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CVR Refining LP  (NYSE:CVRR)
Q4 2018 Earnings Conference Call
Feb. 21, 2019, 3:00 p.m. ET

Contents:

Prepared Remarks:

Operator

Greetings, and welcome to the CVR Energy, Inc. Fourth Quarter 2018 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference call is being recorded.

It is now my pleasure to introduce your host, Mr. Jay Finks, Vice President of Finance and Treasurer. Thank you, Mr. Finks, you may begin.

Jay Finks -- Vice President of Finance and Treasurer

Thank you, Michelle. Good afternoon, everyone. We very much appreciate you joining us this afternoon for our CVR Energy fourth quarter 2018 earnings call. With me today are Dave Lamp, our Chief Executive Officer; and Tracy Jackson, our Chief Financial Officer; and other members of management.

Prior to discussing our 2018 full year and fourth 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. Without limiting the foregoing, the words outlook, believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You are 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 or 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 related to such non-GAAP measures, including reconciliation to the most directly comparable GAAP financial measures, are included in our 2018 fourth quarter earnings release that we filed with the SEC.

With that said, I'll turn the call over to Dave, our Chief Executive Officer. Dave?

David L. Lamp -- Chief Executive Officer and President

Thanks, Jay. Good afternoon, everyone, and thank you for joining our earnings call. Hopefully you had an opportunity to listen to the CVR Partners earnings call earlier today. I'd like to begin the call today with a brief discussion of our accomplishments in 2018, then discuss our operating performance in the quarter as well as for the year.

2018 was a successful and transitional year for CVR Energy. Last year I outlined a handful of strategic initiatives for 2018, and I'm happy to report several accomplishments across both business segments including: significant year-over-year improvements in environmental health and safety performance across the entire company; and a reduction in certain overhead costs through the consolidation of some of our back office locations and reduce staffing.

Specific accomplishments to our Petroleum segment include: we rationalized our crude gathering operations to focus on crude oil located in our backyard, which offers us quality and transportation advantages. We increased our throughput of regional shale oils by 38%, and more than doubled our condensate throughput, which decreased our reliance on Cushing commen crude oil by 30%. We completed the reversal of the Red River pipeline in order to deliver SCOOP / STACK barrels to Coffeyville. The Red River line now has a capacity of 35,000 barrels per day, bringing our total capacity for SCOOP / STACK shale oil barrels for our refineries to 105,000 barrels per day.

The Benfree repositioning project at Wynnewood refinery is under construction, which should increase our liquid yield by 1%. This project is expected to be complete during our spring turnaround under way now. We increased our production of premium gasoline to more than 9,000 barrels per day in 2018 compared to approximately 6,400 barrels per day in 2017. We expect this trend to continue. We increased our internal RINs generation to 24% in 2018 from 18% in 2017, and part by blending biodiesel across both our refinery racks. And in September, we announced our intent to sell the Cushing crude oil tank farm. We expect this transaction to be complete in the coming months.

Earlier today, CVR Partners -- CVR Partners' CEO, Mark Pytosh, announced the following accomplishments in the fertilizer segment in 2018. CVR Partners maintained a high utilization rate at both plants. We began loading UAN cars, railcars at our new loading rack in Coffeyville, which provides unit train capabilities and increased access to BN (ph) rail -- rail line while reducing distribution costs. We completed the second quarter Coffeyville plant turnaround on time and on budget, and we identified and are in the process of developing a plan to construct a backup oxygen unit at our Coffeyville fertilizer plant, intended to reduce the cost of third-party air separation plant outages.

Yesterday we've reported CVR Energy's full year and fourth quarter results. Consolidated net income attributable to CVR Energy for the full year of 2018 was $289 million or $3.12 per diluted share as compared to $235 million or $2.70 per diluted share in the prior year. Fourth quarter 2018 consolidated net income attributable to CVR Energy was $82 million or $0.82 per diluted share as compared to $200 million or $2.31 per diluted share in the fourth quarter of last year. Adjusted EBITDA for the full year of '18 was 280 -- $825 million compared to $406 million in the previous year, driven by improved cracks, wide crude differentials, increased shale oil runs, lower RVO and lower RIN prices. We also in the fourth quarter -- and we also announced in the fourth quarter dividend of $0.75 per share, which will be paid on March 11th to stockholders of record on March 4th. This brings our 2018 total declared dividends to $2.75 per share. On the annualized basis, our current dividend of $3 per share represents an industry-leading dividend yield of approximately 7% based on yesterday's close price.

