
HF Sinclair Corporation
5/4/2023
Welcome to HF Sinclair Corporation and Holley Energy Partners fourth quarter 2022 conference call and webcast. Hosting the call today is Tim Goh, incoming Chief Executive Officer of HF Sinclair. He is joined by Atanasov, Chief Financial Officer, Steve Ledbetter, EVP of Commercial, Valerie Pompa, EVP of Operations, and Matt Joyce, SVP of Lubricants and Specialties, along with John Harrison, Chief Financial Officer of Hawley Energy Partners. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you'd like to ask a question at that time, please press star 1 on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing star 1 again. If you should require operator assistance, please press star zero. We ask that you please limit yourself to one question and one follow-up. Additionally, we ask that you pick up your handset to allow optimal sound quality. Please note that this conference is being recorded. It is now my pleasure to turn the floor over to Craig Beery, Vice President, Investor Relations. Craig, you may begin.
Thank you, Jack. Good morning, everyone, and welcome to HS Sinclair Corporation and Holley Energy Partners' first quarter 2023 earnings call. This morning, we issued press releases announcing results for the quarter ending March 31st, 2023. If you would like a copy of these press releases, you may find them on our website at hfsinclair.com and hollyenergy.com. Before we proceed with remarks, please note the safe harbor disclosure statement in today's press releases. In summary, it says statements made regarding management expectations, judgments, or predictions are forward-looking statements. These statements are intended to be covered under the safe harbor provisions of federal security laws. There are many factors that could cause results to differ from expectations, including those noted in our SEC filings. The call also may include discussion of non-GAAP measures. Please see the earnings press releases for reconciliations to GAAP financial measures. Also, please note any time sensitive information provided on today's call may no longer be accurate at the time of any webcast replay or rereading of the transcript. And with that, I'll turn the call over to Tim Goh. Good morning, everyone.
Today we reported first quarter 2023 net income attributable to HF Sinclair shareholders of $353 million, or $1.79 per diluted share. These results reflect special items that collectively decreased net income by $41 million. Excluding these items, adjusted net income for the first quarter was $394 million, or $2 per diluted share, compared to adjusted net income of $176 million, or 99 cents per diluted share, for the same period in 2022. Adjusted EBITDA for the first quarter was $705 million, an increase of approximately $328 million compared to the first quarter of 2022. In our refining segment, first quarter 2023 EBITDA was $544 million compared to $208 million in the same period last year. This increase was primarily driven by higher refining margins of both the West and Mid-Continent as well as a result of steady demand, tight supply, and favorable crude spreads. Crude oil charge averaged 499,000 barrels per day in the first quarter of 2023 compared to 525,000 barrels per day in the first quarter of 2022 due to heavy turnaround maintenance during the period. Of the three refinery turnarounds we conducted in the first quarter of 2023, I am pleased to report we successfully completed all three on time and on budget. While this is a significant accomplishment in itself, we also addressed many of our end-of-cycle reliability issues on the refinery equipment that was available during these downtimes. Our drive to improve our operating reliability is built around the maintenance strategies that we execute during these turnaround cycles. In our renewable segment, we reported adjusted EBITDA of $3 million and total sales volume of 46 million gallons for the first quarter of 2023. We continue to work to increase utilization at our renewables facilities and expect to achieve normalized run rates in the second half of 2023, which will allow us to optimize advantage feedstock from our pretreatment unit. Our marketing segment reported EBITDA of $6 million and total branded fuel sale volumes of 328 million gallons, representing a $0.04 per gallon margin in the first quarter of 2023. We continue to see strong value in the Dyno brand as the marketing business provides a consistent sales channel with margin uplift for our produced fuels, and we expect to grow our branded sites by 5% or more per year. Our lubricants and specialty product segment reported EBITDA of $99 million for the first quarter of 2023, compared to EBITDA of $145 million for the first quarter of 2022. This decrease was largely driven by the positive FIFO impact from consumption of lower priced feedstock inventory in the first quarter of 2022. We continue to be pleased with the strong performance of our lubricants and specialty product segment and continue to focus on sales mix optimization of our base oils and finished products. AGP reported EBITDA of $88 million in the first quarter of 2023, compared to $73 million in the same period of last year. This increase was mainly driven by contributions from the Sinclair Transportation Assets, which were acquired in March of 2022, as well as higher revenues from our Woods Cross Refinery Process Units, partially offset by higher interest expenses. Overall, we returned $334 million in cash to shareholders through share repurchases and dividends during the first quarter. As of March 31st, 2023, we have $420 million remaining on our share repurchase authorization. We remain fully committed to our long-term cash return strategy of returning 50% or more of our net income to our shareholders, while