U.S. Markets open in 4 hrs 52 mins

Edited Transcript of ALJ earnings conference call or presentation 24-Feb-17 4:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Alon USA Energy Inc Earnings Call

DALLAS Feb 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Alon USA Energy Inc earnings conference call or presentation Friday, February 24, 2017 at 4:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Stacey Morris

Alon USA Energy, Inc. - IR Manager

* Alan Moret

Alon USA Energy, Inc. - CEO

* Scott Rowe

Alon USA Energy Inc - SVP Asphalt Marketing

================================================================================

Conference Call Participants

================================================================================

* Johannes Van Der Tuin

Credit Suisse - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings and welcome to Alon USA Energy's fourth-quarter earnings conference call.

(Operator Instructions)

As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Stacey Morris, Investor Relations. Thank you. You may begin.

--------------------------------------------------------------------------------

Stacey Morris, Alon USA Energy, Inc. - IR Manager [2]

--------------------------------------------------------------------------------

Thank you, Rob. Good morning, everyone, and welcome to Alon USA Energy's fourth-quarter 2016 earnings conference call. With me are Alan Moret, Chief Executive Officer; Shai Even, Chief Financial Officer; along with other members of our senior management team.

During the course of this call we may make forward-looking statements based on our current expectations. These forward-looking statements are subject to a number of significant risks and uncertainties and our actual results may differ materially. For a discussion of factors that could affect our future financial results and businesses, please refer to the disclosure and risk factors disclosed by the Company from time to time in its filings with the SEC. Furthermore, please also refer to the statement regarding forward-looking statements incorporated in our news release issued yesterday and note that the contents of our conference call today are covered by these statements.

On this call we will discuss non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP in our financial release which is posted on our website.

Finally, please be aware that all our statements are made as of today, February 24, 2017, based on information available to us as of today and except as required by law we assume no obligation to update any such statements.

With that I will turn the call over to Alan

--------------------------------------------------------------------------------

Alan Moret, Alon USA Energy, Inc. - CEO [3]

--------------------------------------------------------------------------------

Thank you, Stacey. Good morning, everyone.

As previously announced, Delek US and Alon entered into a definitive agreement in January 2017 under which Delek will acquire the outstanding shares of Alon common stocks that Delek does not already own in an all-stock transaction. The transaction is expected to close in the first half of 2017 subject to customary closing conditions including regulatory approvals and approval by Delek US shareholders and Alon shareholders. We believe the economies of scale, financial strength and synergies generated this merger create the opportunity to drive long-term value for shareholders. On this call, we will not be able to comment on the transaction or address questions around the process or timing.

Turning to our results, 2016 was a challenging year. Excess crude inventories became excess product inventories while low oil prices drove narrow crude differentials. This combination resulted in weak crack spreads for the year. Our performance was also negatively impacted by the cost of RINs.

Given the difficult refining environment, we were pleased to have positive contributions from our asphalt segment, retail segment and our renewable fuels business in California. We began production at our renewable fuels facility in February and the facility produced 30 million gallons of renewable fuel in 2017. We also saw marked improvement in our asphalt business with operating income more than doubling relative to 2015.

For the fourth quarter of 2016, excluding special items, we reported a net loss of $0.20 per share compared to a net loss of $0.21 per share in the same quarter last year. Adjusted EBITDA in the fourth quarter of 2016 was $30 million. Excluding special items, we reported a net loss of $0.92 per share for the full-year 2016 compared to a net income of $1.37 per share for 2015.

The Big Spring refinery ran well in the fourth quarter of 2016 with total throughput of approximately 77,000 barrels per day. The refinery operating margin for the quarter of $7.65 per barrel was negatively impacted by approximately $1.10 per barrel due to RINs cost. Big Spring's operating margin was also negatively impacted by lower product prices in the Group III region compared to our Gulf Coast benchmarks. The refinery's direct operating expenses low at only $3.39 per barrel.

During the fourth quarter of 2016 the Big Springs refinery set a new quarterly record for WTI rate by processing over 44,000 barrels per day of Midland based WTI. In response to market conditions, we have adjusted our crude slate to run more West Texas sour at times than the first quarter, but generally remain incentivized to run Midland based WTI. We are encouraged by the significant ramp-up in production activity in the Permian Basin and expect WTI Midland to stabilize and the transportation-based discount to WTI Cushing. Through the year, Big Spring gained access to two new large crude gathering pipeline systems as they came into service, providing additional supply optionality for both Big Spring and Krotz Springs refineries given our ability to ship Permian barrels to Krotz Springs.

Our retail marketing business faced seasonal headwinds in the fourth quarter of 2016 as well as some continued weakness in the Permian Basin. However, we did see some improvement over the course of the quarter. Compared to the same quarter last year, same-store fuel sales volumes were up 2.9% across our system, including a slight increase in our Permian Basin stores. These trends and same-store fuel sales continued into January.

