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spk06: Good day and welcome to the PAR Pacific third quarter 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ashimi Patel, Senior Manager, Investor Relations. Please go ahead.
spk07: Thank you, Drew. Welcome to PAR Pacific's third 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 PAR 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 Tate.
spk05: Thank you, Ashimi. Good morning to our conference call participants. We're very pleased with our third quarter financial results. All our refining units were profitable, and our retail and logistics business segments continued to generate significant profits. Adjusted EBITDA was $85 million, and adjusted net income was 76 cents per share. These results include a $29 million non-cash mark-to-market benefit for our prior year's RFS compliance. Wyoming refining and logistics profits were particularly notable as the business unit recorded one of its most profitable quarters ever. Strong summer demand bolstered regional product cracks and excellent operational and commercial execution drove record crude charge and sales volumes. Hawaii refining and logistics profitability continued to improve despite the decline in tourism due to the Delta variant outbreak. Unlike prior quarters, crude oil prices were steady, so we experienced very little product price sales lag during the quarter. In the fourth quarter, Asian market improvements are accelerating. Global refined product demand is increasing with significant increases in international air travel. The impact of Chinese tax reforms and concerns about winter supply have diminished Singapore inventory levels. As a result, current Singapore cracks as well as the forward outlook are close to and at times above mid-cycle. Higher product cracks have also contributed to a tighter crude oil market with increased differentials and very high backwardation. These crude oil factors offset the significant improvement in product cracks. Rinse prices were highly volatile during the quarter as the market reacted to conflicting rumors and administrative comments on the renewable fuel standard. We believe the EPA needs to act quickly to affirm our outstanding small refinery exemption applications and to address 2021 RVO obligation levels. With the return to profitability and growing liquidity, we are reviewing our capital allocation options. Reducing our cost of capital remains our highest priority, and debt reduction is presently the most important element of this effort. We were able to repurchase a small amount of our senior secured notes this quarter, In addition to managing our capital structure, we're also evaluating growth opportunities in our local markets. In this regard, I'd like to make a few comments about the energy transition. As we consider longer-term strategies in our market position, we're exploring various opportunities in the Hawaii and Washington markets in particular. To this end, we'll continue to focus on local needs and leveraging regional strengths. And each market demands a different solution. Hawaii is a fairly difficult market for energy transition initiatives given the lack of any carbon mitigation incentive, high electricity costs, and the high cost and complexity of renewable feedstocks. Nonetheless, we are actively exploring concepts that leverage our local resources and address the state's needs. On the other hand, Washington has provided significant incentives with the passage of a low carbon fuel standard and a carbon emission cap and trade system. The region also benefits from inexpensive low-carbon electricity due to abundant hydroelectric power. Furthermore, our operation is an attractive delivery point for renewable fuels and or feedstocks. Given these features, we're working with local agencies and developers to try and position Tacoma as a leader in the development of hydrogen infrastructure. But this effort will take a considerable amount of time and public support. We'll continue to focus on smaller projects with more limited capital requirements. Our most significant energy transition efforts will be small capital, high return projects within our refineries as we focus on reducing our carbon and energy profile while enhancing yields and reducing operating expense. I'm also pleased to announce that we published our inaugural sustainability report. With our focus on community needs, it's important that we demonstrate our adherence to strong ESG standards. This report illustrates our commitment as well as a corporate culture built on integrity and respect for the environment, our communities, our employees, and others. At this time, I'll turn the call over to Joseph to discuss our operational performance.