maintaining a strong balance sheet and investment-grade credit rating. This morning, HF Sinclair made a non-binding proposal to acquire all of the common units of Holley Energy Partners LP, not already owned by HF Sinclair, pursuant to a stock-for-unit merger transaction that would result in HEP becoming an indirect wholly owned subsidiary of HS Sinclair. We believe the proposed transaction simplifies our corporate structure, reduces costs, and further supports the integration and optimization of our portfolio. Please refer to the separate press release for specifics related to this proposal. Looking forward, as I make the transition to CEO of HS Sinclair, I'd like to take this time to share with you my near-term priorities for the company. First, we must continue advancing our operations excellence. This means improving the safety and reliability of our plants, which we believe will result in higher utilization rates and lower operating expenses. This is our top priority, and we have recruited many reliability subject matter experts over the last few years, and we are implementing our operations excellence management system to guide us through this journey. But as I mentioned earlier, it will take time working through our turnaround cycles to make the necessary improvements to our equipment. Second, we have completed a number of transformative acquisitions and we continue to focus on the integration of those assets into our portfolio with the goal of capturing more operating efficiencies and margin opportunities across our asset base. We already realized annual run rate synergies of roughly $100 million from the Sinclair acquisition, and we believe there is more to capture from this acquisition as well as in our lubricant and specialty product segment. Third, I am focused on free cash flow, and I'm committed to continuing our cash return strategy that I mentioned earlier. Returning excess cash to shareholders through dividends and share repurchases while maintaining an investment-grade balance sheet is fundamental to maximizing shareholder value over the long term and positioning the company for future success. With that, let me turn the call over to Atlas.
Thank you, Tim, and good morning, everyone. Let's begin by reviewing H.F. Sinclair's financial highlights. NIP cash flows provided by operations for the first quarter of 2023 total $178 million, which included $164 million of turnaround spent in the quarter. HF Sinclair's standalone capital expenditures totaled $92 million for the first quarter of 23. As of March 31st, 23, HF Sinclair's total liquidity stood at approximately $3 billion, comprised of a standalone cash balance of $1.36 billion, along with our undrawn $1.65 billion unsecured credit facility. As of March 31st, 23, we have $1.7 billion of standalone debt outstanding with a debt-to-cap ratio of 16% and net debt-to-cap ratio of 3%. HEP distributions received by HF Sinclair during the first quarter of 23 total 21 million. HF Sinclair owns 59.6 million HEP limited partner units, which following the acquisition of Sinclair Transportation represents 47% of HEP's outstanding LP units at a market value of approximately $950 million of last night's close. Let's go through some guidance items. With respect to capital spending for full year 2023, we still expect to spend between $250 to $280 million in refining, $25 to $35 million in renewables, $35 to $50 million in lubricants and specialty products, $20 to $30 million in marketing, $50 to $80 million in corporate, and 530 to 630 million for turnarounds and catalysts. At HEP, we expect to spend between 25 and 35 million in maintenance and 5 to 10 million in expansion and joint venture investments. For the second quarter of 2023, we expect to run between 550 to 580,000 barrels per day of crude oil in our refining segment And we have planned turnarounds scheduled at our Navajo and Parco refineries during the period. And lastly, as Tim mentioned, please refer to our separate press release we issued this morning for specifics related to our proposal to acquire the outstanding HEP public units. As negotiations are currently ongoing, we're unable to speak to specifics around the proposal during Q&A. And with that, let me turn the call over to John for an update on HEP.
Thanks, Agnes. HEP generated solid first quarter earnings supported by safe and reliable operations and strong volumes in both our crude and refined product transportation and storage systems. HEP's first quarter 2023 net income attributable to Holley Energy Partners was $58 million, compared to $50 million in the first quarter of 2022. The year-over-year increase was primarily attributable to earnings related to the Sinclair Transportation Assets, as well as higher revenues from our Woods Cross refinery processing units, partially offset by higher interest expense and operating costs. HEP's first quarter of 2023 adjusted EBITDA was $108 million, compared to $85 million in the same period last year. A reconciliation table reflecting these adjustments can be found in HEP's press release. HEP generated distributable cash flow of $84 million, and we announced a first quarter distribution of 35 cents per LP unit, which is payable on May 11th to unit holders of record as of May 1st. Capital expenditures during the quarter were approximately $8 million, including $4 million of expansion, $3 million in maintenance, and $1 million of reimbursable CapEx. We ended the quarter with approximately $556 million in liquidity, comprised of $7 million of cash and $548 million of availability under our $1.2 billion revolving credit facility. For 2023, we are focused on safe and reliable operations while we negotiate the proposal from HF Sinclair. We are now ready to turn the call over to the operator for any questions.