Now I'll speak to some of the fourth quarter highlights from each of our business segments. For the petroleum segment, both plants ran well operationally and there is minimal lost opportunities during the quarter. The combined total throughput for the fourth quarter of 2018 was approximately 221,000 barrels per day as compared to 205,000 barrels per day in the fourth quarter of 2017. As a reminder, the fourth quarter of 2017 was impacted by Wynnewood's planned turnaround.

Combined gasoline and distillate production for the fourth quarter resulted in a clean product yield of approximately 94%. This compares to approximately 93% in the fourth quarter of 2017. In December, our facilities produced a clean product yield of 95.3%. In total, we gathered approximately 109,000 barrels per day of crude oil during the quarter of 2018, as compared to 97,000 last year. The increase in gathered volume was entirely new SCOOP / STACK barrels located close to our refineries.

Now turning to our fertilizer business, during the fourth quarter, CVR Partners had strong production results at both facilities, Coffeyville's ammonia unit operated at 96% utilization, compared to 94% in the fourth quarter of 2017. At East Dubuque, it's ammonia unit operated at 95% utilization in the quarter, compared to 88% in the prior year.

The Board of Directors of CVR Energy's general partner declared a fourth quarter 2018 distribution of $0.12 per common unit, which will be paid on March 11th to unit holders of record on March 4th. As CVR Energy owns approximately 34% of the common units of CVR Partners, we will receive a proportionate share cash distribution.

Now let me turn the call over to Tracy to discuss financial highlights.

Tracy D. Jackson -- Executive Vice President and Chief Financial Officer

Thank you, Dave, and good afternoon, everyone. Before I get into our results, I'd like to outline that during the fourth quarter of 2018 we revised our internal and external use of non-GAAP measures. EBITDA is reconciled from net income or net loss and adjusted EBITDA has been redefined to exclude turnaround expense and any other non-recurring unusual items, and no longer removes first-in-first-out inventory impacts, derivative gains or losses, and business interruption insurance recoveries.

In addition, our refining margin now includes our derivative gains and losses, which were previously reported below operating income. Prior year amounts have been conform to align with this new definition. Management believes this presentation better aligns our financial results to how we evaluate our operations internally and better aligns with industry peers.

We reported net income of $106 million in the fourth quarter of 2018, as compared to net income of $173 million in the prior year period. The fourth quarter of 2017 net income was significantly impacted by $201 million tax benefit recognized in the fourth quarter, associated with the Tax Cuts and Jobs Act. The effective tax rate was 18% for the full year of 2018 as a result of the subsequent to year-end equity transaction and corresponding reduction to non-controlling interests. We estimate our full year 2019 effective tax rate to be between 20% and 25%.

I will now turn to the specific performance of our two business segments impacting our overall quarterly results. The petroleum segments' adjusted EBITDA for the fourth quarter of 2018 was $172 million compared to $60 million in the same period of 2017. The increase in adjusted EBITDA year-over-year was driven by wide crude oil differentials, additional rounds of regional shale oil, a lower renewable volume obligation and lower RINs prices. In the fourth quarter of 2018, our petroleum segments' realized refining margin, excluding inventory valuation impact was $17.47 per total throughput barrel compared to $7.46 in the same quarter of 2017. Benefits to the refining margin from the substantial fall in crude oil flat price through the quarter were partially offset by inventory valuation impacts for net positive impact of $3.78 per barrel during the fourth quarter of 2018. This compares to a favorable impact of $1.59 per barrel during the same period last year. The realized capture rate excluding the inventory valuation impact was 94% in the fourth quarter 2018, as compared to 38% in the fourth quarter of 2017.

The Group 3 crack spread averaged $18.48 per barrel in the fourth quarter 2018, as compared to $19.96 in the fourth quarter of 2017. Crude differentials remain favorable during the quarter with the average differential between Brent-WTI, increasing to $9.26 per barrel or approximately $3 per barrel better than the fourth quarter of 2017. The WCS differential to WTI also widened by approximately $8 per barrel compared to the fourth quarter of 2017, peaking at $50.75 under WTI in October.

With our capacity on multiple pipelines bringing Canadian crude into Cushing, we were able to capitalize on the record high WCS differentials during the quarter by selling those barrels to third parties for higher margins that we would have earned running them through our system. The gains associated with Canadian barrels sold in Cushing are now included in our refining margin and also improved our capture rate for the quarter. Gains on Canadian crude positions for the fourth quarter of 2018 totaled $70 million, which includes unrealized gains of $37 million associated with open purchases that are scheduled for delivery in the first quarter 2019. In the fourth quarter of 2017, we had unrealized position losses of $47 million.