spk00: Thank you, Bill. In the third quarter, our whole system continued to perform safely and reliably as market conditions improved across the board. Starting in Wyoming, our 3-to-1 index in the third quarter was $41.78 per barrel, driven by strong gasoline demand and crack spreads in our market. Refinery throughput was approximately 18,000 barrels per day, and our realized adjusted gross margin in the quarter, excluding prior period market-to-market benefit, was $22.49 per barrel. Our production costs were $5.92 per barrel, reflecting strong execution by our team. So far in the fourth quarter, our Wyoming three to one index has averaged over $23 per barrel with a relatively strong seasonal demand. Plant throughput is in the 16 to 17,000 barrels per day range. In Washington, our third quarter Pacific Northwest five to two one index was $18.59 per barrel on ANS basis. And our refinery throughput averaged slightly over 38,000 barrels per day. Our realized adjusted gross margin in the quarter, excluding prior period mark-to-market benefit, was $3.74 per barrel, including an estimated negative 20 cents per barrel impact from the diesel hydro-treater catalyst change. Our production cost in the quarter was $3.60 per barrel. We recently completed logistics upgrades, which allow us to load ethanol trucks in the refinery rack. The team is exploring additional opportunities to further increase our logistics utilization in renewable service. This activity not only supports our logistics business and diversification, but also supports our positioning through the energy transition process. So far in the fourth quarter, our 5-2-1 index has averaged just under $17 per barrel, and our plant throughput for the quarter is approximately 38,000 barrels per day. You know why? Our Singapore 3-1-2 index in the third quarter was $6.20 per barrel on Brent basis, and our realized core differential averaged $2.27 per barrel premium to Brent. Our throughput averaged approximately 81,000 barrels per day, with the demand recovery best reflected in our yields, approximately 46% of distillate yield in the third quarter, compared to only 31% in the third quarter of last year. Our realized adjusted gross margin in the quarter, excluding prior period mark-to-market benefit, was $5.42 per barrel. Our production costs were $4.28 per barrel, including approximately $0.40 per barrel of planned maintenance execution in the reformer and cogen units. So far in the fourth quarter, our Singapore 312 index has significantly improved to approximately $11 per barrel, mostly driven by the high natural gas price and distillate demand recovery. in Asia. Our estimated full differential for the fourth quarter is approximately $2.88 per barrel, premium to Brent, and our throughput target is in the 82 to 85,000 barrels per day range. In summary, we continue to focus on safe, reliable, and efficient operations. We are encouraged by the improved market conditions, mostly in Hawaii, and the system is well positioned to capture the opportunities. I will leave it there and turn the call over to Will to review our consolidated results.
spk03: Thank you, Joseph. Third quarter adjusted EBITDA and adjusted earnings were $85 million and $45 million, or 76 cents per fully diluted share. Focusing on accounting items first, We're finding results include a $29 million non-cash mark-to-market gain related to the 2019 and 2020 RFS compliance years. Excluding the mark-to-market RENs benefit, our adjusted EBITDA and adjusted earnings per share was 56 million and 27 cents per share, respectively. Shifting to our segment results. Retail segment adjusted EBITDA contribution was $14 million, roughly flat compared to the second quarter of 2021. Same-store sales fuel volumes were up roughly 12%, while merchandise sales were up approximately 3.5% compared to the third quarter of 2020. Wide fuel volumes were approximately 88% of pre-COVID levels, reflecting lower levels of international tourist arrivals, particularly on Oahu. The logistics segment adjusted EBITDA contribution was $19 million compared to approximately $20 million during the second quarter of 2021. Steady volumes kept our logistics assets well utilized during the quarter. The refining segment recorded third quarter adjusted EBITDA of $64 million compared to the second quarter adjusted EBITDA loss of $29 million. Excluding the REN mark-to-market impacts, refining segment adjusted EBITDA was $35 million compared to a second quarter loss of $2 million. All units returned to profitable levels. Focusing upon Hawaii first, adjusted gross margin excluding REN mark-to-market slightly exceeded the improvement in market conditions. The third quarter 312 increased approximately $2 per barrel compared to the second quarter while Hawaii adjusted gross margin, excluding Renmark to market, increased approximately $3.25 per barrel. One of the key issues that has impacted adjusted gross margin capture rates over the last several quarters has been rapid changes in the flat price of oil. Third quarter flat price change was minimal, especially compared to the last nine months. Looking forward, market conditions continue to improve, with the 312 averaging $11 per barrel in October. compared to the $6.20 for the third quarter. However, October ICMA Brent was up nearly $9 per barrel compared to the September calendar month average. In addition, backwardation continues to steepen, increasing the cost of protecting our balance sheet from declines in flat price. Washington adjusted gross