CVR Energy, Inc. (CVI) Earnings Call Transcript & Summary

Greetings, and welcome to the CVR Energy Second Quarter 2024 conference call. [Operator instructions]. It is now my pleasure to introduce your host, Richard Roberts, Vice President of FP&A and Investor Relations. Thank you, sir. You may begin.

Thank you, Christine. Good afternoon, everyone. We very much appreciate you joining us this afternoon for our CVR Energy Second Quarter 2021 earnings call. With me today are Dave Lamp, our Chief Executive Officer; Dane Neumann, our Chief Financial Officer; and other members of management. Prior to discussing our 2024 second 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. You're cautioned that 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 and 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. This call also includes various non-GAAP financial measures. The disclosures included on such non-GAAP measures, including reconciliation to the most directly comparable GAAP financial measures are included in our 2024 second quarter earnings release that we filed with the SEC on 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 second quarter consolidated net income of $38 million and earnings per share of $0.21. EBITDA was $103 million. Our results for the quarter reflect the weakness in the refining product cracks in the Mid-Con in addition to the downtime and increased expenses associated with the fire at Wynnewood. We estimate total pretax impact of our second quarter results from the fire was approximately $50 million, which does not include the impact of any insurance recoveries that may be achieved in the future. We are pleased to announce that the Board of Directors has authorized a second quarter dividend of $0.50 per share, which will be paid on August 19 to shareholders of record at the close of the market on August 12. Our trailing annualized dividend yield based on yesterday's close price is approximately 7%, the highest among independent refiners. In our Petroleum segment, combined throughput -- total throughput for the second quarter of 2024 was approximately 186,000 barrels per day and light product yield was 99% on crude oil processed. Following the fire at Wynnewood in late April, we resumed operations of the #1 crude unit within 2 weeks of the incident and the #2 crude unit began operating in mid-June. Wynnewood is currently operating at normal rates. Benchmark cracks softened during the second quarter with the Group 3 2-1-1 averaging $18.83 per barrel compared to $32.03 per barrel for the second quarter of 2023. Average RIN prices for the second quarter of 2024 also declined from the prior year period and ended the quarter at approximately $0.69 on an RVO weighted basis. Regarding the RFS, we were thrilled with last week's order from the DC circuit vacating EPA's improper denial of dozens of petitions of other refiners seeking small refinery exemptions. While we await the text of this opinion, the outcome mirrors the Fifth Circuit's damning opinion last year vacating EPA's denial of small refinery exemptions for Wynnewood and other refiners from 2017 to 2021. EPA has still not acted on those petitions despite 8 months since their remand. And we will -- and while we intend to oppose the [indiscernible] they filed for the Supreme Court, we think the favorable DC action -- DC circuit action should work in our favor. As previously reported, we have a pending suit against EPA in the Fifth Circuit for the denial of our 2022 petition. And earlier this month, we filed suit for the legal failure to rule on our 2023 petition. We submitted our 2024 petition last week and the clock is ticking for EPA to act. We will continue to fight for the small refinery exemptions what it deserves and also compel EPA to fix what we believe is EPA's clear violation of RFS by allowing non-obligated parties to trade in and manipulate the RIN market. Supreme Court's recent overturn of the Chevron Doctrine may represent an incremental positive for our efforts, though the ultimate impact remains to be seen. For the second quarter of 2024, we processed approximately 12 million gallons of vegetable fuel oil through the pre-treater and the renewable diesel unit at Wynnewood with throughput in the quarter indirectly impacted by the fire in April. The HOBO spread weakened slightly from the first quarter of 2024 with lower diesel prices and the D4 RINs remain depressed as a result of EPA's continued mismanagement of the RFS program. As a reminder, our renewable diesel business is currently reported within our Corporate and Other segment. In the fertilizer segment, both facilities ran well for the quarter with a combined ammonia utilization rate of 102%. Nitrogen fertilizer prices were relatively consistent with first quarter pricing, and we saw a strong demand for nitrogen for the spring planting season. Now let me turn the call over to Dan to discuss our financial highlights.

