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Edited Transcript of PARR earnings conference call or presentation 6-Aug-19 2:00pm GMT

Q2 2019 Par Pacific Holdings Inc Earnings Call

DENVER Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Par Pacific Holdings Inc earnings conference call or presentation Tuesday, August 6, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joseph Israel

Par Pacific Holdings, Inc. - Director

* Suneel Mandava

Par Pacific Holdings, Inc. - SVP of Finance

* William Monteleone

Par Pacific Holdings, Inc. - CFO & Director

* William C. Pate

Par Pacific Holdings, Inc. - President, CEO & Director

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Conference Call Participants

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* Andrew Evan Shapiro

Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member

* Jason Daniel Gabelman

Cowen and Company, LLC, Research Division - VP

* Matthew Robert Lovseth Blair

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

* Michael Joseph Harrison

Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst

* Neil Singhvi Mehta

Goldman Sachs Group Inc., Research Division - VP and Integrated Oil & Refining Analyst

* Timothy A. Rezvan

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to Par Pacific Holdings' second quarter earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Suneel Mandava, Senior Vice President of Finance for Par Pacific Holdings. Thank you, Mr. Mandava. You may begin.

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Suneel Mandava, Par Pacific Holdings, Inc. - SVP of Finance [2]

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Thank you, operator. Good morning, everyone, and welcome to Par Pacific Holdings' Second Quarter 2019 Earnings Conference Call. Joining me today are William Pate, President and Chief Executive Officer; Will Monteleone, Chief Financial Officer; and Joseph Israel, President and Chief Executive Officer of Par Petroleum.

Before we begin, please note that some of our comments today may include forward-looking statements as that term is defined under Federal Securities Laws. Such statements include, but are not limited to, those concerning plans, expectations, estimates and our outlook for the company. Any forward-looking statements are subject to change and are not guarantees of future performance or events. They are subject to risks and uncertainties and actual results may differ materially from what is indicated in these forward-looking statements. Because of this, investors should not place undue reliance on forward-looking statements and we disclaim any intention or obligation to update or revise any forward-looking statements. I refer you to the latest Forms 10-K and 10-Q of Par Pacific Holdings filed with the SEC for a more detailed discussion of the major risk factors affecting our business. Further information regarding these as well as supplemental financial and operating information, include a reconciliation of certain non-GAAP financial measures to the most comparable GAAP figures may be found on our press release and our investor presentation on our website www.parpacific.com or in our filings with the SEC.

I'll now turn the call over to our President and Chief Executive Officer, Bill Pate.

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William C. Pate, Par Pacific Holdings, Inc. - President, CEO & Director [3]

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Thank you, Suneel. Good morning to all of our conference call participants. I'm delighted to report record financial and operational results for the second quarter of 2019.

Our adjusted earnings per share of $0.45 was a 45% increase over adjusted earnings per share for the second quarter of 2018, illustrating the accretive impact of our recent acquisitions. We generated $57.5 million of free cash flow and $69 million of adjusted EBITDA. We achieved these financial results due to record operational availability in our refining system, record throughput in our logistics unit and solid retail volumes and margins.

High operational availability is achieved only through solid environmental compliance and safety awareness. I want to thank our refining team for their attention to the environment and to ensuring safe operations.

I also want to highlight our ability to integrate 3 significant acquisitions in the last 18 months without any increase to G&A expense. This accomplishment illustrates our ability to leverage systems and processes and achieve consistent productivity gains at our headquarters. I'm very pleased with our Washington acquisition. The integration is moving forward rapidly, and we are already realizing significant commercial opportunities and benefiting from the strong spring market conditions triggered by unplanned outages on the West Coast.

We're expanding our marine freight capabilities, which will lower our refined product transport costs. The inland crude oil pricing in Washington is also nicely counterbalancing the elevated waterborne crude oil dips that we continue to face in Hawaii. And we're making progress on our next-gen renewables fuel project in Washington, which I expect to generate further logistics savings upon completion.