margin, excluding rent market, improved slightly from the second quarter levels due to improved net backs on asphalt partially offset by rising backwardation. Asphalt margins tend to widen in falling price environments and compress during rising price environments. As previously mentioned, while volatile across the months, the flat price change was modest across the quarter in aggregate. Wyoming refining results reflect a strong summer driving season with attractive capture of the local market environment. There was minimal FIFO impact during the quarter. Laramie generated adjusted EBITDAX of $26 million and a net loss of $42 million for the third quarter of 2021. Year to date, Laramie generated adjusted EBITDAX of $96 million and a net loss of $1 million. Laramie's third quarter and year to date net income was negatively impacted by unrealized derivative losses totaling $55 million. Year to date capital expenditures have been less than $1 million. Laramie net debt improved from $133 million to $116 million between the July refinancing they completed and September 30th. Laramie exit production as of September 30th was 116 million cubic feet a day equivalent. Laramie is receiving spot market pricing on between 20 to 30% of their production over the next 12 months. Stronger prompt pricing has accelerated Laramie's ability to reduce debt. Shifting back to the PAR Pacific cash flow statement. PAR Pacific's third quarter cash flow from operations was $53 million. Excluding the Renmark market, working capital was an approximate $12 million source of funds during the quarter. Capital expenditures and turnaround outlays were $8 million. Accrued cash interest expense equaled $14 million. Our net liability for the 2019 and 2020 RFS compliance years totaled $120 million. based upon $1.35 per RIN unit. We expect there to be approximately $30 million of working capital outflows related to the 2021 RIN fixed price commitments in the fourth quarter. Looking forward, we expect our annual cash interest expense to be $50 to $55 million and gap interest expense to be in the $15 million per quarter range. In addition, consistent with our prior commentary, We expect 2021 annual capex and turnaround outlays to be between $35 and $45 million. Our quarter end liquidity totaled $277 million, made up of $201 million in cash and $76 million in availability. Our liquidity on hand remains strong and provides flexibility to consider alternatives to reduce our funding costs. As Bill referenced, our top capital allocation priority remains debt reduction. This concludes our prepared remarks. Operator, I'll turn it back to you for Q&A.
spk06: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Carly Davenport with Goldman Sachs. Please go ahead.
spk08: Hi, good morning. Congrats on the strong quarter. My first question was just around high-level capital allocation. With the macro having improved, the setup from our perspective looks constructive as we go into 2022 here. So as you continue to generate cash into next year. How do you think about the uses of that cash? Know that, you know, leverage has been the key focus, but curious if when you think about where the stock has been trading relative to what some of the parts, if there's also a path to incremental capital returns here.
spk05: Carly, it's Bill. As I mentioned in my prepared remarks and will allude to, our focus will continue to be debt reduction. We don't have any limitations on either repurchasing equity or a significant limitation, say, on repurchasing equity or distributing equity, declaring a dividend. But at this point, I think we're going to be focused on reducing our debt and then obviously exploring some of these small capital projects that we think will help position us for the growth in the future.
spk08: Great. Thank you. And then the follow-up was just around OPEX, and Joseph talked about some of the moving pieces at Hawaii being a bit higher during the quarter. But can you just talk about some of the moving pieces looking forward into 4Q and 22 and just frame perhaps the impact that higher natural gas prices could have on OPEX or cost of goods sold in the near term?
spk00: Yes. I will report that the full $28 per barrel OPEX or production cost in Hawaii is about 80 cents per barrel, higher than the average or our guidance. In our prepared remark, we explained half of it. The 40 cents per barrel is related to the cogent and regeneration maintenance. The other 40 cents per barrel gap is really associated with utility costs. Some of it was the way we price our steam. Some of it is related to the cogent maintenance, you know, when we don't operate cogen, we burn less fuels, but we have to buy power from the grid. And the other aspect in optics in the third quarter in Hawaii was just timing for routine maintenance, especially in our tank farm. So we do believe the 350 going forward is a good guidance. Your second question was about natural gas. sensitivity and I will answer for the entire system. Our sensitivity is very low compared to the typical refiner. Start with Wyoming. Every dollar per million BTU change in natural gas has seven cents per barrel production cost sensitivity for Wyoming, has only two cents per barrel sensitivity in Washington and have pretty much zero in Hawaii because we don't burn natural gas or don't buy natural gas in Hawaii. So the weighted average sensitivity for our entire system is only two cents per barrel compared to 20 cents per barrel sensitivity for the typical refinery out there.