Rent expense in the fourth quarter of 2018 dropped significantly to $13 million or $0.64 per barrel of total throughput as compared to $86 million or $4.57 per barrel as the total throughput in the same period last year. The full year 2018 RINs expense was $60 million as compared to $249 million in 2017. Based on recent market prices of RINs and current estimates of production rates, we currently estimate that our RINs expense will be approximately $80 million to $90 million in 2019, excluding any potential reductions in renewable volume obligation.

The petroleum segments' direct operating expenses excluding turnaround were $4.41 per barrel of total throughput in the fourth quarter of 2018 as compared to $4.82 in the prior year period. The decrease was primarily associated with lower personnel expenses and higher total throughput volume as the fourth quarter of 2017 was impacted by the fall turnaround at Wynnewood.

Now turning to our fertilizer segment. For the full year of 2018, CVR Partners reported operating income of $6 million and net loss of $50 million or $0.44 per common unit, and adjusted EBITDA of $90 million. This is compared to operating losses of $10 million and net loss of $73 million or $0.64 per common unit, and adjusted EBITDA of $67 million for the full year 2017. The approximate 50% year-over-year increase in adjusted EBITDA was primarily due to the improved net back pricing of 17% and 14% for ammonia and UAN, respectively.

For the fourth quarter of 2018, CVR Partners reported net sales for the period of $98 million, and net loss of $1 million, and adjusted EBITDA of $33 million. This is compared to net sales of $78 million, and net loss of $27 million, and adjusted EBITDA of $8 million for the prior year period. These improvements were driven predominantly by improved net back pricing as well as an increase in UAN sales volumes of 20%, partially offset by 45% lower ammonia sales volumes. The decrease in ammonia sales volumes was primarily attributable to weather issues in Corn Belt.

Turning to the consolidated balance sheet. The total consolidated capital spend for the full year 2018 was $102 million, which included $79 million from the petroleum segment, and $20 million from CVR Partners. Of this total, environmental and maintenance capital spending comprised $81 million, including $62 million in the petroleum segment, and $16 million at CVR Partners.

The 2018 spending plan was reduced in the first quarter of 2018, down from $130 million of total capital spending, of which $100 million was estimated to be environmental and maintenance capital. The reduction in spending was associated with management's revaluation of the plan and associated changes. We estimate the total consolidated capital spending for 2019 to be approximately $210 million to $240 million, of which approximately $150 million to $175 million is environmental and maintenance capital.

Our cash position remains strong as we ended the quarter with cash of approximately $668 million on a consolidated basis, which includes $62 million at CVR Partners. We feel confident in our strong balance sheet and liquidity position heading into 2019. Looking ahead, we estimate our total throughput for the first quarter 2019 to be approximately 205,000 to 215,000 barrels a day. We expect total direct operating expenses for the first quarter to be approximately $85 million to $95 million, and total capital spending to range between $35 million and $45 million.

With that, Dave, I'll turn the call back to you.

David L. Lamp -- Chief Executive Officer and President

Thanks, Tracy. In summary, 2018 was a successful year for CVR Energy. For 2019, our mission continues to be a top tier Northern -- North American petroleum refining and fertilizer company as measured by safe and reliable operations, superior financial performance and profitable growth.

Looking at 2019 and beyond, we currently see similar market themes to what we saw in '18. GDP growth and strong gasoline demand driven by low unemployment and favorable gasoline prices, IMO 2020, marine fuel spec changes to 0.5 total sulfur associated -- and associated impacts to distillate demand, continued strong exports of gasoline and diesel, favorable Brent, TI spreads due to the continuing growth of shale oil production, and the price needed to support exports, the favorable WCS, WTI spreads, primarily due to limit -- limited pipeline takeaway from Canada, and continued improvement in fertilizer marketing conditions.