In Hawaii, we continue to face challenges in the waterborne crude market. And in the first half of the year, we also experienced some of the worst Singapore gasoline cracks in years. Nonetheless, our increased scale and related cost structure improvements allowed us to sequentially improve our capture in the quarter. In July, we also completed the pipeline integration work to interconnect the crude oil facilities at our 2 Hawaii refining locations.

With the completion of that project, the IES assets are fully integrated within the Par Pacific system. I also want to congratulate our team on the commissioning of our distillate hydrotreater project last month. The Hawaii team completed this project under budget and 2 months ahead of plan. They accomplished this task while simultaneously executing a turnaround at the newly acquired crude unit, undertaking a reformer catalyst [region] and completing the pipeline tie-in project.

Looking forward to the third quarter, we expect the business to continue to perform well with strong retail performance, improving cracks in the Asian markets and the peak summer driving season in Washington and Wyoming. These trends will be tempered by a continued challenging waterborne crude market and downtime from the Hawaii crude unit turnaround. Looking out to the fourth quarter, we continue to be well positioned for IMO 2020 with our high distillate yields.

At this time, I'll turn the call over to Joseph to provide more details on our operations.

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Joseph Israel, Par Pacific Holdings, Inc. - Director [4]

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Thank you, Bill. Second quarter execution for our refining system was exceptional. By running safely and close to a perfect 100% reliability, we were able to fully capture what the market gave us with high-efficiency and low production costs. Our balanced system helps to minimize our exposure to certain market conditions and gives us the opportunity to optimize and perform on a consistent basis.

Global waterborne crude differentials remain elevated, mostly due to an undersupplied global oil market and ongoing geopolitical tension. As a result, in the quarter, our realized crude differential NOI averaged $2.95 per barrel over Brent on deliverable basis. This crude differential is approximately $2.15 per barrel over 5 years average.

On the product side, Singapore 4-1-2-1 Crack Spread was $6.22 per barrel driven by weak gasoline and partially offset by favorable distillate and fuel oil. Our realized adjusted gross margin NOI was $3.46 per barrel in the quarter with 99.3% operational availability.

Our refinery throughput averaged approximately 116,000 barrels per day. Refinery yield matches well with the demand profile in Hawaii, which allows us to focus on the local supply needs consistent with input pricing and with minimum exports.

Production costs in the second quarter were only $2.82 per barrel, reflecting our improved cost structure following the refining assets acquisition from IES.

The new 10,000 barrels per day diesel hydrotreater or DHT is starting up this date, a couple of months ahead of original schedule. Project cost is just under $26 million compared to the announced $27 million budget. With the DHT online, our distillate production capability in Hawaii is up to approximately 55,000 barrels per day. And including 20,000 barrels per day of flow through from fuel oil production, 65% to 70% of our production in Hawaii is driven by distillate pricing through the IMO transition.

During the month of July, we are also executing our plan from a reformer company regeneration and turnaround works in the acquired IES assets for approximately $10 million to $12 million roughly, of which approximately 75% is expected to be customized. We are estimating approximately $0.70 to $0.80 per barrel of gross margin missed opportunities associated for the works.

Considering the turnaround works, our target throughput for the third quarter is 98,000 to 103,000 barrels per day in Hawaii. Crude differentials remain elevated for the third quarter at approximately $3.16 per barrel premium to Brent, reflecting a highly backward dated market structure.

However, following recent economic cuts in Asia by several refineries, Singapore inventories are close to 5 years low for oil product and the 4-1-2-1 Singapore Crack Spread Index has improved to approximately $9.80 per barrel so far in the third quarter.

