CVR Energy Inc.

Greetings, and welcome to the CVR Energy Inc. Third Quarter 2022 Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Richard Roberts, Vice President of FP&A and IR. Thank you, Mr. Roberts. You may begin.

Thank you, Camilo. Good afternoon, everyone. We very much appreciate you joining us this afternoon for our CVR Energy Third Quarter 2022 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 2022 Third Quarter 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 may be deemed to be forward-looking statements. Your caution of these statements may be 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. Let me also remind you that CVR Partners completed a 1 for 10 reverse split of its common units on November 23, 2020. Any per-unit references made on this call are on a split-adjusted basis. 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 2022 third 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.

Thank you, Richard. Good afternoon, everyone, and thank you for joining our earnings call. Yesterday, we reported third quarter consolidated net income of $80 million and earnings per share of $0.92. EBITDA for the quarter was $181 million. Our strong results for the quarter were driven primarily by the refining segment due to high distillate cracks and our best-in-class distillate yield, somewhat offset by turnarounds at both fertilizer plants during the quarter. We are pleased to announce the Board of Directors has authorized a third quarter regular dividend of 40 cents per share and a special dividend of $1 per share, both of which will be paid on November 21st to shareholders of record at close of market on November 14th. Year to date, the Board has authorized regular and special dividends totaling $4.80 per share representing a yield of over 12% based on yesterday's closed price. In our petroleum segment, combined total throughput for the third quarter of 2022 was approximately 202,000 barrels per day, and like product yield was 97% on crude oil process. Benchmark crack spreads remained elevated during the quarter, with Group 3-211 averaging $43.94 per barrel. The distillate crack remained significantly above the gas crack in the quarter, and we continued to operate our refineries in max distillate mode. RIN prices also remained stubbornly high at $8 per barrel, thereby adding approximately $0.30 per gallon to fuel costs at the pump due to EPA's continued mismanagement of the RFS regulations. We have filed petitions in the Fifth Circuit seeking judicial review of our EPA's ridiculous and misguided denial of Winnie Wood small refinery exemptions for the years 2017 through 2021. We will continue to fight for the rights we believe Winnie Wood is entitled to, as intended by Congress when the RFS regulation was passed and became the law of the land. We expect to file for an exemption for 2022 soon. We continue to increase throughput rates at the Winnie Wood Renewable Diesel Unit in the quarter, processing approximately 18 million gallons of vegetable oil feedstock. The hobo spread averaged a negative $1.48 per gallon for the third quarter, an improvement of approximately 50 cents per gallon from the second quarter. For the third quarter, our financial results also improved for renewable diesel business, which currently is included in our corporate and other segments. In the fertilizer segment, we completed planned turnarounds at both facilities in the third quarter. We currently do not have any other planned turnaround scheduled for fertilizer until fall of 24. Fertilizer markets remain tight, and we have seen a steady increase in prices over the past few months, which is carried through to the fall, and we expect to carry through through the fall and into 2023. Now let me turn the call over to Dane to discuss our financial highlights. Thank you, Dave, and good afternoon, everyone.