Certainly. The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your touch-tone phone. We ask that you please limit to one question and one follow-up. If you have additional questions, we welcome you to rejoin the queue. If at any point your question has been answered, you may remove yourself from the queue by pressing the star 1 key again. Thank you. Our first question comes from the line of Roger Reed with Wells Fargo Securities. Your line is open. Yeah, thank you. Good morning, everybody.
And Tim, welcome to the lead role here.
Thanks, Roger. Appreciate it.
So I guess one question for me, starting with the proposed HEP consolidation, you know, why now, and can you give us a little bit of the, you know, the back and forth between the two entities in terms of determining the right value here and the decision to go, you know, all units, or excuse me, all stock for units instead of, you know, a combination of things?
Yeah, Roger, as Agnes mentioned earlier, We just put the proposal out last night. We're not able to talk about it just because it's a public negotiation. But what I can tell you is we believe this proposed transaction simplifies our corporate structure, it reduces our costs, and it further supports the integration and optimization of our portfolio. It also provides an opportunity to unlock cash. that is currently being held at the MLP level for LP distributions and debt reduction. And this cash would become available for Dyno's long-term capital allocation strategy.
Okay, that's helpful. And then my unrelated follow-up, you mentioned renewable diesel should be at full run rates second half of this year. Obviously, Q1 was a little bit of a bump in the road, to say the least. The factors talked about before were the hydrogen issue as well as just the startup kind of challenges. So, I'm curious between where you are today and where you'd expect to be mid-year onwards, how do those two items get solved?
Roger, thank you. This is Atlas. First of all, I think we're pleased with the performance of our renewables. segment in the first quarter on an adjusted EBITDA basis, we were positive, which we're pleased with. With respect to some of the challenges that we've talked about in the past couple, one of them has been reliability. The second one has been hydrogen availability. So, with respect to operational challenges, we've made very good progress in the first quarter. We've helped improve yields in some of our particular Cheyenne assets. and we continue to work on a longer-term solution for our hydrogen problem. So, working on the process optimization as well as the long-term solution on hydrogen are two important priorities for us. With respect to run rates, I think we have made steady progress, but we're really looking at that second half of the year where we're looking to achieve normalized run rates. With respect to the second quarter, I would also point to your attention to the fact that we have turnarounds in two of our facilities that are co-located with refineries, both Barco and Navajo, which would impact run rates in the second quarter. But that also gives us an opportunity to really continue to work on addressing operational issues and come out really in better shape after these turnarounds.
Yeah, and Roger, I'll just chime in as well, just for some color. You know, we're not happy with the results of the renewable diesel business yet, but we are happy with the progress. And so showing positive adjusted EBITDA this quarter is evidence that we're moving in the right direction. As Agnes mentioned, we had several turnarounds. This quarter, we have a few more here in the second quarter that will continue to improve the hydrogen infrastructure and the rest of the utility infrastructure that is around these renewable diesel plants, as well as what Agnes mentioned, just our better understanding of how to run these plants better is going to contribute and help us deliver in the second half the run rate that we're expecting.
Yeah, fair enough. Could I just ask the one clarification? Since the hydrogen obviously is a long-term solution, if you're going to run at higher rates, does that imply you do have a short-to-medium-term solution in place then?
Well, I think the short-to-medium-term solution is to just continue to optimize the operation of the assets. And like I said, we've seen good progress there. really the longer-term solution is hydrogen supply, supplying hydrogen. Another thing is, as we look at our just conventional diesel cracks, sometimes we obviously have to make decisions around economics, and that's part of the optimization equation.
Yeah, we think our short-term solution, to get to our normalized run rate in the second half, we have solutions that we can work to to get to that. And then, of course, we are working long-term solutions to our hydrogen supply issues that we're not ready to talk about today but are in the process of being worked.
Appreciate that. Thank you.
Our next question comes from the line of Matthew Blair with TPH. Your line is open.
Hey, good morning, everyone. Tim, I was hoping you could elaborate more on the opportunity to improve refinery operations. You mentioned for the three planned turnarounds in Q1, you addressed some, I think it was end of cycle issues. Could you talk about and provide any examples of the problems that you're finding and what you're doing to fix them?