In Washington, our refinery throughput averaged approximately 39,000 barrels per day. Our 5-2-2-1 index on an ANS basis averaged $17.14 per barrel in the second quarter. That site's product inventories are back to normal through imports and high utilization rates following a busy maintenance period between March and May. Bakken crude oil reflecting approximately 2/3 of our crude rate in Washington traded at $1.42 per barrel discount to WTI and WCS, reflecting approximately 1/3 of our crude slate traded at $12.56 per barrel discount to WTI, both on FOB basis.

In the second quarter, adjusted gross margin was $9.92 per barrel with 99.9% operational availability. The strong West Coast [trust funds] in VGO crack spreads positively impacted our structure. Production costs were $4.42 per barrel. We continue to be very impressed with our local team in Washington. Integration is going well as our logistics and commercial flexibility as a system continue to revolve around our Pacific Northwest assets, providing us with more optionality along the West Coast. So far in the third (sic) [second] quarter, our 5-2-2-1 index has averaged approximately $15 per barrel on ANS basis. Our target throughput for the third quarter in Washington is 38,000 to 40,000 barrels per day. In Wyoming, our 3-2-1 index was $28.89 per barrel in the second quarter. Our refinery throughput averaged approximately 18,000 barrels per day.

Our realized adjusted gross margin in the quarter was $16.78 per barrel, including a negative $1.16 per barrel, a 5-point impact. Production costs were only $5.58 per barrel, reflecting 99.6% operational availability and high throughput. We are now at the peak of our gas -- of our regional gasoline season and our Wyoming 3-2-1 index has averaged approximately $27.75 per barrel in July. We continue to access and benefit from discounted pipeline and local crude oil production in the Powder River Basin. Our third quarter target throughput in Wyoming is 17,000 to 18,000 barrels per day.

And now I'll turn the call over to Will to review consolidated results and Laramie highlights.

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William Monteleone, Par Pacific Holdings, Inc. - CFO & Director [5]

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Thank you, Joseph. Our segment level results reflect strong contributions from each area, while we're able to continue to hold our aggregate G&A spend relatively flat. Refining segment contribution was $43 million, an increase of $14 million compared to Q2 2018. The increase in the quarter was principally driven by the full -- the first full quarter contribution from the Washington refinery.

Our Logistics segment posted another record quarter of $20 million of adjusted EBITDA driven by elevated marine movements in Hawaii and overall throughput in Washington. The outlook for commercial synergies between Hawaii and Washington continues to improve, and we are feeling more comfortable with the upper end of our previously provided range of $5 million to $10 million.

Our Retail segment was also a solid contributor with segment contribution of $15 million, up nearly $4 million versus the second quarter of 2018.

Retail same-store sales fuel volumes were flat compared to Q2 2018. In total, our Retail and Logistics segments made up 44% of segment adjusted EBITDA contribution, reflecting an attractive segment balance.

Laramie generated approximately $14 million of adjusted EBITDAX and a net loss of $11 million, excluding the impact of $8 million of unrealized gain on derivatives. Laramie's last 12 months adjusted EBITDAX stands at $93 million. Given current natural gas and natural gas liquids pricing, Laramie intends to cease drilling activity during August, resulting in lower CapEx for the year.

Shifting focus to accounting items. The largest item impacting both adjusted EBITDA and adjusted net income was a FIFO drag of approximately $2 million for the second quarter within the Wyoming Refining segment.

In addition, adjusted net income was reduced by a $1.6 million charge associated with unrealized interest rate derivatives flowing through the interest expense line. Last, and only impacting our GAAP net income was approximately $4 million of debt extinguishment expenses related to the exchange of the convertible notes during the quarter.

On the capital structure front, we made strides towards our targets through our convertible exchange activities in allocating cash flow from operations towards paying down debt.

Our net debt to capitalization declined by 6% from 52% to 46%, while total liquidity increased approximately $50 million to $175 million at quarter end.

Second quarter GAAP interest expense totaled $20 million, of which $15 million was cash interest. DD&A totaled $22 million. Cash from operations adjusted for funding underneath the working capital facilities totaled approximately $95 million, including a working capital inflow of approximately $12 million and reflecting a partial reversal of the Q1 2019 working capital build.

