HollyFrontier Corporation

welcome to the holly frontier corporation's first quarter 2021 conference call and webcast hosting the call today from holly frontier is mike jennings president and chief executive officer he is joined by rich volvo executive vice president and chief financial officer tim go executive vice president and chief operating officer tom creary president refining and marketing and bruce lerner president holly frontier lubricants and specialties 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 would like to ask a question at that time, please press star 1 on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. If you should require operator assistance, please press star 0. 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, Julie. Good morning, everyone, and welcome to Holley Frontier Corporation's first quarter 2021 earnings call. This morning, we issued a press release announcing results for the quarter ending March 31, 2021. Yesterday afternoon, we issued a press release announcing our acquisition of Shell's Puget Sound Refinery. If you would like a copy of the press releases and the acquisition investor presentation on the Puget Sound Refinery, you may find one on our website at hollyfrontier.com. Before we proceed with remarks, please note the safe harbor disclosure statement in today's press release. 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 release and acquisition investor presentation 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 Mike Jennings. Thanks, Greg. Good morning, everyone. Today we reported first quarter net income attributable to Holly Frontier shareholders of $148 million, or $0.90 per diluted share. These results reflect special items that collectively increased net income by $234 million. Excluding these items, adjusted net loss for the first quarter was negative $85 million or negative 53 cents per diluted share versus adjusted net income of $87 million or 53 cents per diluted share for the same period in 2020. Adjusted EBITDA for the period was $47 million, a decrease of $221 million compared to the first quarter of 2020. The refining segment reported adjusted EBITDA of negative $66 million compared to 176 for the first quarter of 2020. And consolidated refinery gross margin was $8 per produced barrel, a 28% decrease compared to the same period in last year. This decrease was primarily due to lower realized product margins coupled with compressed crude differentials. First quarter margins were also impacted by winter storm Erie, which increased natural gas costs by approximately 65 million across our refining system. First quarter crude throughput was approximately 348,000 barrels per day, slightly below our guidance of 350 to 380,000. We recently completed planned turnaround work at our Tulsa and Woods Cross refineries and have no scheduled maintenance until the fall. Strong finished product and base oil margins drove a record financial quarter for our lubricants and specialty products business. Recorded EBITDA was $87 million compared to $32 million in the first quarter of last year and included $8 million for restructuring charges. Excluding the $8 million of restructuring charges and lubricants and specialties, adjusted EBITDA was $95 million. RAC Forward adjusted EBITDA was $88 million, representing an 18% adjusted EBITDA margin. For the fourth year of 2021, we expect to earn between $230 and $270 million of adjusted EBITDA in the RAC Forward portion of this business. Within the RACFAC segment, we expect base oil margins to temper from current spot market levels, but expect they will continue to be higher than the past three years. The energy part of this is going to be the job of $96 million for the first quarter, $64 million in the first quarter of last year. During the quarter, refined product volumes improved, and we're optimistic for continued improvement in refined product demand in our markets as we head into the summer driving season. We are excited to announce that yesterday, Holley Frontier entered into an agreement to acquire Shell's Tooth Sound Refinery for a purchase price of $350 million plus hydrocarbon inventory to be valued at closing with an estimated current value of $150 to $180 million. This purchase price represents an attractive acquisition multiple of one and a half to two times D to the dot net of inventory based on the refinery's historical financial performance. The Puget Sound refinery is a high conversion, 149,000 barrel per day capacity plant located in Anacortes, Washington. It is well positioned in the premium Pacific Northwest product market and has advantage access to both Canadian crude via the Trans Mountain pipeline as well as Alaska North's flow of supply. Puget Sound has an outstanding environmental health and safety track record and has been well capitalized for the past 10 years. We are committed to continuing the site's track record of responsible operations and we look forward to welcoming Puget Sound's highly skilled workforce to the Holly Frontier family. Financially, Puget Sound Refinery has a history of consistent earnings and free