For the third quarter of 2022, our consolidated net income was $80 million. Earnings per share was $0.92, and EBITDA was $181 million. Our third quarter results include an unfavorable inventory valuation impact of $114 million, a negative marked market on our estimated outstanding rate obligation of $38 million, and unrealized derivative gains of $20 million. Excluding the above-mentioned items, adjusted EBITDA for the quarter was $313 million, and adjusted earnings per share was $1.90. Adjusted EBITDA on the petroleum segment was $306 million for the third quarter, driven by high utilization rates out of refineries and strong product cracks in the mid-con. Our third quarter realized margin, adjusted for inventory evaluation, unrealized derivative gains, and RIN mark-to-market impacts was $23.05 per barrel, representing a 52% capture rate on the Group 3 2-1-1 benchmark. RIN's expense for the quarter, excluding the mark-to-market impact, was $98 million, or $5.28 per barrel, which negatively impacted our capture rate for the quarter by approximately 12%. Note this excludes the approximately 50 million worth of RINs generated by the renewable diesel unit in the third quarter. The estimated accrued RFS obligation on the balance sheet was $715 million at September 30th and was marked to market at an average RIN price of $1.69. As a reminder, our estimated outstanding RIN obligation excludes the impact of any small refinery exemptions. Direct operating expenses in the petroleum segment were $5.53 per barrel for the third quarter, compared to $4.52 per barrel in the third quarter of 2021. The increase in direct operating expenses was primarily due to higher repair and maintenance expenses and increased natural gas and electricity costs. Adjusted EBITDA on the fertilizer segment was $10 million for the third quarter, with results impacted by lower production volumes and elevated operating expenses as a result of the two planned turnarounds completed in the quarter as well as approximately 11 days of downtime at the Coffeyville facility due to outages at the third-party air separation plant. The partnership declared a distribution of $1.77 per common unit for the third quarter of 2022. As CVR Energy owns approximately 37% of CVR Partners common units, we will receive a proportionate cash distribution of approximately $7 million. Cash provided by operations for the third quarter of 2022 is $156 million and free cash flow was $93 million. Total consolidated capital spending was $68 million, which included $23 million in the petroleum segment, $25 million in the fertilizer segment, and $16 million on the pretreatment unit for the RDU. For the full year 2022, we estimate total consolidated capital spending to be approximately $204 to $234 million, and turnaround spending to be approximately $80 to $85 million. Turning to the balance sheet, we ended the quarter with a consolidated cash balance of $618 million, which includes $119 million of cash in the fertilizer segment. Total liquidity as of September 30th, excluding CVR partners, was approximately $746 million, which was comprised of primarily a $499 million of cash and availability under the ABL facility of $247 million. Looking ahead to the fourth quarter of 2022 for our petroleum segment, we estimate total throughput to be approximately 200 to 220,000 barrels per day, direct operating expenses to range between 100 and 110 million, and total capital spending to be between 30 and 35 million. For the fertilizer segment, we estimate our fourth quarter 2022 ammonia utilization rate to be between 93 and 98%, direct operating expenses to be approximately 60 to 70 million, excluding inventory impacts, and total capital spending to be between 5 and 10 million. For renewables, we estimate fourth quarter 2022 total throughput to be approximately 14 to 17 million gallons for the quarter due to a catalyst change. Direct operating expenses for the fourth quarter are expected to be between 5 and 7 million. With that, Dave, I'll turn it back over to you.

