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Edited Transcript of CVI earnings conference call or presentation 21-Feb-19 8:00pm GMT

Q4 2018 CVR Energy Inc Earnings Call

SUGAR LAND Feb 24, 2019 (Thomson StreetEvents) -- Edited Transcript of CVR Energy Inc earnings conference call or presentation Thursday, February 21, 2019 at 8:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David L. Lamp

CVR Energy, Inc. - CEO, President & Director

* Jay Finks

CVR Energy, Inc. - VP of Finance

* Tracy D. Jackson

CVR Energy, Inc. - Executive VP & CFO

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Conference Call Participants

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* Matthew Robert Lovseth Blair

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research

* Prashant Raghavendra Rao

Citigroup Inc, Research Division - Senior Associate

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Presentation

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Operator [1]

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Greetings, and welcome to the CVR Energy, Inc. Fourth Quarter 2018 Conference Call. (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.

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Jay Finks, CVR Energy, Inc. - VP of Finance [2]

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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?

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David L. Lamp, CVR Energy, Inc. - CEO, President & Director [3]

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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 -- with the consolidation of some of our back-office locations and reduced 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 common 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 a 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 underway 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, in 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 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 Rail] line while reducing distribution cost. We completed in the second quarter, Coffeyville plant, turnaround on time and on budget. And we identified that we're 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 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 -- or, excuse me, $825 million compared to $406 million in the previous year, driven by improved cracks, wide crude differentials, increased shale oil RINs, lower RVO and lower RIN prices.

We also in the fourth quarter -- we also announced in the fourth quarter a dividend of $0.75 per share, which will be paid on March 11 to stockholders as of record on March 4. This brings our 2018 total declared dividends to $2.75 per share. On an 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 was 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. And in December, our facilities produced a clean product yield of 95.3%. In total, we gathered approximately a 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, its 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 11 to unitholders of record on March 4. As CVR Energy owns approximately 34% of the common units of CVR Partners, we will receive a proportionate of share cash distribution.

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

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Tracy D. Jackson, CVR Energy, Inc. - Executive VP & CFO [4]

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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 nonrecurring 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 conformed 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 a $173 million in the prior year period. The fourth quarter of 2017 net income was significantly impacted by a $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 noncontrolling 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 2 business segments impacting our overall quarterly results. The Petroleum segment's adjusted EBITDA for the fourth quarter of 2018 was a $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 runs of regional shale oil, a lower renewable volume obligation and lower RINs prices. In the fourth quarter of 2018, our Petroleum segment's realized refining margin, excluding inventory valuation impacts, 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 fallen 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 a $1.59 per barrel during the same period last year. The realized capture rate, excluding the inventory valuation impacts, 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 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 400 -- $47 million. RINs 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 of total throughput in the same period of 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 segment's 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, a 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, a net loss of $73 million or $0.64 per common unit and adjusted EBITDA of $67 million for the full year of 2017. The approximate 50% year-over-year increase in adjusted EBITDA was primarily due to the improved netback pricing of 17% and 14% for ammonia and UAN, respectively.

For the fourth quarter 2018, CVR Partners reported net sales for the period of $98 million, a net loss of $1 million and adjusted EBITDA of $33 million. This is compared to net sales of $78 million, a net loss of $27 million and adjusted EBITDA of $8 million for the prior year period. These improvements were driven predominantly by improved netback 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 the corn belt.

Turning to the consolidated balance sheet. The total consolidated capital spend for the full year 2018 was a $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 2 -- $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 reevaluations of 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 remained 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 of 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.

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David L. Lamp, CVR Energy, Inc. - CEO, President & Director [5]

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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 of 0.5 total sulfur associated -- and associated impacts to distillate demand, continued strong exports of gasoline and diesel, favorable Brent TI spreads due to continuing growth of shale oil production and the price needed to support exports, favorable WCS WTI spreads primarily due to limited pipeline takeaway from Canada and continued on improvement in fertilizer marketing conditions.

We believe CVR Energy is well positioned for 2019 and beyond. To achieve our mission, our strategic objectives are: continued improvement in all health -- environmental, health and safety matters, safety is our #1 priority when safe operations result in 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; continue to increase our internally generated RINs and reduce our RIN [exposure], this includes increasing our biodiesel blending as well as continuing to explore building a wholesale and retail business; increasing liquid yield at Wynnewood by completing the design and evaluation of a new isom unit and the recovery of LPGs from fuel gas, in addition, we have started to schedule a process engineering design on the new [K set], our key project at Wynnewood as well; install a oxygen search system for the Coffeyville Fertilizer plant; execute our planned turnarounds on time and on or under budget; prudently managing our cost; increase our natural gasoline processing and WCS capacity through phased -- a series of phased projects at Coffeyville refinery, Phase 1 includes the addition of a naphtha hydrotreater unit and isom unit to increase the capacity of -- for processing natural gasoline to 10,000 barrels per day. Over the last 5 years, the average spread of Group 3 gasoline over natural gasoline was nearly $23 a barrel. Phase 2 would include adding a gas oil hydrotreater to increase liquid yield -- liquid volume yield and increase WCS runs. And Phase 3 would include debottlenecking a reformer. If 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 continue to improve, and yesterday, they were approximately $19 per barrel and $10 per barrel, respectively.

