Dave, I know you're not going to tell us too much detail on the hedging. But can you tell us that if The gasoline and distillate, both of them being hedged 25% of your future output or that one is being hedged more than the other?

Speaker 2

Well, I think we did a combination of all. We did 211s, We did some distillate, we did some gas. So it's a wide variety, just depending on what our strike price was at the time. And I really am not going to get into all the details of exact volumes.

Speaker 8

Okay. And when I just want to clarify that when Dane was talking about RMB 95,000,000 On the wind cost for the quarter, is that all include the wind you generate from the Audi or that's excluding the wind you generate in the Audi?

Speaker 3

So Paul, the $95,000,000 is the refineries obligation excluding the RIN from the RD. That's Assuming they're just buying the RIN from the RD on a like an open market transaction. They still have to be costed for that.

Speaker 8

I see. And also that just clarify that, I mean in the past, I think you have the shipping history To get about 30,000 barrels per day of the WCS and you just sold most of them at Koosheng and 1 layer bit in the cost of it. Are you still doing that and getting about 30,000 barrels per day and which is included in your result?

Speaker 2

Yes. Typically, we'll get 25 on the Keystone side and 5 on the Spearhead side. But and we are contracted for 10 on the Spirit side. But we run it opportunistically. It's in the money, we'll run it.

Speaker 2

And of course, we had a coker turnaround in the Q1. So we minimized the runs during that period of time. And now, it's basically a push on whether you run it or not, just where the spreads are and what we can sell it for in Cushing. So we're not running any now. Don't plan on running for the next month as long as the spread stays where it is.

Speaker 8

Right. A final one for me. What's the sustaining CapEx for the corporation now going forward? And that also On the renewable, maybe I missed it. Did you tell us that what is the gross margin and the net and the pretax income for that operation In the Q1?

Speaker 2

We haven't been disclosing that until we break it out as a segment, which we plan to do Probably at the end of the year or start of next year.

Speaker 8

Okay. And how about sustaining CapEx?

Speaker 3

Yes. Sustaining CapEx for the corporation, we should say is $80,000,000 to $100,000,000 Paul.

Speaker 8

Okay. We do. Thank you.

Speaker 1

You're welcome. Thank you.

Operator

We have reached the end of the question and answer session. I would now like to turn the floor back over to management for closing comments.

Speaker 2

Again, I'd like to thank you all for your interest in CVR Energy. Additionally, I'd like to thank our employees for their hard work and commitment towards safety Safe, reliable and environmentally responsible operations. We look forward to reviewing our Q2 2023 results during our next earnings call. Have a great day.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful

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