Thanks, Dane. In summary, we had another strong quarter driven by the refining segment. We are pleased to be returning another $1.40 per share of dividends to our shareholders. Market conditions are currently very strong across all our businesses, and we believe we are well positioned to benefit from the structural changes we see taking place. Starting with refining, the strength in the cracks this year has largely been driven by tight supply conditions driven by refined product inventories well below five-year average levels. Between lost production capacity as a result of refinery closures and significantly increased operating costs for many refineries outside the United States. We are currently seeing record exports of gasoline and diesel out of the U.S., while imports have mostly stayed flat. In addition, planned and unplanned downtime at refineries across the U.S. has caused refined product supplies to tighten further and cracks to move higher. Despite the declines we are experiencing in gasoline and diesel demand, forward distillate cracks are heavily backward dated, but are currently over $45 per barrel for all of 2023. On the crude side of the equation, inventories are also low on the low end of the five-year averages, and continued releases from the strategic petroleum reserves are impacting differentials. Shell oil production volumes are up. And we believe most incremental barrels are going to exports, which is supportive of a wider breadth TI differential. We are seeing volumes on our gathering system stabilize at around 125,000 barrels per day. And new projects have been announced in our gathering areas that could offer additional upside potential. Turning to the fertilizer segment, nitrogen fertilizer production in Europe has been significantly reduced as a result of an increase in natural gas and energy prices over the past year, and this has created an opportunity for U.S. producers to export fertilizers to Europe. As a result, domestic fertilizer supply is tighter, and we've seen a steady increase in prices since summer. We have sold product through the end of the year and into the first part of 23, and believe prices for the spring of 23 could be similar to the highs that we saw in the spring of 2022. We currently believe strong fundamentals in the fertilizer market could persist for several years. With turnarounds now complete, we are looking at the potential brownfield capacity expansion at both our plants, which we think could be done at a much lower cost than greenfield capacity. Finally, in our renewable business, we continue to ramp up production on renewable diesel units and have reached design capacity of 315,000 gallons per stream day of feed in early October before taking the unit down for catalyst change. Yields have recently been above 90% for renewable diesel production as a percentage of vegetable feedstock. With the catalyst change currently in process, we expect to add additional isomerization catalysts, which should increase catalyst life by a few months. Construction on the PTU is progressing and we are currently expecting an in-service date early to mid third quarter of 2013. With the addition of the PTU, we expect to see between a 50 cent and a dollar per gallon increase in our renewable diesel margin. Looking at the fourth quarter of 2022, quarter-to-date metrics are as follows. Group 2 1-1 cracks have averaged $52.54 per barrel, with a Brent TI spread at $5.33 per barrel, and the Midland differential at $1.90 over WTI. WTL differential has averaged $1.21 over TI, and the WCS differential has averaged $25.77 per barrel under WTI. Fertilizer prices remain strong as well, with ammonia prices over $1,100 per ton and UAN prices over $5.50 per ton. As of yesterday, Group 3 2-1-1 cracks were $46.71 per barrel. The Brent TI spread was $7.87 per barrel. WCS was $29.15 under WTI. and rins were approximately $8.60 per barrel. As I mentioned, we believe many factors driving the strong market conditions in our refining and fertilizer business are structural, and we are optimistic about the outlook for the rest of the year in 2023. Our focus remains unchanged. We strive to operate our plants in a safe, reliable, and environmentally responsible manner and continue to grow and continue to focus on growing our renewables business. Our transformation to segregate the renewables business remains on track, and we expect completion in the first half of 2023. We also continue to explore opportunities to invest in projects where we believe we can earn an attractive return, both in renewables and in our refining business. We have identified some diesel recovery projects we believe could increase our industry-leading distillate yield to close to 50% on crude processed. I look forward to providing additional details on these projects as they develop. With that, operator, we're ready for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. One moment please while we pull for questions. Thank you. Our first question is with Matthew Blair from TPH. Please proceed with your question.

Hey, good morning, Dave, and congrats on the strong capital returns to shareholders. I had a question on your WCS share at Coffeyville. It looks like it stayed fairly low, I think just around 6% of your total feedstock slate, despite some attractive WCS discounts. So is that going to be the case going forward that Even if WCS spreads widen out, the refinery will process some, but then you'll resell some WCS at Cushing?

Well, I think this quarter we'll be maximizing the amount of WCS we run because, as you mentioned, the spreads did widen out. In the first part of the quarter, it was actually fairly narrow. We were better off to sell it. So we have adjusted, and then we had some work we had to do on the coker in a sulfur plant that took some of the WCS out of the slate for a while. We do have a turnaround next year on the coker that will affect our WCS runs, but I expect us to run up to the maximum we can within sulfur and tan limits of our process equipment.

Sounds good. And then, Dave, do you have any expectations for this upcoming RVO from the EPA? You know, there's a thought that things actually might look pretty different going forward. You know, the EPA might issue a 2023 to 2025 RVO. And there's also some talk about how, you know, this 15 billion ethanol blending rate requirement is going away and EPA might have more flexibility to reduce the ethanol requirements. Do you have any thoughts on that?