Merchandise same-store sales were down 2.2% in the fourth quarter of 2016 relative to the same quarter last year. However, excluding our Permian Basin stores, same-store merchandise sales were up 4%. Looking forward, we are encouraged by the increase in the Permian rig count, which has more than doubled since May 2016, and we believe our retail stores are well-positioned to benefit as the local economy improves.

Our Krotz Springs refinery averaged 70,000 barrels per day of total throughput in the fourth quarter of 2016. The refinery operating margin was $3.40 per barrel for the quarter. This included a negative impact of $1.60 per barrel related to RINs costs and a negative impact of $0.20 per barrel as a result of the two Colonial Pipeline outages. The refinery direct operating expense was low at $3.44 per barrel. We continue to make progress with the alkylation project at Krotz Springs and have received the necessary permits for the project.

In California we reported operating income for our renewable fuels facility of $9 million for the fourth quarter. This marked our most profitable quarter since operations began in February. This profitability was achieved in spite of lower throughput of 2,400 barrels per day due to reduced hydrogen supply resulting from the maintenance being done by a third-party supplier.

The fourth-quarter results benefited from lower costs and goods, mainly a reduction in talent price from the third quarter to the fourth quarter. We have re-rated the capacity of [fuels] facility from 2,500 barrels per day to 3,000 barrels per day based on a project we completed in November to increase hydrogen compression.

Operating at 3,000 barrels per day, we expect total throughput at our renewable fuels project to average 2,500 barrels per day in the first quarter due to weather-related mechanical issues and hydrogen supplier maintenance. We also expect to perform a turnaround at the plant in the second quarter of 2017. Including the impact of the turnaround, we expect full-year 2017 throughput to average approximately 2,600 barrels per day.

While the blender's tax credit lapsed at the end of 2016 and its absence will have an impact on our quarterly profitability, we still benefit from strong pricing for our products, LCFs credits and D4 RIN credits. We expect that either the blender's tax credit will be reinstated retroactively to the beginning of 2017 or D4 RIN prices will escalate. In addition, we expect to see an increase in the price of LCF credit throughout the year.

Our asphalt business continues to perform very well. In the fourth quarter, our asphalt segment generated $4.5 million of EBITDA, which is impressive considering that the fourth quarter tends to be seasonally weak. Asphalt sales volumes were up 9% relative to the fourth quarter of 2015 and margins were strong at $108 per ton. For the year, asphalt sales were up 19% over 2015. We also reduced our direct operating expense by over $2 million.

We maintain our positive outlook on this business and are encouraged by the backlog we are accumulating in the 2017 paving season as well as continued strength in asphalt demand in West Texas. The new administration's emphasis on infrastructure could further support this business. As we have said in the past, we believe the improvements made in this business are sustainable.

As we mentioned in our third-quarter 2016 earnings call, we filed an application with the EPA for an RFS exception for Krotz Springs for both 2015 and 2016 based on the negative impact of the program on the refinery. This month we received notification that that the EPA has granted our request that Krotz Springs be exempted from the requirements of the RFS for calendar year 2016. As a result, we expect to book a reduction in RINs expense of $29 million in the first quarter of 2017 based on a weighted average RINs price of $0.58 per RIN.

For 2017, we currently expect RINs expense to total $31 million at Krotz Springs and $20 million at Big Spring based on RIN prices as of January 31, 2017. These amounts exclude the RINs generated from our renewable fuels facility in California and the reduction in RINs expense resulting from the exemption discussed earlier.

We do not expect any major maintenance at Big Spring in 2017. At Krotz Springs we expect to perform a reformer regeneration and catalyst replacement in the [ice on] unit in the fourth quarter of 2017. We expect total throughput at the Big Spring refinery to average 77,000 barrels per day for the first quarter of 2017 and 75,000 barrels per day for the full year. We expect total throughput at the Krotz Springs refinery to average 77,000 barrels per day for the first quarter of 2017 and 74,000 barrels per day for the full year.

As noted in our earnings release, our Board has declared a regular quarterly cash dividend of $0.15 per share.

Looking to the first quarter, we have started the year with counter seasonal strength in crack spreads. We have been pleased to see widening differentials between domestic crudes and Brents and the decline in RIN prices. We remain focused on operating well and controlling our costs.

With that, we're glad to take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Thank you.

(Operator Instructions)

Nicholas Brown, Zazove Associates.

--------------------------------------------------------------------------------

Stacey Morris, Alon USA Energy, Inc. - IR Manager [2]

--------------------------------------------------------------------------------

Hello, Nick. Can you hear us?

--------------------------------------------------------------------------------

Operator [3]

--------------------------------------------------------------------------------

No, he is not. He must have disconnected. There are no further questions at this time. I would like to turn the call back over to Management for closing remarks.

Excuse me. We do have a question. It comes from Ed Westlake, Credit Suisse.