We believe CVR Energy is well positioned for 2019 and beyond. To achieve our mission, our strategic -- the strategic objectives are: continued improvement in all health -- environmental health and safety matters; safety is our number one priority and safe operations result and reliable operations; profitable growth of our crude gathering and logistics system by purchasing local crudes in our backyard and building out our pipeline system to supply our refinery operations. Completing the sale of our Cushing, Oklahoma tank farm, continuing to increase our internally generated RINs and reduce our RIN exposure, this includes an increasing our biodiesel blending as well as continuing to explore building the wholesale and retail business, increasing liquid yield at Wynnewood by completing the design and evaluation of new isom unit and the recovery of LPGs from fuel gas. In addition, we have started to schedulize process engineering design on the new KSET Alky project at Wynnewood as well. Install a oxygen surge system for the Coffeyville fertilizer plant, execute our planned turnarounds on time -- on time and on or under budget, prudently manage those costs, increase our natural gasoline processing at WCS capacity through phase -- a series of phase projects at Coffeyville refinery, Phase 1 includes the addition of the naphtha hydrotreater unit and isom unit to increase the capacity of -- for processing natural gasoline to 10,000 barrels per day. Over the last five years, the average spread of Group 3 gasoline over natural gasoline was nearly $23 a barrel. Phase II would include adding a gas oil hydrotreater to increase liquid yield -- liquid volume yield and increase WCS runs, and Phase III would include debottlenecking the reformer. If it's (ph) supported economically and approved by the Board, these projects all have returns of 30% or higher with a total capital estimate of $350 million.

Looking ahead at the first quarter of 2019, Group 3 cracks have averaged $14.02 per barrel, and the Brent, TI spread has averaged $9.01 per barrel. These market drivers continued to improve, and yesterday they were approximately $19 per barrel and $10 per barrel, respectively. The Wynnewood 2019 spring turnaround is onschedule and has begun the turnaround is expected to last about a month across $25 million during the first quarter of 2019. Units affected include the number two crude unit, as well as the CCR, as well as the naphtha hydrotreater and distillate hydrotreater.

Finally, on January 29, 2019, we purchased all the remaining CVR Refining common units, not already owned by CVR Energy or its affiliates. As a result of this purchase, the common units were delisted effectively February 8, 2019. The purchase was funded with approximately 200 million of cash on hand combined with $105 million credit facility. On February 11, 2019, the credit facility was repaid in full.

So with that operator, we are ready for questions.

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Prashant Rao with Citigroup. Please proceed with your question.

Prashant Rao -- Citigroup -- Analyst

Hi, thanks and good afternoon guys.

David L. Lamp -- Chief Executive Officer and President

Good afternoon.

Prashant Rao -- Citigroup -- Analyst

Maybe I could -- maybe just jump in ahead first year and ask a bigger picture question about the M&A environment. Obviously sensitive to the fact, but you can't disclose too much or maybe you could give us some commentary on where conversations are right now, given the change in the macro environment, things are volatile right now, it's been dumping a lot in the last few months. Any color there would be helpful in sort of how you see maybe CVR -- CVI's place in that process right now and as we go forward to 2019?

David L. Lamp -- Chief Executive Officer and President

Sure. I think as far as the macro goes, I think the bid-ask is still fairly wide, although has narrowed somewhat with the recent market conditions, we have made no secret about it -- that as a company CVI is looking for a consolidation play of some sort, and we continue to support that strategy with doing all we can to simplify the business, as well as streamline the business, making this vision as could be is also develop our strategic projects. So other than that, there is not -- I don't -- I think the number of consolidate since -- has shrunk with the Marathon-Andeavor transaction, and it'd be interesting to see if it's -- there is more interest in the E&P side than there historically has been for these type of assets and look forward to reporting on that in the future.

Prashant Rao -- Citigroup -- Analyst

Okay. Interesting. Appreciate the color. Well, maybe on operations, one question on credit sourcing and another on the optionality project Coffeyville. On the SCOOP / STACK increased barrels that you're getting, is there something we could quantify what the margin benefit versus maybe Brent, TI Cushing as the differential there or maybe through the full chain given that you kept more clean products out of it. And the second part of the question is sort of thinking about, I think you mentioned before that you're able to your gathering process and you're able to get higher distillate yields in the average sort of SCOOP / STACK barrel, maybe a slightly lower API barrels that you are gathering there. Wondering if you could also comment upon that status and sort of the progress there and sort of the evolution of how that's going?

David L. Lamp -- Chief Executive Officer and President

Sure. The additional barrels we are gathering almost exclusively are the SCOOP and STACK barrels of nature in there of the quality and basis in Cushing. The barrel we buy today, which historically we bought about 80,000 barrels at Cushing common, in Cushing -- to -- on the increment supply Coffeyville, and we're replacing that with the STACK / SCOOP type barrel. As you mentioned, there is a quality difference, and that typically runs between $1 and $1.50 just based on the blend that's available in Cushing. And our plan is to continue to push that more and more barrels -- as the STACK and SCOOP grows, we will push more and more to Coffeyville and up until we are backed out all the Cushing common which today even if we had Red River completely full, still another 50,000 barrels or so.