Yeah, Matt, this is Tim. I'd be happy to. I've mentioned before that You know, you've got resource and capability opportunities to improve. You've got systems and processes to improve. But the third leg in the triangle is we've got to improve the equipment itself, right? I like to say equipment doesn't know we're talking about it until we actually do something with it. And during the turnarounds, we have the ability to to take those maintenance strategies and actually affect the equipment that's usually not available except for turnarounds. So let me turn it over to our new EVP of operations, Valerie Pompa. She has over 30 years of operating experience, and we're really glad to have her on our team. Val, you want to talk a little bit more about turnarounds?
Sure. Our first quarter turnarounds, so some examples going back to hydrogen, Navajo specifically, we've spent A significant amount of our scope and effort are on hydrogen improvement projects, really gained at improving reliability around our hydrogen system in Navajo. And so our strategy that goes from our equipment strategies that Tim mentioned aimed for reliability or short-term, PM programs and PM program improvements and then during the turnarounds that gives us opportunities to upgrade whether it be exchangers, specific equipment that has reached a point where it's time to change it, upgrade and focus really on just getting our utilization and availability up higher to meet our demand.
Yeah, I think as a summary, Matt, Val has been doing a great job driving these improvements. We implemented over 15 risk reduction projects during the turnarounds and over three very large yield improvement projects during the turnarounds. So we're expecting improved operations as we start to run conditions here.
Sounds good. And then on the lubricant side, Was there a material FIFO impact in Q123? And could you talk about the factors that supported better lubricants, profitability, quarter-over-quarter, even though your index declined? Thanks.
Yeah, hi there. I'll take this one. This is Atlas. So with respect to our FIFO impact, there was a FIFO impact. It was about 14%. a million, but even with that in mind, we're still very pleased with our results. When you look at the profitability of the business, there's really a couple of notable drivers. One of them is the favorable product mix. The second one is really strong margins in our group three base oil that go into a lot of higher value end uses. And the third one is really continued strength in the finished products market. So when you take all of those three together, that really accounts for the successful quarter that we've had in that business. you know, product mix, products mix, and margins are really the two main drivers.
Yeah, and Matt, let me chime in too. The FIFO impact that Atlas mentioned was a $14 million headwind for this quarter. This is the first quarter of 23. Without that, our ex-FIFO number would have been higher than what we reported and was actually a quarterly record for us on an ex-FIFO basis. Last year, which is what you asked, We had a sizable FIFO tailwind. As you mentioned, it was something closer to $49 million, something in that range. And on an ex-FIFO basis, it would have been lower than that. But it gives me the opportunity to introduce another new member of our leadership team, Matt Joyce, who has nearly 30 years in the base oil and lubricants industry. We're really glad to have him. Matt, you want to provide any other color on the lubes business?
Yeah, sure. Thanks, Tim. And Matt, nice to meet you. Building on what Atnas mentioned, the team has really positioned us well, focused on key objectives. We're going after certain end-use markets that are higher-value markets, and we're well-situated in those today. We enjoy a presence in many of those markets, off-highway construction, mining, natural gas. We've introduced some new products into that space, and we're seeing some really good results. And further to that, we've seen some geographic expansion into targeted markets. that's been successful. And very finally, the product mix that Atnas mentioned and Tim has mentioned in prior earnings calls, that's by design. That is something that was intentional, that's not just stumbling into it. We have purpose to get in there and make our value and our value proposition to our end-user customers as robust as possible. As a result, get the returns that you're seeing and continue to trend at this higher than mid-cycle range, and we're really excited about that.
Great. Thanks for all the commentary.
You bet. Our next question comes from Paul Chang with Scotiabank. Your line is open.
Thank you. Good morning. Two questions, please. Tim, since you're saying you're going to take the opportunity during the turnaround to improve the assets, so should we assume over the next two or three years the turnaround expense is going to be higher than usual? And if that's the case, do you have a range that you can provide how that looks like over the next two or three years? And second question is, I think in the past that the company has said the lubricant in the long haul may be worth more money for other people and may not be together with the HSN care. So wondering if that is still the view, and if that's the view, what will be the precondition or criteria for you to make that decision? Thank you.
Okay, Paul, thanks for your questions. Let me ask Val to comment on the turnaround.
Yeah, so our turnaround spend this year has really been driven by the acquisitions. We acquired several, as you know, new sites. Those came with refineries ready for turnaround. We've implemented all of those, and we spent really this last year working towards an optimized turnaround schedule. So that's I'll call this kind of our catch-up year to really bring all those acquisitions in, address the reliability concerns that we saw, and now get us on a run rate for turnaround.
Paul, let me take the second questions on lubricants.