--------------------------------------------------------------------------------

Johannes Van Der Tuin, Credit Suisse - Analyst [4]

--------------------------------------------------------------------------------

Hi. It's Johannes. I hope you're doing well. A couple of very quick questions. One is infrastructure spend. Presumably, any new infrastructure spend that is coming from federal government is going to really increase the amount of asphalt consumed. Is there anything you are seeing on the local level for this calendar year, either in the Texas market or elsewhere, that is specific and a little bit more actionable?

--------------------------------------------------------------------------------

Alan Moret, Alon USA Energy, Inc. - CEO [5]

--------------------------------------------------------------------------------

In general, we see the West Texas economy and the spend in West Texas on asphalt and asphalt projects as being very strong. Scott, do you have anything you want to add to that?

--------------------------------------------------------------------------------

Scott Rowe, Alon USA Energy Inc - SVP Asphalt Marketing [6]

--------------------------------------------------------------------------------

The Texas DOT has a very robust five-year plan, which could be void by an increase from a federal level. But we have not seen that to date.

--------------------------------------------------------------------------------

Johannes Van Der Tuin, Credit Suisse - Analyst [7]

--------------------------------------------------------------------------------

Okay. Are there any of the states that have infrastructure spending plans that are coming out that should be watched from our perspective?

--------------------------------------------------------------------------------

Scott Rowe, Alon USA Energy Inc - SVP Asphalt Marketing [8]

--------------------------------------------------------------------------------

Nothing of note so far.

--------------------------------------------------------------------------------

Johannes Van Der Tuin, Credit Suisse - Analyst [9]

--------------------------------------------------------------------------------

Okay. On AltAir, the RIN fork of D4 RINs -- supposed to be [D5] RINs, but that's no as material -- have come down along with D6 RINs somewhat. They may go up or go down, but is there a good way of thinking about what a, I don't know, a $0.10 move in the price of a RIN will have an impact to earnings for AltAir? Is there a good way of thinking about the impact of the RIN price for the profitability of that business as opposed to the intrinsic sales in that business?

--------------------------------------------------------------------------------

Alan Moret, Alon USA Energy, Inc. - CEO [10]

--------------------------------------------------------------------------------

I will give you a simplistic formula and then you can think about how to use it best. Every gallon of renewable product that we make there, diesel or jet fuel, brings with it 1.7 RINs, so the -- based on the throughput of the plant and something that's in an excess of 95% of renewable jet and renewable diesel yields, you can guess your calculation from that.

--------------------------------------------------------------------------------

Johannes Van Der Tuin, Credit Suisse - Analyst [11]

--------------------------------------------------------------------------------

Okay. That's very helpful. Then, it did not sound like there were other questions in the queue, so I can if I could press you with a third question, it would be appreciated. That has to do with just gasoline demand and same-store sales. There were a couple of really low gasoline demand numbers in a year-over-year basis in the last month, and they recovered somewhat. But it had some people in the market worried for a little while in terms of which the trajectory of gasoline demand. One theory is that it was just the DOE and they were mis-estimating what there export numbers were, and as a consequence of that it just made it optically look lower than it was because that weekly DOE number is a derived number. I was wondering if you're seeing anything on the ground in your stores that would either confirm or deny any sorts of trends when it comes to gasoline demand within your footprint area?

--------------------------------------------------------------------------------

Alan Moret, Alon USA Energy, Inc. - CEO [12]

--------------------------------------------------------------------------------

Let me try that, and if anybody has anything to add we can do it. On the DOE numbers first, we think that's obviously has lot of noise in DOE numbers with the export/import calculations that go into that. We tend to rely on one of our consultants that we use that we think does a pretty good job of sorting the things out. If you would look -- if you take their numbers at face value, I think you would see about a 1% decline year to date, year on year, if you will. At least, in some order that seems to line up with vehicle miles traveled, so it had maybe some reasonableness from that standpoint, too.

Locally, in our markets and our areas, we produce a lot of gasoline in the wintertime, but we have been able to move it to our marketplaces as we normally do. We talked about our same-store sales being up, some on fuel sales, so I think we are -- that is what we see locally.

--------------------------------------------------------------------------------

Johannes Van Der Tuin, Credit Suisse - Analyst [13]

--------------------------------------------------------------------------------

Okay. Thank you very much. Appreciate you taking the time.

--------------------------------------------------------------------------------

Alan Moret, Alon USA Energy, Inc. - CEO [14]

--------------------------------------------------------------------------------

Surely.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

(Operator Instructions)

There are no further questions at this time. I would like to turn the call back to Management for closing remarks.

--------------------------------------------------------------------------------

Alan Moret, Alon USA Energy, Inc. - CEO [16]

--------------------------------------------------------------------------------

Thank you for your attention and your interest in the Company. Appreciate the chance to talk to you and look forward to talking to you in the future.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

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