Capital expenditures totaled $24 million during the second quarter. Planned 2019 total capital expenditures and turnaround outlays remains consistent with previously communicated ranges between $100 million and $110 million. This concludes our prepared remarks.

Operator, I'll turn it back to you for Q&A.

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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 Neil Mehta with Goldman Sachs.

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Neil Singhvi Mehta, Goldman Sachs Group Inc., Research Division - VP and Integrated Oil & Refining Analyst [2]

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The first question I had was just on the Hawaii operations. It's good to see Singapore margins moving in the right direction in the third quarter. One of the risks continues to be on the crude side with OPEC cuts continuing and the lack of availability of some of those medium and heavy grade crudes on the water. Can you talk about what you are doing to optimize to manage that risk and drive profitability for your waterborne exposed refineries?

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Joseph Israel, Par Pacific Holdings, Inc. - Director [3]

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Yes, Neil. Joseph here. With regards to the elevated global crude oil differentials, really since the second half of 2017, oil demand has clearly outpaced supply. OpEx has demonstrated consistent production discipline and ongoing geopolitical tension kept oil barrels out of the market resulting in elevated crude differentials to clear the barrels. In addition, the backlog data market structure is another cost component in the realized crude differentials considering the delivery time. Fortunately, as you would expect, oil products in Asia caught up recently with the elevated crude differentials. And time will tell where it's going from here. Eventually, it will take an oversupplied crude market to take us back to historical range for crude differentials. To help you monitor crude differentials, we are adding starting this week history in current quarter guidance for realized crude differential in Hawaii to our weekly index file, which is available on our website.

Our optimization team in Hawaii does a consistent, really robust scanning work. A lot of good opportunities around the globe and end up with a optimized crude freight for what's really on a monthly basis, so we'll continue to do that and minimize the pain as we can.

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William C. Pate, Par Pacific Holdings, Inc. - President, CEO & Director [4]

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Neil, this is Bill. Just to chime in on that, too. Fortunately, our refinery has a fair amount of flexibility. And I think we've mentioned in the past, we run at a batch mode. And one of the things we can do as we optimize is we can -- if the medium seller market starts to get a little pricey, we can go for longer runs on sweet. That allows us -- the key and the big challenge for us in the market is the demand for jet. And obviously, as we access more sweets and lighter crude, sometimes we can get a little more jet yield out of that and that helps to reduce the imports. So as Joseph said, we're constantly optimizing, assessing the market. And if a different grade starts to become unfavorable then following the LP analysis, we'll adjust our batch modes slightly to optimize our crude selection.

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Neil Singhvi Mehta, Goldman Sachs Group Inc., Research Division - VP and Integrated Oil & Refining Analyst [5]

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That's great. And then the follow-up is kind of a bigger picture question on capital allocation, free cash flow and leverage. After completing the West Coast transaction, leverage did tick up and you had the option theoretically to issue equity, and it looks like you guys are going to try to organically delever the business to not dilute your existing shareholders. And so just your views on where you want the target leverage ratio to get to. How long it's going to take you in a base case to kind of get to the place you want to get to, confirm that you have no intention to (inaudible) at this point? And then sort of what do you do with the excess cash? It's a big picture question, but maybe you can kind of help us think about the uses of free cash flow.

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William Monteleone, Par Pacific Holdings, Inc. - CFO & Director [6]

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Sure. Neil, this is Will. I'll take a shot at that. So I think just from a target perspective and where we'd like to be, I think we like our net debt to capitalization to be down in the 30% to 35% range. And I think on an imputed basis, that gets you in a net-debt-to-EBITDA probably in that 1.5x range. So again, I think that's our target. I think as we indicated this quarter, we made some decent progress there. We allocated about $15 million cash towards the convertible note exchange that we conducted. So again, moving it down 6 percentage points during the quarter was a good step in the right direction. And we also built our liquidity up to $175 million range. I think we'll continue to build liquidity through the year and evaluate our debt position as we head into next year and evaluate whether we'd like to pay down debt or pursue other alternatives from a deleveraging standpoint. I think from a time horizon, I think we've got capital expenditure requirements next year with respect to turnarounds. That being said, I think over the next 24, 36 months, we think we ought to be able to achieve that.