spk08: Great. That's very helpful. Thanks for taking the questions.
spk06: The next question comes from Bill Gresh with J.P. Morgan. Please go ahead.
spk04: Hey, good morning. First question, just a bit of a follow-up on Hawaii. Recognizing that the crude differential will be 288 this quarter, so that's a bit of a headwind. But with where the crack spreads are that you've discussed and other moving pieces, do you feel like Um, there are any headwinds to fully capturing this uplift in the crack spread, given how strong it is.
spk03: So it's, it's will, um, I think the, the, the best kind of factors that I've called out that, you know, we see is as impacting, uh, capture rates. Um, again, the third quarter I think was, was strong. And again, a lot of that was, we were in a flat price environment where there was relatively minimal change, obviously in the, in October, we've seen, I sprint up nearly $9. And so again, there is some price lag impact for us, but I think it's transitory with respect to rapid changes in crude price. And so I think that's one factor. And then again, I think backwardation is the other item I'd call out. Again, we hedge the majority of our inventory in Hawaii. And again, it protects our balance sheet against declines in flat price. And so, again, as we've seen, steeping, the cost of protecting that inventory is going up. So those are the factors, but I think as you called out, you know, the 312 is up nearly $5 a barrel, and our crude costs in the fourth quarter are up, you know, roughly 60 cents. So there are some, you know, impacts from the rising price, but again, I think we're positively inclined to see where the market's heading right now.
spk04: got it that makes sense um will any initial thinking around the 22 capex with some of these um small capital high return projects do you have a way of thinking about the magnitude
spk03: I think we'll provide the full year guidance in the next quarter's call field, but I think the only items I'd call out is, you know, we've historically commented that our maintenance capex is in that kind of 35 million range, 35 to 40, and then we do have the Washington turnaround that we called out as planned activity during the first quarter of 22. Again, we'll come out with, you know, formal expectations around that, but historically that's been about a $35 million outlay.
spk04: My last question is just around capital allocation in terms of any interest in looking at M&A opportunities. There are some assets on the market, including one just announced by a peer in Alaska as well. So I was just curious if you broadly have M&A interests in particular niche markets.
spk05: Yeah, Phil, I mean, we've been consistent, I think, in sharing what our strategic area of interest is, and it's Pad 4 and kind of the upper reaches of Pad 5. And there certainly are assets that have been bandied about. We're also obviously always evaluating opportunities in that area. But, you know, and certainly with the liquidity we have and kind of coming out of the pandemic, I think we have a little more flexibility. But I think this market environment is really requires that we be very disciplined and discriminating as we evaluate our opportunities.
spk04: Great. Thanks, Bill.
spk06: The next question comes from Matthew Blair of Tudor Pickering Holt. Please go ahead.
spk02: Hey, good morning, everyone. So Laramie had a big increase in profitability that really doesn't flow through into your EPS. Could you provide just an overall update here? You know, what's the plan on drilling going forward? What's the plan on debt reduction? And is there any update in terms of potentially monetizing your 46% investment?
spk03: Sir Matthew, it's Will. So I think as you referenced, you know, a nice step up in Laramie contribution. Obviously, it's not flowing through our reported results at this juncture. Ultimately, the net debt's down to $116 million. There's a preferred piece of equity that is senior to our common position, which is about $55 to $60 million. And so, ultimately, I think refinancing and getting Laramie to a more sustainable capital structure remains their objective. The fundamentals are improving. The credit metrics are improving. And I think ultimately, you need to see kind of the winter season play out and see the cash flow continue to come in. Their current objectives are to pay down debt. They're not running a rig right now. There's minimal capex. And ultimately, I think de-levering is their principal focus.
