CVR Energy Inc

NYSE:CVI

Earnings Call Transcript 2017-Q4

[Operator]

Greetings and welcome to the CVR Energy Inc. Fourth Quarter 2017 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Jay Finks, Vice President of Finance. Thank you, Mr. Finks. You may begin.

[Jay Finks, Vice President, Finance]

Thank you, Michelle. Good afternoon, everyone. We very much appreciate you joining us this afternoon for our CVR Energy fourth quarter 2017 earnings call. With me today are Dave Lamp, our Chief Executive Officer; Susan Ball, our Chief Financial Officer and other members of management.

Prior to discussing our 2017 fourth quarter and full year results, let me remind you that this conference call may contain forward-looking statements as that term is defined under Federal Securities laws. For this purpose any statements made during this call that are not statements of historical facts maybe deemed to be forward-looking statements, without limiting the foregoing, the words outlook, believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements.

You are cautioned that these statements maybe affected by important 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-looking statements. 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 2017 fourth quarter earnings release that we filed with the SEC this morning prior to the opening of the market.

With that said, I will turn the call over to Dave, our Chief Executive Officer. Dave?

[Dave Lamp, Chief Executive Officer]

Thank you, Jay. Good afternoon, everyone and thank you for joining our earnings call. Hopefully, you had an opportunity to listen to the CVR Partners and CVR Refining earnings calls earlier today.

Before I begin, I would like to make a couple of comments. First, I am very excited to be the new CEO for CVR Energy. I look forward to working with our great employees we have here to continue to improve on safe, reliable operations and shareholder returns. Secondly, I would like to thank Jack Lipinski and the former executives who have retired or recently left the company for all their contribution to the success of CVR Energy over the years.

This morning, we reported CVR Energy’s fourth quarter and full year results. For the fourth quarter of 2017, consolidated adjusted net income was $24 million or $0.28 per diluted share as compared to an adjusted income of $4 million or $0.05 diluted share for the fourth quarter of last year. For the full year 2017, adjusted income was $76 million or $0.87 per diluted share as compared to adjusted net income of $42 million or $0.48 per diluted share in 2016. We also announced today a quarterly cash dividend of $0.50 per share, which will be paid on March 12 to stockholders of record on March 5.

Now, I will speak to some of the fourth quarter highlights from each of our business sections starting with the petroleum business. CVR’s fourth quarter – CVR Refining’s fourth quarter 2017 adjusted EBITDA was $76 million as compared to $28 million a year ago. CVR Energy also declared a fourth quarter distribution of $0.45 per common unit. CVR Energy owns approximately 66% of the common units of CVR Refining and therefore receives a proportional amount of the distribution. Operationally, CVR Refining processed 188,000 barrels a day of crude in the fourth quarter of 2017 compared to the 207,000 barrels a day of crude in the fourth quarter of 2016. Crude throughput for the fourth quarter of 2017 was reduced by Wynnewood’s planned turnaround which was completed on schedule and on budget. I would note that our Coffeyville refinery set a new annual crude throughput record by processing approximately 131,600 barrels per day in 2017.

Now turning to the nitrogen fertilizer business, CVR Partners announced the fourth quarter 2017 adjusted EBITDA of $8 million as compared to $18 million for the fourth quarter of 2016. Operationally the fourth quarter results were impacted by 12 days of unplanned downtime at the East Dubuque facility and a few maintenance days on the UAN plant at Coffeyville. CVR Partners announced today, it will not pay a cash dividend for the fourth quarter of 2017.

Now, let me turn the call over to Susan to talk about our financial highlights.

[Susan Ball, Chief Financial Officer]

Thank you, Dave and good afternoon everyone. As Dave previously mentioned adjusted net income for the fourth quarter of 2017 was $24 million or $0.28 per diluted share as compared to adjusted net income of $4 million or $0.05 per diluted share in the fourth quarter of 2016. We believe adjusted net income is a meaningful metric for analyzing our performance as it eliminates the impact of non-cash and other unusual items inherent in our business and provides a more transparent view as to market expectations. The most significant adjustment to derive adjusted net income for the fourth quarter 2017 was the adjustment for net tax benefit as a result of the tax cuts and jobs acts legislation that was signed into law in December of 2017. Due to the reductions of the corporate federal income tax rate from 35% to 21% which is effective beginning in 2018, we did re-measure our net deferred tax liabilities as of December 31, 2017 to the lower tax rate that will be in effect for the years in which the deferred tax assets and liabilities are expected to be realized. As a result we recorded and recognized a tax benefit of approximately $200 million in the fourth quarter of 2017.

To derive adjusted net income we did adjust out this – impacts of this one-time benefit related to the re-measurement of the net deferred tax liabilities. Additionally, we adjusted for the loss on derivatives not settled in the current period of $47 million, major scheduled turnaround expenses of $43 million and a favorable FIFO impact of $30 million. The adjustments for the fourth quarter of 2016 were a favorable FIFO impact of $22 million loss on derivatives not settled during the period of $16 million and a gain on extinguishment of debt of $200,000. The gross pretax adjustments to net income are reduced with the portion that’s just treatable to the non-controlling interest and then are further reduced for the net tax impact associated with those amounts. The total income tax benefit for the fourth quarter of 2017 was $234 million as compared to an income tax benefit of $22 million in the prior year quarter.