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Operator [7]

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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 [8]

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I thought the value of your integrated model really came through this quarter with the record logistics results, near record retail. Could you just provide a little bit more commentary on the drivers behind the good numbers in each of those segments? And I guess specifically on logistics, do you feel that, that's a sustainable number going forward?

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William Monteleone, Par Pacific Holdings, Inc. - CFO & Director [9]

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Sure, Matt. It's Will. I think with respect to logistics, the principal driver of the increase was really activity -- marine activity in Hawaii. And again, that's going to move a little bit quarter-to-quarter based on bulk deliveries of both crude and product. And then separately, you may recall, during the first quarter, we referenced some delays with respect to train deliveries in and out of Washington due to weather. Again, I think we caught up on that during the second quarter, had more activity there. So again, I think the historical kind of throughput that we've guided to on an annual basis or the historical contribution, I think, is a good representation of the way we think about the business. And again, I think on the retail side, really a stronger environment for retail margins, given changes in Platts price during the quarter. And I think, overall, we've seen an industry-wide expansion in retail margins during the quarter. We participated in that.

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Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research [10]

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Sounds good. And then, Will, could you provide an update on the drilling program and just overall strategy at Laramie given the drop in natural gas and NGL prices? Did you say that you had ceased drilling in August?

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William Monteleone, Par Pacific Holdings, Inc. - CFO & Director [11]

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That's correct. So Laramie, we'll be ceasing drilling activity during the month of August. Given where pricing is, we'll be continuing some of its completion activities for the balance of the year. And I think we'll revisit pricing on a go-forward basis. I think strategically, given where commodity prices are, I think the most important thing for Laramie is, frankly just balance sheet preservation and trying to get to a point where we're generating free cash flow. And I think that's what Laramie is focused on. And I'd expect them to continue to do that on a ongoing basis.

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Operator [12]

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Our next question comes from the line of Mike Harrison with Seaport Global Securities.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [13]

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I was wondering if you could go through the DHT project. And maybe now that it's complete, congratulations on getting it completed. Now that it's complete, can you maybe talk through how we should think about the timing or ramp-up of that 5,000 to 7,000 barrels per day? And maybe the magnitude of that contribution on kind of an EBITDA basis? Is this something that we see a lot of contribution in kind of Q3? Or is it still mostly 2020 once the new regulations start to kick in?

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William Monteleone, Par Pacific Holdings, Inc. - CFO & Director [14]

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Yes. Mike, it's Will. I think the best way to think about it from a modeling perspective is really kind of a mid-Q4 type of contribution as it starts to kick in. And again, I think if you recall, we had previously provided our assessment on return thresholds for that $27 million project in the 30% range. And I think we still feel comfortable with that return profile, which I think ought to put you in the mid-single digits in terms of annual contribution for additional EBITDA.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [15]

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Okay. And then I know you mentioned the crude unit turnaround in Hawaii. Any other kind of special maintenance or turnaround actions that we need to keep in mind for the second half and as we get into, I guess, first part of 2020?

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Joseph Israel, Par Pacific Holdings, Inc. - Director [16]

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No. In Hawaii, we're still planning our major turnaround next year early in the summer. But until then, we don't have any schedule or planned turnaround in Hawaii, other what we executed given the first quarter, reformer regeneration, sulfur units and some maintenance.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [17]

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All right. And then last question for me is on Wyoming, you mentioned the $1.9 million of FIFO headwinds during this quarter. Just wondering how we think about that as we move into Q3. Is that something that kind of reverses? Or any thoughts on that?