Well, I do, Matt. None of them are any good. Most of the time, my view is that EPA has completely mismanaged the entire RFS program, starting with this ridiculous denial of all small refinery waivers. It gives me no confidence that they'll do anything that they say. Um, and I don't know how in the world you can issue an RVO for the next three years when you don't even know what gasoline demand is or distillate demand is. Um, and a lot of factors can change those, uh, as you well know. Um, I don't know, I'm sure you've noticed, but RIN prices have drifted up, um, ever since the RVO has been, was announced for, uh, for 21, 22, um, and, uh, It's done nothing but go up, and that's just reflected in the fact that they've maintained this $15 billion of ethanol, and the market basically can't blend that much. Now, the economics for blending ethanol are very strong right now, particularly with a $1.71 RIN, D6 RIN, but my confidence level on them to do anything that makes any sense. They are worried about the price of gasoline, and yet They have 30 cents now, probably 35 cents, frankly, of cost built in for blending ethanol when it doesn't really need a subsidy. It's profitable to do on its own.

Makes sense. Thanks for all the color. You're welcome.

Thank you. Our next question is from John Royale with J.P. Morgan. Please proceed with your question.

Hi, good afternoon. Thanks for taking my question. If you could potentially get into the potential brownfield expansions in fertilizer, any further detail there, you know, what size we're talking about, anything on potential costs or return expectations?

Well, we're in the early throes of, we just completed two turnarounds, big turnarounds for both plants. So after we get all lined out from all that, which we're pretty close to, we'll start the feasibility studies on these. But I think you're looking at a modest increase, somewhere between less than 15%. Don't know the exact numbers yet because we just really haven't done the work yet. But I think I would estimate that there are less than 100 million in each expansion, something like that. Or we probably won't do them if they're any more expensive than that. But 15% is a good walking number. Capacity on East Dubuque is around 1,100 tons a day. And Coffeyville is about 1,350 or so tons per day. So that gives you some numbers to work with.

Yeah, it's really helpful. Thank you. And then just thinking about the special dividend and kind of how it ties into the balance sheet. How do you feel about your net leverage right now? I think it's just under a billion of net debt. Do you think that's kind of the right level for this business or could you actually draw down some cash with the special dividend in excess of cash flows and lever up a little?

Well, we think about, you know, with the current EBITDAs, it's probably, we probably could afford some more debt, but a little bit of concern of what the interest rates are going to be going forward. We do have one tranche of our bonds that are due 25. So we'll be looking at refinancing somewhere in 24 on those. And we're always keeping the option open to buy down some of that if the interest rates are are too high. You know, it's too early to know what they'll be at this point. But, you know, we always had the opinion that we're a cash machine and we pay, if we earn it, we're going to pay it out to shareholders. And I think we've shown that in the last two quarters that that is truly what we march to.

Great. Thank you. You're welcome.

Thank you. Our next question is from Carly Davenport with Goldman Sachs. Please proceed with your question.

Hey, good afternoon. Thanks for taking the questions. Wanted to just start on the capital return side. Can you talk a little bit about kind of where you view the optimal regular dividend level over time? Is there potential to grow that in the near to medium term or is there more of a preference to continue to kind of utilize the special dividend as a flywheel in this robust margin environment?

Well, Carly, I think the interesting fact is that I think this is the first time in history we've had both businesses hitting on full stride, refining at the same time as fertilizer and fertilizer at the same time as refining. And that is a little bit of the logic for a special because the fertilizer cycle will turn at some point. And I don't know on refining. I think it's structurally short for quite a long time. But I think we used to have a regular dividend of around $0.80. And we would love to get back to that number. And the board looks at it every quarter to see if it makes sense to increase the regular and decrease the specials. But right now, with both hitting at the same time, history would tell us that doesn't last forever. So we remain cautious on that.

Got it. That makes sense. Thank you. And then the follow-up was just on renewable diesel. Recognize that the process to kind of build that out and eventually break the business out is ongoing. But can you talk a little bit about what you're seeing from a unit margin perspective at that business as you think about how 3Q tracked and then thinking about where 4Q has been tracking?