Thank you, Dave, and good afternoon, everyone. For the second quarter of 2024, our consolidated net income was $38 million, earnings per share was $0.21, and EBITDA was $103 million. Our second quarter results include unrealized derivative gains of $17 million and an unfavorable inventory valuation impact of $1 million. Excluding the above-mentioned items, adjusted EBITDA for the quarter was $87 million and adjusted earnings per share was $0.09. Adjusted EBITDA in the petroleum segment was $37 million for the second quarter, with the decline from the prior year period primarily driven by lower product cracks in Group 3 and reduced throughput volumes due to the downtime of Wynnewood. Our second quarter realized margin adjusted for unrealized derivative gains and inventory valuation impacts, was $9.81 per barrel, representing a 52% capture rate on the Group 3 2-1-1 benchmark. RINs expense for the quarter, excluding the mark-to-market impact was $40 million or $2.33 per barrel, which negatively impacted our capture rate for the quarter by approximately 12%. The estimated accrued RFS obligation on the balance sheet was $312 million at June 30, representing 471 million wins mark-to-market at an average price of $0.66. As a reminder, our estimated outstanding RIN obligation excludes the impact of any small refinery exemptions. Direct operating expenses in the Petroleum segment were $6.94 per barrel for the second quarter compared to $5.46 per barrel in the second quarter of 2023. The increase in direct operating expenses was primarily driven by increased repair and maintenance expenses and lower throughput volumes as a result of the Wynnewood fire. Adjusted EBITDA in the Fertilizer segment was $54 million for the second quarter with lower feedstock costs and direct operating expenses somewhat offsetting the decline in prices relative to the prior year period. Partnership declared a distribution of $1.90 per common unit for the second quarter of 2024. The 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 second quarter of 2024 was $81 million and free cash flow was $7 million. Significant uses of cash in the quarter included $76 million of capital and turnaround expenditures, $52 million for cash taxes and interest, $50 million for the first -- for the CBI first quarter 2024 dividend and $13 million paid for the noncontrolling interest portion of the CVR Partners' first quarter 2024 distribution. Total consolidated capital spending on an accrual basis was $41 million, which included $33 million in the Petroleum segment, $5 million in the Fertilizer segment and $2 million for the RTU primarily related to the pretreatment unit. Turnaround spending in the second quarter was approximately $3 million. For the full year 2024, we estimate total consolidated capital spending to be approximately $195 million to $220 million and turnaround spending to be approximately $55 million to $65 million. Turning to the balance sheet. We ended the quarter with a consolidated cash balance of $586 million, which includes $48 million of cash in the Fertilizer segment. Total liquidity as of June 30, excluding CVR Partners, was approximately $790 million, which was comprised primarily of $539 million of cash and availability under the ABL facility of $251 million. Looking ahead to the third quarter of 2024. For our Petroleum segment, we estimate total throughput to be approximately 200,000 to 215,000 barrels per day, direct operating expenses to range between $95 million and $105 million and total capital spending to be between $35 million and $40 million. For the Fertilizer segment, we estimate our third quarter 2024 ammonia utilization rate to be between 95% and 100%, direct operating expenses to be approximately $53 million to $58 million, excluding inventory impacts and total capital spending to be between $10 million and $15 million. With that, Dave, I will turn it back over to you.

Thanks, Dan. In summary, petroleum market conditions remained challenging in the second quarter, and we would characterize second quarter crack spreads as below mid-cycle levels. Part of the second quarter weakness in cracks can be attributed to high fleet utilization and somewhat lackluster petroleum product demand in the U.S., although demand in the Mid-Con has remained within 5-year bands. Over the past week, we have seen an uptick in the benchmark cracks in the Mid-Con primarily driven by the tightness in the gasoline and diesel basis, likely due to unplanned downtime by other refineries in PADD II. As I often say, the best cure for low prices is low prices. We already seen evidence of RIN cuts from more marginal refineries, particularly in Asia and Europe due to the weakness in refining margins in those areas. We believe there is more -- likely more to come in order to rationalize supply, which, along with an increase in product exports or an uptick in U.S. product demand on improved economic sentiment could provide additional support for refining margins. Turning to the fertilizer segment. The spring planting season went well and demand for nitrogen was strong. In July, we completed both summer UAN fill and the fall ammonia prepay and saw solid demand for both products at prices that were above 2023 fill pricing better than most were expecting. We currently have a solid order book heading into the fall and UAN pricing has risen from summer fill prices. Finally, in renewables, we resumed planned operations at the renewable diesel unit in early June following the downtime associated with the Wynnewood Fire in April. The pre-treater for the renewable diesel unit is also operating at planned rates. And so far, we've seen an improvement in renewable diesel yield and resulting economics at current market prices. Discussions are ongoing to the potential conversion of Wynnewood renewable diesel unit to 100% SAF, and we expect to have the development plan together in the next few months for our larger project at Coffeyville. We continue to believe there will be a market for renewable diesel and sustainable aviation going forward. And while there is significant interest in the market from potential off takers for SAF, the bid-ask spread remains fairly wide. In addition to these potential projects in renewables, we continue to explore strategic transactions both in refining and potentially related to the CVR partners, although we have nothing to report at this point. Looking at the third quarter of 2024 quarter-to-date metrics are as follows: Group 2-1-1 cracks have averaged $19.12 per barrel with a Brent-TI spread of $3.22 per barrel and the WCS differential at $14.39 per barrel under WTI. Prompt fertilizer prices are approximately $520 per ton for ammonia and $240 per ton for UAN. As of yesterday, Group 3 2-1-1 cracks were $21.74 per barrel, the Brent-TI was approximately $4 per barrel and WCS was $15.75 under WTI. RINs were $3.96 per barrel. As always, we continue to strive to operate our plants in a safe, reliable and environmentally responsible manner to explore opportunities to grow the company. We also continue to focus on maximizing free cash flow and protecting the balance sheet while aiming to provide an attractive return to shareholders. With that, operator, we're ready for questions.