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William Monteleone, Par Pacific Holdings, Inc. - CFO & Director [18]

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Mike, I think we're going to need to wait and see how kind of Platts prices settle out. I think the principal driver there of the change period-over-period is usually the change in crude oil prices. So again, I think a little early to provide any thoughts on the direction of that move going into the third quarter.

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Operator [19]

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Our next question comes from the line of Jason Gabelman with Cowen.

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Jason Daniel Gabelman, Cowen and Company, LLC, Research Division - VP [20]

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I want to revisit a topic discussed last quarter just on low sulfur fuel oil pricing. And I am wondering, as we think about kind of low sulfur fuel oil pricing improving through 2020 because of IMO, can we expect Par to roughly get the price that we see on the screen? And then if I could just add a wriggle to that. Do you guys sell all of the low sulfur fuel oil you produce in Hawaii to utilities? Or is there an opportunity to sell it into the bunker pool as well?

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William Monteleone, Par Pacific Holdings, Inc. - CFO & Director [21]

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Jason, it's Will. I think we do sell the majority of our low sulfur fuel oil to the utilities. That being said, I think there's nothing that we think that would prevent us from selling incremental volumes into the bunker market either locally or into another region of the world. So I think that's with respect to the output. And I think in terms of the way we think about the pricing, I think at least initially, that distillates are going to be the best representation of where low sulfur fuel oil will clear in the market. And I suspect over time that low sulfur fuel oil spreads will move away from pure diesel pricing. And again, that's the way I think we think about the value of that product in the marketplace.

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Jason Daniel Gabelman, Cowen and Company, LLC, Research Division - VP [22]

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So just if I could clarify that answer. If there are 2 prices I'm looking at it in my model, 1 of ULSD and 1 of low sulfur fuel oil, which one would be more appropriate to attribute to the low sulfur fuel oil that you're selling?

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William Monteleone, Par Pacific Holdings, Inc. - CFO & Director [23]

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I think in the interim, it's going to be somewhere in between, Jason. It's probably the best way to think about it.

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Jason Daniel Gabelman, Cowen and Company, LLC, Research Division - VP [24]

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Got it. Okay. And then just -- I think you guys had just mentioned that you're going to have a turnaround in Hawaii in 2020, if I heard you correctly. And I believe there's also one in Washington next year. So can you just give an indication of what CapEx directionally, what it's going to come in at in 2020?

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Joseph Israel, Par Pacific Holdings, Inc. - Director [25]

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Yes. So we'll view the turnaround schedule across the system, and we believe we are able to push the majority of the Washington turnaround into 2021 in the first quarter. This will leave a small first [chapter] in October, but it's really going to have an insignificant impact to our overall operations. This will allow us to focus on only 2 turnarounds. Next year, first one in Hawaii early in the summer and then the one in Wyoming in October.

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William Monteleone, Par Pacific Holdings, Inc. - CFO & Director [26]

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And then, Jason, it's Will. From just a turnaround outlay perspective, I think what we've historically indicated is that Hawaii typically runs about $35 million. And Wyoming in that $15 million to $17 million range. So I think that's probably a pretty good sense of where the outlay is for '20. And then again, I think a smaller number for Washington, as Joseph indicated later in the fourth quarter, probably in the less than $5 million range.

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William C. Pate, Par Pacific Holdings, Inc. - President, CEO & Director [27]

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Yes. And then Jason, also keep in mind some of the turnaround outlays for Hawaii and Wyoming are actually incurred during 2019. So again, I think you could probably shave about $10 million off that total.

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Joseph Israel, Par Pacific Holdings, Inc. - Director [28]

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(inaudible)

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Jason Daniel Gabelman, Cowen and Company, LLC, Research Division - VP [29]

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And I'm assuming these are partial turnarounds? These aren't full shutdowns of plants?