cash flow, averaging $235 million of annual EBITDA and $75 million of free cash flow between 2015-2019. Again, an attractive one-and-a-half to two-time EBITDA multiple net of inventory for this well-capitalized and very well-operated refinery. We expect the acquisition will be immediately accretive to earnings per share and free cash flow. Financing for the acquisition will come from a combination of a one-year suspension of our regular dividend as well as cash on hand. Additionally, we are evaluating opportunities for an asset drop-down to Holley Energy Partners. This transaction is currently subject to regulatory clearance and other customary closing conditions and is expected to close in the fourth quarter of 2021. A copy of the acquisition press release and accompanying slide deck can be accessed on our website under the Investor Relations Events and Presentations tab. So with that, let me turn the call over to Rich. Thank you, Mike. As previously mentioned, the first quarter included a few unusual items. Pre-tax earnings were positively impacted by a lower cost-to-market adjustment of $200 million and a $52 million gain on a tariff settlement, which were partially offset by severance costs of $8 million related to restructuring in our lubricant specialties segment, as well as charges related to the Cheyenne refinery conversion to renewable diesel production include decommissioning charges of $8 million, LIFO inventory liquidation costs of $1 million, and severance charges totaling approximately $500,000. A table of these items can be found in our earnings press release. Cash flow from operations was $62 million in the first quarter, which included $25 million of turnaround spending and $14 million of working capital gains. Holly Frontier's standalone capital expenditures total $117 million for the quarter. As of March 31st, 2021, our total liquidity stood at approximately 2.5 billion, comprised of a standalone cash balance of over $1.1 billion, along with our undrawn $1.35 billion unsecured credit facility. As of March 31st, We had $1.75 billion of standalone debt outstanding, with a debt-to-cap ratio of 25%, and a net debt-to-cap ratio of 8%. Last week, we successfully completed an extension of our $1.35 billion revolving credit facility, which now matures in April 2026. We anticipate recovering between 50 and $60 million in cash tax benefits in 2021 under the CARES Act. And in the first quarter, we recovered $21 million of estimated tax payments made during 2020. During the first quarter, we declared and paid a dividend of 35 cents per share, totaling $58 million. As Mike mentioned, as part of the acquisition financing of the Puget Sound Refinery, the Holly Frontier Board of Directors approved a one-year suspension of the regular quarterly dividend, effective with the dividend to be declared for the first quarter of 2021. It is expected to resume the dividend after such time. HEP distributions received by HFC during the first quarter totaled $22 million. Holly Frontier owns 59.6 million HEP limited partner units, representing 57% of HEP's LP units, with the market value over $1.2 billion as of last night's close. Turning to forward-looking guidance. Within our refining segment, for the second quarter of 2021, we expect to run between 400 and 420,000 barrels of crude per day. With respect to capital spending, we are increasing our capital guidance specifically in our renewables segment based on updated project cost estimates. Our total renewables project spend is now expected between $800 and $900 million. And importantly, these projects remain on schedule. Specific to calendar 2021, We now expect to spend between $625 to $675 million in renewables versus our prior guidance of $520 to $550 million. The rest of our 2021 capital budget is unchanged. We still expect to spend between $190 to $220 million for capital at Holley Frontier refining and marketing, $40 to $50 million in lubricants and specialty products, and $320 to $350 million for turnarounds and catalysts. At ACC, we expect to spend $14 to $18 million for maintenance capital, $30 to $35 million for expansion capital, which includes our investments in the Cushion Connect joint venture, and $5 to $8 million in refinery processing unit turnarounds. As a reminder, beginning in the fourth quarter of 2020, Activities associated with the conversion of Holly Frontier's Cheyenne Refinery to renewable diesel production, along with the construction of renewable diesel and pretreatment units in Artesia, New Mexico, are reported in Holly Frontier's corporate and other segments. For fiscal year 2021, we continue to expect corporate segment operating expenses to be in the range of $100 to $120 million. which includes decommissioning and severance costs related to the Cheyenne Refinery conversion in the range of $20 to $30 million. With that, Julie, we're ready to take questions.

The floor is now open for questions. At this time, if you have questions or comments, 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 pound key. Thank you. Your first question comes from Manav Gupta with Credit Suisse.