Excluding the income tax benefit of approximately $200 million from the re-measurement of the net deferred tax liabilities the income tax benefit would have been approximate $34 million. The overall effective tax rate benefited also from certain state income tax credits and other associated items. Additionally the overall effective tax rate is impacted by the income or loss associated with the non-controlling interest in CVR Refining’s and CVR Partners’ earnings. In 2018, we expect our effective tax rate to be between 13% and 15%. Additionally as we move forward into 2018 and beyond we will see that benefits of the reduced tax rate through reduced cash tax payments on federal taxable income.

I will now turn to the specific performance of our two business segments impacting our overall quarterly results. As Dave mentioned earlier CVR Refining’s adjusted EBITDA for the fourth quarter of 2017 was $76 million as compared to $28 million in the same period in 2016. This increase was primarily driven by a significant increase in the Group 3 2-1-1 crack spread, partially offset by an increase in net RINs cost and an overall reduced crude discount. Just as a reminder, the fourth quarter of 2017 was impacted by Wynnewood’s turnaround which was completed on schedule and on budget. In the fourth quarter of 2017 CVR Refining’s realized refining margin adjusted for FIFO was $11.87 per barrel as compared to $7.32 in the same quarter of 2016. The Group 3 2-1-1 crack spread averaged $19.96 per barrel in the fourth quarter of 2017 as compared to $11.60 in the fourth quarter of 2016.

Now, turning to our fertilizer segment, as previously mentioned, CVR Partners’ fourth quarter adjusted EBITDA was $8 million as compared to $18 million in the same period last year. The decrease in adjusted EBITDA over the periods was primarily attributable to lower realized ammonia and UAN sales prices, lower UAN sales volumes and approximately 12 days of unplanned downtime at the East Dubuque facility partially offset by increased ammonia tons sold. The average UAN product price at the plant gate for the fourth quarter of 2017 was $132 per ton as compared to $147 per ton in the prior year fourth quarter. The average ammonia product price at plant gate was $264 per ton in the fourth quarter of 2017 as compared to $352 per ton in the fourth quarter of 2016. Total consolidated capital spending for the fourth quarter 2017 was $39 million, which included $34 million at CVR Refining and $3 million at CVR Partners. The 2017 full year capital spending was $119 million. We estimate that the total consolidated capital spending for 2018 will approximate $230 million.

Our cash position remains strong as we ended the quarter with cash and cash equivalents of approximately $482 million on a consolidated basis. Total consolidated gross debt as of December 31, 2017 was approximately $1.2 billion unchanged from a year ago. On November 14, 2017, CVR Refining amended and restated its $400 million ABL facility which now matures in November 2022. CVR Energy has no debt exclusive of the debt that resides at CVR Refining and CVR Partners. As of December 31, 2017, CVR Refining’s total debt is approximately $545 million and CVR Partners’ total debt is approximately $647 million.

With that, Dave, I will turn the call back over to you.

[Dave Lamp, Chief Executive Officer]

Thanks, Susan. In summary, 2017 was a successful year for CVR Energy. For 2018, our mission is to be a top tier North American petroleum refining and fertilizer company as measured by safe reliable operations, superior financial performance and profitable growth. Looking at 2018 and beyond, we see following industry structure in general macro market themes. Favorable Brent-TI spreads due to the ever growing shale oil production favorable WCS-WTI spreads mainly due to the limited pipeline takeaway capacity from Canada, continued strong exports of gasoline and diesel, normalization of crude, gasoline and distillate inventories in the United States and for that matter, the world, constructive political pressure to reform the broken renewable fuel standard regulations, tax reform, fast approaching IMO marine fuel spec changes to 0.5 sulfur, total sulfur, improve fertilizer market conditions with solid demand and lower imports. With all of these, we believe CVR is well positioned for ‘18 and beyond.

To achieve our mission, our strategic initiatives and – the strategic initiatives and objectives for 2018 are to continually improve our all environmental health and safety matters. Safety is job one and safe operations are generally reliable operations. To leverage our crude gathering system and pipelines to deliver high quality crudes produced in our backyard at favorable costs, to build a wholesale retail business to reduce our RIN exposure, to install biodiesel blending facility – facilities at all our acts, to expand our capacity to process WCS in light shale oil crudes at Coffeyville to capture market opportunities offered with the coming IMO specifications, to improve our liquid yields at Wynnewood refinery by 3.5% and finally to restructure our organization to reduce G&A cost, eliminate unprofitable activities and improve decision making.

I would also like to add some more color – additional color to the RIN fiasco and the broken renewable fuel standard regulation, as mentioned earlier constructed political pressure has developed with the Philadelphia Energy Solutions bankruptcy and the continued high cost of RINs in the marketplace. As evident from this bankruptcy filing RINs make the difference between a healthy growing independent merchant refining company employing thousands of people and their families across the country with high pay and high skilled manufacturing jobs and a bankrupt unsustainable capital starved company fighting to stay in business. In addition, these companies had a few multiplier effects on the communities where they operate and their loss will be seriously felt in those communities through years. I believe the right senators are now engaged to repeal or significantly reform the regulation to prevent additional independent merchant refiners from the experience in the same pay. The industry – the refining industry only asked to allow free markets to work and ideally eliminate the mandate or at a minimum prevent RINs from picking winners and losers.

With that operator, we are ready for questions.

[Dave Lamp, Chief Executive Officer]

Again we would like to thank you for your interest in CVR Energy. We would also to thank our employees again for their hard work making 2017 a successful year for the company. We look forward to reviewing our first quarter results of ‘18 in our next earnings call. Thank you very much.

[Operator]

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.