Par Pacific Holdings, Inc.

Greetings and welcome to the Power Pacific Holdings Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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, Ashimi Patel, Manager and Best Relations for Power Pacific Holdings. Thank you. Ms. Patel, you may begin.

Thank you, Melissa. Welcome to Power Pacific's second quarter earnings conference call. Joining me today are William Pate, President and Chief Executive Officer, Will Monteleone, Chief Financial Officer, and Joseph Israel, President and Chief Executive Officer of Power Petroleum. Before we begin, note that our comments today may include forward-looking statements. Any forward-looking statements are subject to change and are not guarantees of future performance or events. They are subject to risks and uncertainties, and actual results may differ materially from these forward-looking statements. Accordingly, investors should not place undue reliance on forward-looking statements and we disclaim any obligation to update or revise them. I refer you to our investor presentation on our website and to our filings with the SEC for non-GAAP reconciliations and additional information. I'll now turn the call over to our President and Chief Executive Officer, Bill Pate.

Thank you, Ashimi. Good morning and welcome to all of our conference call participants. The COVID pandemic has brought serious challenges to almost every person in the world. Like many industries, the energy sector has been hit pretty hard. And furthermore, the pandemic has impacted Hawaii's economy more than most regions, given the high reliance on air travel and tourism. While our geographic diversity and vertical integration has helped to offset the unprecedented impact on our operations in Hawaii, our second quarter results reflect difficult market conditions. During the second quarter, we reported negative adjusted EBITDA of $50 million, and an adjusted net loss of $1.70 per share. These results were driven principally by losses in our Hawaii refining unit, which had negative adjusted EBITDA of $70 million due to low throughput and negative realized gross margin. In response to weak demand, global refining throughput has been cut to near minimum rates, and yet supply continues to outpace demand for refined products, resulting in some of the most significant inventory builds in history. For this same reason, many refineries in the U.S. and elsewhere have permanently shut their operations, which is promising for well-positioned refineries like ours. With the virtual halt of commercial air traffic, jet fuel demand has dropped to record lows. Refiners are dropping all possible jets into diesel. Consequently, distal inventories are currently at the highest level in 40 years. Finally, restrictions on mobility have greatly reduced the gasoline demand. Rising case levels in major demand areas in the U.S., like Texas and California, have stifled the increase from the partial reopening that had taken place in the early part of the summer. On the crude supply side, both inland and waterborne crude differentials experienced extreme volatility. While crude differentials initially widened to reflect a surplus of crude oil, this trend reversed rapidly as other factors tightened the physical market. Taking all of these circumstances together, refining margins have dropped to historic lows and have persisted at unprofitable levels for most refineries. While challenges remain, we believe the worst is behind us. Crude diffs and product cracks have modestly improved when compared to the prior quarter, and refined product inventories have begun to decline. We also have several contracts with improved terms in Hawaii, which will significantly improve our capture going forward. An increase in air travel to the state will also help the utilization and profitability of our Hawaii logistics network. And finally, I'd like to note we're very pleased with the financial results of our retail business, which reported record-adjusted EBITDA of $19 million despite a decline in fuel demand. The diversification afforded by our retail unit is most evident in economic downturns like the present. Throughout this period, we have concentrated on those aspects of our business under our control, making structural improvements so that we will emerge from this environment with a stronger high cash flow enterprise. In the next nine months, we remain focused on completing three major turnarounds. We're confident that we have very strong franchises in our local markets, and there's no better time to refurbish our valuable refining network than in a weak market with minimal lost opportunity. Despite the second quarter losses, we enter these turnarounds having increased our liquidity by 49% for nearly $70 million during the quarter. We remain cautious in how we operate our business. A quick resumption in the economy seems unlikely. Therefore, we have identified additional cost cuts to manage effectively during an extended pandemic and to position us to thrive when economic activities fully resume. Before turning the call over to Joseph to review our operations, I want to thank our employees for their dedication and for continuing to execute safely and efficiently. Joseph, the floor is yours.