That said, your second question on the distillate yields in the quality of the stuff, we have seen very -- we probably are the industry leader in distillate yield per barrel, averaging somewhere around 44% to 45% on average, and we have not seen any decline in that running this type of crude. This barrel is a little bit lighter, it's 45 to 46 gravity, but it's the fact that we can gather at the wellhead, (inaudible) -- really keeps every other cat and dog out of it. So it's -- we view it as a real competitive advantage.

Prashant Rao -- Citigroup -- Analyst

Okay, thanks. And then just one last question on the crude optionality, the project at Coffeyville, specifically Phase 2 that improve your liquid yield and the gasoline hydrotreater increasing the Canadian crude processing. What was the time -- when would that sort of start? Where you take get Board approval today for the three-year project? What slice of that timeline would Phase 2 fall in, please?

David L. Lamp -- Chief Executive Officer and President

Well, it depends. We may combined Phase 1 and Phase 2, that's still under study. Just because the Phase 2 is such a good project, and the main reason is such a good project is that we have excess hydrogen with the hydrogen plant that we underutilized. So it makes that project very economical. And to -- basically, it could be accelerated to that three-year timeframe, but if we waited to them sequentially, it'd be more like six years.

Prashant Rao -- Citigroup -- Analyst

Okay. Thanks. I appreciate the time, and I'll turn it over.

David L. Lamp -- Chief Executive Officer and President

Sure.

Operator

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

Matthew Blair -- Tudor, Pickering, Holt & Co. -- Analyst

Hey, good morning, everyone. How are you, Dave?

David L. Lamp -- Chief Executive Officer and President

Good, Matt.

Matthew Blair -- Tudor, Pickering, Holt & Co. -- Analyst

Maybe continuing on M&A theme, so you currently own 34% of UAN, is that -- are you happy with that level? Do you envision that changing anytime soon?

David L. Lamp -- Chief Executive Officer and President

Well, it's a key question of going-forward strategy is -- how -- are we more appealing with the -- with UAN in our portfolio or less appealing, and that's an ongoing debate that's happening. I don't see us increasing our ownership in UAN. Although it is certainly an option, we do view that UAN is undervalued. That said, I think the more important side of it would be is is how do we affect a transaction with that in the portfolio or not. So that will be the key question going forward.

Matthew Blair -- Tudor, Pickering, Holt & Co. -- Analyst

Okay. And then could you remind us how much of your EBITDA comes from midstream activities these days?

David L. Lamp -- Chief Executive Officer and President

Well, we don't really break that out as such. We do have probably $60 million to $75 million of -- what I'd call traditional logistical MLP assets in our logistics. It's probably going up a little bit with the Red River reversal, because lot of that wasn't in there, in any future growth we do -- and bringing more STACK / SCOOP barrels toward Cushing. But that's a good historical number.

Matthew Blair -- Tudor, Pickering, Holt & Co. -- Analyst

Great. And then lastly, Tracy, did you say that the unrealized hedge gains were 37 million? And if so, is that a number that's flowing through both the refining gross margin, as well as refining EBITDA in your reporting?

Tracy D. Jackson -- Executive Vice President and Chief Financial Officer

Correct. Yes. So all of those. $37 million, and it is included in the refining margins.

Matthew Blair -- Tudor, Pickering, Holt & Co. -- Analyst

Great. Thank you.

David L. Lamp -- Chief Executive Officer and President

Welcome.

Operator

Thank you. We have reached the end of our question-and-answer session. I would like to turn the call back over to management for any closing remarks.

David L. Lamp -- Chief Executive Officer and President

Again, I'd like to thank you all for your interest in CVR Energy. Additionally, I'd like to thank our employees for their hard work and commitment toward a safe, reliable environmentally responsible operations. We look forward to reviewing our first quarter 2019 results in our next earnings call. Thanks, and goodbye.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Duration: 30 minutes

Call participants:

Jay Finks -- Vice President of Finance and Treasurer

David L. Lamp -- Chief Executive Officer and President

Tracy D. Jackson -- Executive Vice President and Chief Financial Officer

Prashant Rao -- Citigroup -- Analyst

Matthew Blair -- Tudor, Pickering, Holt & Co. -- Analyst

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