We will now be conducting a question-and-answer session. [Operator instructions] Our first question comes from the line of John Royall with JPMorgan.

So Dave mentioned potential insurance recovery regarding the $50 million loss from the Wynnewood outage. Is there an expectation you can share for how much of that $50 million you might see coming back and maybe a time line as well?

Well, we have a deductible and [ we'll promote a ] -- property and equipment standpoint is probably where most of that will come from. We don't really have a good estimate yet, but I'm guessing around $20 million and with the time frame of getting it back is always an interesting process.

And then can you talk about the broader strategy around renewables in today's market? I know you have a couple of potential projects that are moving forward. But obviously, the margin environment is challenged right now, and I know this is all kind of pending finding agreements with partners. But are you waiting at this point to see if the market improves before you sanction these projects? Or do you remain confident in the long-term viability of RD and SaaS such that you might take FID in a lower margin environment?

Well, I think you got to remember how we got here. The RVO that was set for 3 years was set, I think, basically, for political reasons, if nothing else with an election coming up to lower the price of gasoline and diesel. And that what it manifests itself into is defer way under RVO. And as a result, the RINs dropped and then were the -- largely the economics of RD. That said, if you still look at what the market offers even on a bean oil basis, you can eke out some profit just if you operate well at design rates and minimize your costs. So, I think there's no question decarbonization is still going to be with us for a long time and probably the best material out there that can handle heavy machinery and trucks and as such is renewable diesel, if you really want to reduce carbon. So, I think that the market is there. And of course, from an SAF standpoint, really the airlines really have no other alternative to really reduce carbon. So, you could do ethanol to SAF but if you look at the yields and the cost, it's almost identical to the SAF group via vegetable oils and waste oils. So, I think it's around a long time, John and our timing is -- we're not in a big hurry to push these things out. From an SAF standpoint and converting Wynnewood, we really want to have contractual terms that give us a return or we just won't do it. And the Coffeyville side is -- this is really a deal where we're putting sweat equity into it, a little bit of money to seed it but bottom line is we're looking for partners that we could roll the Wynnewood business and with eventually monetize our investment there. So, we're still positive on it. Timing is not perfect, but a new RVO coming out here with a new President, and hopefully, they'll put some sense into it and decouple 6s from 4s and I think you'll see the market improve dramatically if that occurred.

Our next question comes from the line of Neil Mehta with Goldman Sachs.

Dave and team, I guess the first question, just building on the UAN commentary. It was a very strong quarter at UAN in the fertilizer segment. Sometimes those of us in refining have less visibility into some of the coming and going of that segment. So, can you talk about what you're seeing on the ground? Anything that's onetime in nature or have we found a sustainable level of higher profitability?

Well, I think, Neil, if you look at the market, it's really stabilized. I think it's kind of in balance, and that's driven the prices back to what we would call mid-cycle, 520 and 250 on UAN, 520 on ammonia and 250 on UAN is right in the wheelhouse of mid-cycle. Farmer economics are still fairly good, although price of grains have dropped quite a bit, but they're still very profitable. If you own the land, a little less if you're leasing the land. But as our customers go, we go, and I think the demand for fertilizers is quite strong as evidenced by our fill prepaid on ammonia and our fill on UAN, that -- that kind of gives you a look into the market going forward. So, it looks very positive to us.

And you talked a little bit about trying to figure out the right long-term corporate structure around some of these assets from a -- whether it makes sense to monetize the nitrogen business. But you've also talked over the years about if you're not a seller, then you could be a buyer and just put that in the context of the refining business. Are there assets in the market that look interesting to you? And you've talked about diversifying outside of Group 3 as well. So how does that fit into the strategy?

I think if you have any weakness in our company, we're concentrated in the Mid-Con in one market with the Cushing crudes, and that's about it. Obviously, diversification away from that or in addition to that is a good thing. So, we look at everything that comes on the market and there are some interesting deals out there. We don't have anything to announce yet or even discuss but we will look at everything and continue to look at everything just as we do with the UAN and how it's structured in our 100% ownership of the GP but 37% of the units. So, we continue to innovate on that and look at all options.

[Operator instructions]. Our next question comes from the line of Paul Cheng with Scotiabank.

Dave, I think in the past, you have, at one point, suggest that you may even consider to convert the LC back into just one in crude oil. Can you give us some idea that -- I mean, under what circumstances that you will make such a decision? And that what kind of time line or the precondition that you're looking for?