Thank you, Bill, and good morning, everyone. In the second quarter, our system operated safely and efficiently to meet customers' demand and mitigate COVID-19 market headwinds. Our refineries are well-tuned to produce what the market needs, and our cost structure continues to reflect Strong reliability and cost control by our team. In the second quarter, our refining segment operating expense for the three refineries combined was approximately $9 million, or 16% under our average 2019 quarterly expenses. Starting with Wyoming, our second quarterly refinery throughput averaged approximately 13,000 barrels per day. Our 3-to-1 index for the second quarter was $17.39 per barrel, and our realized adjusted gross margin was $6.22 per barrel. Our capture in Wyoming was negatively impacted by product pricing in Rapid City and the elevated CODIS early in the quarter when oil price couldn't support production. On the other hand, FIFO increased our margin capture in Wyoming by approximately $3.70 per barrel. Our second quarter production cost in Wyoming were $7.72 per barrel. Improved gasoline demand with a challenged distillate market in the Rocky Mountains have supported refining utilization increase in PAT-4 up to 87% in July. Well below the 100% in July of last year. So far in the quarter, the 3-to-1 index has averaged just under $21 per barrel. Our 45-day turnaround in Wyoming is scheduled to start mid-September per plan. This is a five-year cycle major turnaround, and our team is well prepared to execute the scope. Our target throughput for the third quarter, including the turnaround impact, is in the 13,000 to 14,000 barrels per day range. In Washington, our second quarter refinery throughput averaged approximately 36,000 barrels per day. Our second quarter throughput implies a relatively strong 85% utilized capacity compared to the 62% average for past five refineries. Our yields and the integrated marketing presence in the Tacoma niche market have allowed us to maintain close to normal operations with minimum COVID-19 demand impact. Our second quarter Pacific Northwest 521 index was $11.92 per barrel on ANS basis and realized adjusted cost margin was $3.78 per barrel. Production costs were $3.76 per barrel. Demand for jet fuel and Diesel continues to be weak in the West Coast market. And with the gasoline demand slowly improving, our Pacific Northwest 50 to 1 index has averaged just under $10.50 per barrel so far in the third quarter. Asphalt demand continues to be stable, and our target refinery throughput for the third quarter is approximately 40,000 barrels per day. In Hawaii, Our second quarter refinery throughput was approximately 67,000 barrels per day. Singapore product crack spreads have been extremely weak through this pandemic, and our 312 Singapore index was a negative 14 cents per barrel on Brent basis. Our second quarter crude oil differentials were $5.67 per barrel premium to Brent. and our realized adjusted gross margin in Hawaii was a negative $6.96 per barrel. Production costs were $4.45 per barrel. Our 30-day turnaround in Hawaii has started over the weekend and our team is well prepared for this four-year cycle major turnaround with a planned contractor's equipment and catalyst on site. So far in the third quarter, demand for jet and gasoline in Hawaii has slightly improved to approximately 30% and 80% respectively of pre-COVID-19 demand level. Our 312 Singapore Index has improved to approximately $3 per barrel, and our third-quarter code differentials are expected to improve to approximately $1.88 per barrel. Driven by global oil dynamics and the more favorable market structure and shipping rates. As a reminder, our core differential estimates are based on our latest sales estimates, run plans, good commitments, and the implied costing. Target throughput in Hawaii for the quarter, including the turnaround impact, is approximately 60,000 barrels per day. In summary, these days we remain focused on our employees, community, and customer safety as we all navigate through COVID-19. In addition, we are all focused on a safe and efficient execution of our turnarounds in Hawaii and Wyoming. We have successfully matched our operations to meet demand with maximum efficiency and remain optimistic and excited Thank you, Joseph. Second quarter adjusted EBITDA and adjusted earnings were a loss of $50 million and $91 million, or $1.70 per fully diluted share. Focusing on accounting items first,