spk02: Sounds good. And then circling back to capital allocation for PAR, you know, you mentioned you'd paid down $150 million so far this year. Can you share any targets or goals going forward? How much do you need to pay down, you know, to get to a more normalized balance sheet in your view?
spk03: Sure, Matthew. I think at the end of the day, our preferred capital structure is really to a point where, you know, we think about a refining business with, you know, very much financed and funded by equity and our retail and logistics business being, you know, appropriately levered for the type of stability that those cash flows offer. So again, I think we're continuing to monitor those businesses, but they've been stable performers even through the pandemic. And ultimately, I think, you know, you know, if we can get to probably a consolidated level where we're in the one and a half times range, it probably will give us, you know, the cushion that we'd like to be, you know, where the retail and logistics business are conservatively levered. And we can, again, attract a lower cost of debt capital. That remains one of our key focuses.
spk06: Great. Thank you. Again, if you have a question, please press star, The next question comes from Jason Gabelman with Cowan. Please go ahead.
spk01: Good morning. Thanks for taking my question. I wanted to first ask about the RIN liabilities still have outstanding mentioned, I think another $30 million of fixed commitments related to RINs in 4Q21. Where does that leave you? on your 2019 and 2020 rent obligations, and then also, I guess, on where your accrued 2021 liability is net of your rent assets. My second question is on these low-carbon energy opportunities. You mentioned hydrogen in Washington, and I don't know if there's something specific in Hawaii, but can you maybe elaborate on those opportunities a little bit more when you expect to generate earnings that are material for the business from those opportunities. Thanks.
spk05: Jason Spill, let me take the low-carbon energy opportunities, and I'll turn the RINs question over to Will. He's got the harder answer here. On the low-carbon energy opportunities, as I mentioned, the hydrogen, we're really in the very early stages of working with the local authorities, leveraging the fact that they've got low-cost hydroelectric power and looking at converting that into hydrogen for supplies to such things as municipal transportation infrastructure, marine infrastructure, generally controlled distribution systems. But we have the space, we've got a balance of utilities that we can help support the development of something in the area, but it's very early stage, as I mentioned, and still a lot of dialogue needs to take place within the community to pursue that. But given the federal support for hydrogen, we do think that Tacoma is particularly well suited for this type of an application. Turning to Hawaii, really the high electricity cuts preclude any cuts of something like a hydrogen infrastructure. And we're more focused on our refinery and the fact that we have a steam reforming unit where we're converting naphtha into hydrogen. And that obviously puts us in a position where we think there's some innovative ways potentially to capture carbon and use and sequester it.
spk03: Great. And Jason on RENs. Again, the 2019 and 2020 liabilities at $120 million. I think once the $30 million outflow is completed in the fourth quarter, we'd expect really to be, let's say, fully purchased on our 2021 obligation. And so, again, I think where that leaves us is effectively where, you know, as we head into, you know, March of next year, we will have, let's say, two years of rent assets and three years of rent liability accrued on our balance sheet. And then ultimately, you know, we'll be waiting for action from the EPA with respect to both the RVO percentages for the 2020 and 2021 years, as well as small refinery exemptions, you know, which will impact sort of the aggregate position that we have. I think there's minimal incremental cash outflows planned with respect to kind of the Q1 2022 timeframe. And again, ultimately, The RFS allows you to defer settlement for up to two consecutive years, and ultimately that will push cash flows out in the downside case to the 2023 time frame.
spk01: Got it. Just to be clear, so you'd be fully kind of accrued on your 2021 RIN liabilities after these 4Q outflows?
spk03: That's correct. And ultimately, the cash settlements will reflect the accrual. Again, at this point, we have accrued expense. And again, there have not been cash outflows at this point in time to the tune of about the $30 million. If you recall, that was about $40 million last quarter. So again, we chewed into about $10 million of that during the third quarter. Super. Thanks. That's really helpful.
spk06: This concludes our question and answer session. I would like to turn the conference back over to William Pate for any closing remarks.
spk05: Thank you, Drew. I want to thank our team for their hard work, which drove the record earnings from our business this quarter. Have a good day.
spk06: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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