The Wynnewood 2019 spring turnaround is on schedule and has begun. The turnaround is expected to last about a month and cost $25 million during the first quarter of 2019. Units affected include the #2 crude unit as well as the CCR as well as the naphtha hydrotreater and distillate hydrotreater.

Finally, on January 29, 2019, we've 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 a $105 million credit facility. On February 11, 2019, the credit facility was repaid in full.

So with that, operator, we are ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Prashant Rao with Citigroup.

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Prashant Raghavendra Rao, Citigroup Inc, Research Division - Senior Associate [2]

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

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David L. Lamp, CVR Energy, Inc. - CEO, President & Director [3]

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Sure. I think as far as the macro goes, I think the [Benasque] 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 consolidation play of some sort, and we continue to support that strategy with the -- doing all we can to simplify the business as well as streamline the business. Making it as efficient as could be, as also develop our strategic projects. So other than that, there's not -- I don't think the number of consolidees has shrunk with the Marathon Andeavor transaction. And it will be interesting to see if there's 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.

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Prashant Raghavendra Rao, Citigroup Inc, Research Division - Senior Associate [4]

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Okay. Interesting. Appreciate the color. A little bit maybe on operations. I have 1 question on crude sourcing and another on the optionality project for Coffeyville. On the SCOOP, STACK increased barrels that you're getting, is there some way we could quantify what the margin benefit versus maybe Brent TI Cushing as a differential there or maybe through the full changing that you get 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 -- through your gathering process, you're able to get higher distillate yields than the average sort of SCOOP, STACK barrel, maybe slightly lower API barrels that you're 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.

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David L. Lamp, CVR Energy, Inc. - CEO, President & Director [5]

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Sure. The additional barrels we are gathering almost exclusively are the SCOOP and STACK barrels of nature in there -- of the quality basis. And, of course, the barrel we buy today, which, historically, we bought about 80,000 barrels of Cushing common, in Cushing to -- on the increment, supply Coffeyville, and we're replacing that with a STACK, SCOOP-type barrel. There -- as you mentioned, there is a quality difference in that typically runs between a $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 of the Cushing common, which, today, even if we had Red River completely full, still another 15,000 barrels or so. That said, your second question on the distillate yields and the quality of this stuff. We have seen very -- we probably are the industry leader in distillate yield per barrel, and we're treating 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 it at the wellhead, bringing them neat really keeps every other cat and dog out of it. So it's a -- we view it as a real competitive advantage.

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Prashant Raghavendra Rao, Citigroup Inc, Research Division - Senior Associate [6]

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Okay. And then just the last question on the crude optionality project in Coffeyville, specifically Phase 2, that improvement in liquid yield and the gas oil hydrotreater increasing the Canadian crude processing. What was that time -- when will that sort of start? Will you take -- get more approval today? It looks like a 3-year project. What slice of that time line would Phase 2 fall into?

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David L. Lamp, CVR Energy, Inc. - CEO, President & Director [7]

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Well, it depends. We may combine Phase 1 and Phase 2. That's still under study just because the Phase 2 is such a good project. And the main reason it's such a good project is we have excess hydrogen with the hydrogen plant that we underutilize. So it makes that project very economical. And basically, it could be accelerated to that 3-year time frame [indiscernible], if we waited and did them sequentially, it'd be more like 6 years.

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Operator [8]

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Our next question comes from the line of Matthew Blair with Tudor, Pickering, Holt.

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Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research [9]

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Maybe continuing on the 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?

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David L. Lamp, CVR Energy, Inc. - CEO, President & Director [10]

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Well, it's a key question of going forward strategy is how -- are we more appealing 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 of -- the more important side of it would be is how do we affect the transaction with that in the portfolio or not. So that would be the key question going forward.

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Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research [11]

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

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David L. Lamp, CVR Energy, Inc. - CEO, President & Director [12]

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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-able assets in our logistics. It's probably gone up a little bit with the Red River reversal because a lot of that wasn't in there and any future growth we do and bringing more STACK, SCOOP barrels towards Cushing. But that's a good historical number.

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Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research [13]

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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?

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Tracy D. Jackson, CVR Energy, Inc. - Executive VP & CFO [14]

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

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Operator [15]

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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.

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David L. Lamp, CVR Energy, Inc. - CEO, President & Director [16]

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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 towards a safe, reliable and environmentally responsible operations. We look forward to reviewing our first quarter 2019 results in our next earnings call. Thanks, and goodbye.

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Operator [17]

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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.