while we were finding results including an approximate $3 million BIPO accounting benefit. In addition, solely impacting GAAP net income was the reversal of a non-cash lower of cost or market charge of approximately $158 million. Shifting to segment results. Retail segment adjusted EBITDA contribution was $19 million driven by increased fuel margins and steady merchandise margins exceeding our prior record quarter by approximately $2 million. Same store sales fuel volumes were down roughly 30%, while merchandise sales were up approximately 1% compared to the second quarter of 2019. Gasoline demand has rebounded to approximately 80% of prior year from the April troughs in the 50% range. Our merchandise sales have been much stronger as customers turn to our stores at times when social distancing measures make larger format retail locations more cumbersome to access. The logistics segment adjusted EBITDA contributions was $12 million, down $7 million from the 2019 quarterly average, with reduced throughput in Hawaii causing most of this decline. Washington and Wyoming locations performed in line with throughput and sales. The refining segment recorded a segment-adjusted EBITDA loss of $72 million. Hawaii results reflect the impact of elevated crude differentials paired with record low crack spreads. Q2 Hawaii crude differentials declined from Q1 peaks. However, FIFO accounting and a slowing sales profile increased the weighting of higher-cost crude procured before the pandemic versus cheaper crude procured after the pandemic. As we look forward to the third quarter, while we expect to lose approximately 30 days of manufacturing activity due to the turnaround, our storage flexibility and make-up capacity allow us to partially mitigate lost manufacturing gross margins. Washington and Wyoming contributions were both close to break-even for the quarter. Laramie generated adjusted EBITDA of $5 million and a net loss of $14 million for the second quarter, net to our interest Laramie's results reduced our adjusted earnings by $2 million. Moving to the capital structure and liquidity front. Our ending liquidity totaled $204 million, made up of $143 million in cash and $61 million in availability. The increase in liquidity reflects the completion of the senior secured notes offering conducted in May, partially offset by the net cash consumed after pay down of working capital facilities. We generated cash from operations of $19 million, which included about $5 million of turnaround outlays. Working capital was a source of funds, excluding non-cash impacts from intermediation revaluation, and was principally used to reduce the deferred payment facility balance by approximately $20 million. Capital expenditures and turnaround outlays totaled approximately $20 million, and accrued cash interest equaled about $14 million. We made good progress on achieving our cost reduction objectives. We reduced operating expenses and logistics cost of goods sold during the quarter by approximately $50 million on an annual run rate basis. With additional reductions identified, we expect our capital expenditures and turnaround outlays to be on the lower end of our previously provided range of $95 to $110 million. This concludes our prepared remarks. Operator, I'll turn it back to you for Q&A.

Thank you. At this time, we'll be conducting a question and answer session. If you'd 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'd 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 star key. Our first question comes from the line of Neil Mehta with Goldman Sachs. Please proceed with your question.

Great. Can you guys hear me okay?

Yes. Good morning, Neil.

Good morning. Well, the first question is around Hawaii, not surprisingly, and obviously very challenging results in the second quarter, consistent with the economic environment and the crude differentials. Bill, maybe you could start off by talking about how you think about the pace of recovery. When we talk about recovery, the demand side, but also the margin side. And then related to that, if you could also make some comments about Thank you very much.

Some resumption in air travel would actually help our logistics network. It probably wouldn't have a significant impact on our refining business with the shutdown of PAR West. We have the flexibility to run that crude unit when the demand for jet fuel is high. But in the current environment, with the shutdown of that unit, we can actually run quite efficiently with our existing unit. And so then the question really becomes when do cracks come back? We took the perspective and continue to believe that the cracks are going to be determined largely by global inventories. And given the pandemic, you can't wait for that to happen. So we have been working aggressively with our customers in the community. And as contracts have rolled over, we've been working with our customers to improve the economics associated with our sales to ensure that we get additional profitability even without a resumption in cracks. And I think the worst is behind us. The other advantage that I think we're going to see is diffs have actually, you know, they were very high at the beginning of the year going into the calendar year because of IMO 2020. As Will noted, when the sales slowed down, we were essentially consuming on a FIFO basis some higher cost crude That's largely behind us. As Joseph noticed, our disks have improved materially from Q2 over Q1 and, of course, from Q3 over Q2, and so I think that's going to help us as well. And then in terms of capacity, let me just address that quickly. I mean, I think I've already answered it, but with the two crude units, our ability to restart the west unit if capacity ramps up is there, but I would point out that the real determination for the restart of the crude unit is going to be economic, which is going to relate to the cracks in the environment.

That's very clear, Bill. Thank you for those comments. The follow-up is just on the retail side. You had a great quarter there for whatever some of the parts is worth. We think the retail business is worth $8 a share. A lot of the stock is trading below that, so which might represent, you know, highlight just the value of your stock at these levels. But how do you think about unlocking the value of retail? Is there anything you can do to continue to highlight and illuminate the value there because it's a large driver of the business and people often think of you as refining first and retail second when there's a lot of value.