Sure. Q3, I think, or probably September, was a good month for us. With a hobo, as I mentioned, was off 50 cents. and some of the basis had come in to some degree. You know, I always thought refining was a wild business, but I'll tell you, renewable is wilder than any of it. There's so many variables in it that go up and down, and with low carbon fuel standards at $60, when we started the unit, they were almost $200. That's largely been offset by rent increases. But, you know, we're still optimistic. I think September we printed a positive number, and we still don't have the pathway completed on the final pathway for the LCFS. So we're on the provisional still. As we get towards getting that certified, then we'll pick up another tranche. And then, you know, as I mentioned, we've got the capacity. We've demonstrated full capacity. We still have some challenges around that to work out in the refinery, but I think we'll be successful at that. And we should have a pretty good run in 23, assuming we can lengthen the catalyst life a little bit by adding some more isomeric catalyst to the mix. So, you know, we're very positive on it. And with the PTU, you know, PTU is going to be between 50 cents and a dollar uptipped. And that just adds right to the bottom line.

Great. Appreciate that color. Thank you.

You're welcome.

Thank you. Our next question is from Paul Chang from Scotiabank. Please proceed with your question.

Hey, guys. Good afternoon. Can you talk a little bit about the project you mentioned of the district yield improvement? What is the capacity, the yield? the timing and also which facility and what is the cap expanding may look like?

Paul, we're in the early phases of looking at this, but we're pretty confident there's at least 6,000 barrels available to pick up over top of what we do today. We typically yield about 44% on crude. We're trying to push that number towards 50%. And the molecules are there. It's just we need to de-bottleneck all three of our distillate hydrotreaters and put some hardware on some of our vacuum towers to recover this distillate. But I'm pretty confident it's there. It's just a matter of what is it going to cost to get that done. And we're still in the engineering studies to figure that out.

And David, what is the... the earliest that the project will get sanctioned or will get complete? Any kind of timeline that you can share?

Well, you know, it's going to take us another six months to fully define it, I think. You know, then it's a question of do we need downtime to make the changes? And then those will have to coincide with turnarounds or, you know, if we deem it or opportunities come up to do it. But Most likely it's going to take a turnaround to do these because we have to make modifications to the vacuum towers to do it. So I'm going to guess two years minimum, maybe three. But I'll tell you, Paul, we still think diesel is short for a long, long time. It just structurally is going to be around for a long time, it appears to us, with IMO 2020 and some of the other factors that have happened on that gas and and the balance around the world.

Right. And David, for the renewable diesel, you're saying that you're going to have a catalyst change in the fourth quarter. That's only six months since you started up the project. It seems to be a very short duration. Has that come as a surprise?

No, that was our design basis, was six months at full rate. I think the first load may have gone a little quicker just because of startup. But we've got a good handle on it now. Like I said, I think we'll stretch that out. I'm pretty confident we'll get another two months at least. So hopefully we'll only have one catalyst change niche next year. We're budgeting for two, but hopefully we'll only have one.

And how expensive it is when you change the catalyst each time?

Cal has cost about $2 million, and to change it out is about $3 million. So $5 million total.

Okay.

And final question, that any preliminary estimate for 2023 CapEx and turnaround expense? I think that you do have one turnaround in cost of view next year. And then also that what is your RVO currently on the balance sheet reliability? Thank you.

We don't disclose typically. We all provide guidance for the next quarter, Paul, on what we plan to do in 23. As far as the RVO, or as far as the RIN short, Dan, you want to cover that?

Yeah. So the short as of the end of the month or the end of the quarter, Paul, was 422 million rins, just under, well, 423 million rins, and it was $715 million. Yeah.

And that has come down, Paul, since the second quarter because we are buying feverishly for the Coffeyville and to close out the Coffeyville Refinery RVO.

And Then how of the 423, what's the component related to Winniewood?

Of the 423, around 295 million RINs are Winniewood or just under half a million dollars, Paul.

Thank you.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Again, we'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 safe, reliable, and environmentally responsible operations. We're proud of the work we do, and we're proud of providing the American public with the fuels they need to enjoy modern life. And we look forward to reviewing our fourth quarter results in the next earnings call. Thank you.

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