We continue to believe as an operator of downstream systems and niche markets that it's very important to be integrated. And certainly the profitability of our retail business was very strong in the second quarter, not just in Hawaii. We also had good profitability in the Pacific Northwest. And as we grow our business, we want to grow our retail business in line with it. With trailing EBITDA that's north of $65 million, we have a very strong franchise. and we believe that that franchise is a significant contributor of free cash flow to our overall enterprise. So for us, we think the value really will be realized as the free cash flow of the enterprise is recognized and I think that the key is going to be getting through these turnarounds and ultimately a resumption of the global economy and with that in hand, I don't know why we shouldn't be a significant producer of free cash flow.

Thanks, guys. Appreciate it.

Thank you. Our next question comes from the line of Matthew Blair with Tudor Picker and Holt. Please proceed with your question.

Hey, good morning, Bill and Will. Can you guys hear me okay?

Yes, clearly.

Great, great. So we've seen some refinery closures in the West Coast and the Rockies. I was hoping you could just provide your perspective on, you know, how that might impact supply-demand fundamentals both in the short term as well as the long term for your markets.

Yeah, I mean, if you think about it, we've had two refineries that have closed in the last six months because even though the Dickinson refinery was announced several years ago, I think the actual closure took place this spring and then obviously Cheyenne had their last crude running through I think in the last 10 days. So that will have an impact on our Wyoming operations. We haven't seen that yet. But, you know, and frankly, the shutdown of those refineries in the near term is probably not going to have a significant impact because the decline in demand overall nationally has a much more significant impact than the shutdown of those refineries. And I think you've seen the same thing on the West Coast. Martinez has been down for a while. Marathon's announcement that that's going to be converted to an RD facility and will no longer be producing carbon-based fuels. I think that was already baked into the market. You're going to see more of a draw, and I think you're just going to have more tightness on the West Coast market. I don't know if you'd add anything to that, Joseph.

No, I think Billy's right. It's a long-term impact for the industry. Short-term, we will be patient, waiting for the demand to come back.

Sounds good. And then... Just to recap on the crude differential at Hawaii, so the third quarter, was your guidance a $1.88 benefit, and do you have any, I guess, early indication on what the fourth quarter might look like?

Yeah, $1.88 is our guidance for third quarter, and we don't give a fourth quarter estimate at this point. The market is Thank you, Matthew. Thank you. Our next question comes from Brad Heffern with RBC Capital Markets.

Please proceed with your question. Hey, good morning, everyone.

Thanks for taking my questions. Good morning, Brad.

So I was curious about some of the comments you made on the contract. So I think in the past you talked about having the $1 per barrel Hawaii improvement this year. Obviously that goal was set in a very different environment, but I'm just curious if what you're getting on the contract front is sort of over and above that prior target that you had.

It's a component of the prior target, but I think our forecast is substantially more than $1 at this point. It'll It really started with contracts that were rolling over on June 30. There are more contracts that have amended terms that become effective in July and late August, and I think for Q4 we'll have the full impact of those contracts helping our business.

Okay, got it. And then just on the liquidity front, obviously you guys did the debt offering and liquidity looks good right now. I'm just curious if We are in a significantly prolonged downturn. What are some of the other levers that you could pull that maybe wouldn't be obvious to us?

Brad, this is Will. I think the most evident one or most attractive asset that we hold is probably the real estate underlying a handful of our locations in Hawaii. So I think that's a Unencumbered assets that we hold up at the parent company level that we could monetize. We do have some debt on that at the parent company level, but believe that that's an attractive real estate portfolio.

Okay. Got it. Thank you.

Thank you. Our next question comes from the line of Manav Gupta with Credit Suisse. Please proceed with your question.

Hey, guys. On the retail front, you had a good 2Q. I'm just trying to understand between July and August, has that trend continued both on the fuel side and the merchandise side, or has there been any rate of change versus 2Q in terms of retail segment?

Yes, Manav. I'd say that retail demand bottomed in April, and then it gradually picked up almost on a linear basis week by week. from the bottoming at the end of April. At this point in Hawaii, demand is about 80% of the prior year. And in Spokane, demand is closer to 90% of the prior year in terms of fuel sales. Merchandise in both cases is above our budget and at this point kind of above prior year. So we're seeing very strong store traffic. We're still seeing some reduction in demand. I don't really expect the demand to change dramatically from here. And needless to say, margins were very strong when crude prices declined with the lag there, and those have firmed up some. But it continues to be a very strong and profitable business segment for us.

Thank you. A quick follow-up on the logistics side. Given all the turnaround activity and lower throughput, should we assume 3Q earnings mirror something closer to the 2Q earnings, or it should be more comparable to last year?

Yeah, Manav, I think it's going to be tied closely to throughput. But as you heard in Joseph's guidance, you know, in Hawaii, we're at 60,000 a day throughput. And then, again, there's modest impact in Wyoming with A small part of the quarter being impacted by the turnaround activity. So I think you've got a pretty good proxy for what the logistics segment looks like with lower throughputs with our second quarter results.

Thank you for taking my questions. Thank you.

Thank you.

Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star 1 on your telephone keypad. Our next question comes from the line of Jason Gableman with Cowan & Company. Please proceed with your question.

Hey, morning. I wanted to ask about the working capital impact from the quarter. It seemed like that helped cash flow. Can you just disclose what that amount was and if that's kind of now a sustainable amount or if there's going to be some volatility where that could reverse going forward? And I have a follow-up. Thanks.

Sure. So just to remind you, below the cash flow from operating section of the cash flow statement, we've got roughly $20 million of outflow that I referenced in my prepared remarks in the financing section of the cash flow statement. That's one component piece that's related to the changes in working capital. To give you a look at the aggregate change in working capital, netting down all the LCM charges and all the other impacts, it's roughly $60 million of benefit. And again, there's about the $20 million outflow that's there. And in terms of the forward impact, I think it's difficult to predict the working capital swings. I think with changes in price and refined product builds and draws.

Yeah, I guess the spirit of the question was is some of the working capital benefit in 2Q expected to reverse in normal course absent volatility in crude prices or not?

I don't think we expect it to reverse imminently.

Okay, great. And then just my follow-up on 2021 CapEx. Clearly, this is an elevated year of maintenance. So I guess, firstly, was there any thoughts around pushing this maintenance out to 2021 to defer some of the spend? Or did you elect to take maintenance exactly because what you said on the call, the margin environment is weak right now? And then given the high turnaround spend this year, What does that mean for 2021 spending? Does that go back towards more of a run rate, sustained CapEx level? Thanks.

This is Bill. Let me say that, yes, all three turnarounds, while the financial issues around it, we probably could defer, certainly could reduce the scope in some cases and reduce the capital, but given the environment, and given the opportunity to invest in our refineries at this point, we think that's the right decision to make going forward. And to your question about 2021, I think coming out of these turnarounds, if anything, CapEx should go down. We have no major capital requirements post these turnarounds. We've invested a fair amount this year in a facility Great, thanks.

Thank you. Our next question comes from the line of Andrew Shapiro with Lawndale Capital Management. Please proceed with your question.

Hi, guys. Pardon me if you mentioned in your prepared comments I was a little late to the call. Commercial jet fuel demand for you in the Hawaii area, what kind of levels is it at? 50%, 20%, 80%? And similarly, where is the military demand? That's probably remain near the same, or has it dropped as well?

No, military demand is about the same, and military demand in Hawaii is probably 30% of our contractual demand. Overall, in the Hawaii market, the market is running right now at about 30% of pre-pandemic demand, and that's up from a bottom when it bottomed at about an 80% decline or 20% of pre-pandemic demand.

Has there been guidance at all from the state authorities as to stages and the timing of reopening things?

There has, but it's all dependent on improvements in the case rate. The case rate has been growing in Hawaii recently. Andrew, you may have missed this part of the conversation earlier, but The key question for us in Hawaii is really not going to revolve around volumes with the shutdown of the Far West unit. We really don't need a full resumption of air traffic to generate profitability there. It much more relates to cracks in our contracts with our customers in that market.

Okay, great. Thank you. Thank you.

Thank you.

Thank you. Our next question comes from the line of Patrick Sheffield with Beach Point Capital Management. Please proceed with your question.

Hey, guys. Thanks. My question has been answered. Great. Thanks, Patrick.

Thank you. Ladies and gentlemen, this concludes our question and answer session. I'll turn the floor back to Mr. Pate for any final comments.

Thank you, Melissa. While the market's been difficult over the past few months, I believe we're well positioned for the future with a diversified business model. We'll generate significant free cash flow once we complete these three upcoming turnarounds and we see an improvement in the global economy. On behalf of our management, our customers, and our communities, I also just want to thank our employees for their dedication and hard work. Have a good day.

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