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Joseph Israel, Par Pacific Holdings, Inc. - Director [30]

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You're talking about the 2019 outlay?

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Jason Daniel Gabelman, Cowen and Company, LLC, Research Division - VP [31]

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Yes.

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Joseph Israel, Par Pacific Holdings, Inc. - Director [32]

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So the 2019 outlay is just reflecting ordering equipment that we will need later in the turnaround. It doesn't involve any type of shutdown or slowdown.

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William Monteleone, Par Pacific Holdings, Inc. - CFO & Director [33]

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But in 2020, there are plant-wide outages, Jason.

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Joseph Israel, Par Pacific Holdings, Inc. - Director [34]

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Yes.

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Operator [35]

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Our next question comes from the line of Tim Rezvan with Oppenheimer & Co.

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Timothy A. Rezvan, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [36]

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A question first on the balance sheet. You've been pretty clear that deleveraging is a goal. You're ending the second quarter with $106 million of cash on the balance sheet. I'm assuming you'd like to use that to continue kind of grinding down debt. I guess what debt vehicles are kind of in your crosshairs right now? And how can we think about interest expense sort of trending into 2020, in addition to, I guess, the reduction we saw from the last convert retirement?

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William Monteleone, Par Pacific Holdings, Inc. - CFO & Director [37]

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Sure. So I think, Tim, as a indication with respect to the starting point on a cash interest basis, right, we're running about $50 million a year, just using the second quarter as the starting point on an annualized basis. And so again, I think the convert reduction of about $35 million on the principal balance is a positive contribution. You didn't get a full quarter of that. So again, I think we'd expect a small reduction there. And then I think -- as I indicated, I think we're likely to continue to build our cash position, monitor overall cash from operations and carry into the year a cash balance probably at least in the $175 million range the target -- I should say liquidity balance, not cash balance. And then I think we'll visit which one of the debt facilities makes the most sense to reduce the overall balance assuming we continue to generate additional liquidity.

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Operator [38]

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Our next question comes from the line of Andrew Shapiro with Lawndale Capital Management.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [39]

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A lot were asked and answered, but I have a few around the edges here. Just a little bit more clarification, if you could, on both the IES and U.S. Oil acquisition integration synergies. Is like -- what do you see as any further consolidation, integration synergy timelines for each of the acquisitions? Or is the digestion completed now and all we're doing here is anniversarying the year-over-year savings?

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William C. Pate, Par Pacific Holdings, Inc. - President, CEO & Director [40]

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So Andrew, let me take this. I think, first of all, with respect to Washington, we're making some really good progress on commercial synergies. And they're probably more significant than we thought they were when we acquired the business, so those will continue to be ongoing. I don't know that they'll show up as a synergy or a cost saving. These are opportunities where we think we can maximize the value of our products within our system. And that will play out for a period of time.

With respect to Washington, we've also expanded our marine capability. And this really ties into Hawaii as well, which will reduce the cost of moving ethanol out to Hawaii. We have not begun to realize that savings yet. That's a significant savings. It's probably as big as the -- close to the lower end of the range of the cost savings that we laid out for the acquisition by itself. And then in addition to that, with that expanded capability, our ability to backhaul and to move products from Hawaii back to the West Coast on an opportunistic basis exists. And those are the synergies that I see in the system that we're really just starting to get our arms around.

With respect to the integration too, we still have a fair amount of work to go in terms of integrating the processes and the systems. We see that unfolding over the next 2 to 3 quarters. Not sure that you'll see a lot of impact on the bottom line there, but it's more a matter of aligning all our systems and processes and ensuring that we've got consistent kind of systems and processes throughout the organization. There'll be certainly a point in time when we're shifting an entire organization over to our SAP system that will require some more effort.

And then turning to IES. The integration is largely done. So the asset is folded in and working very well with respect to our existing -- our original refinery. There's probably still some optimization work in terms of logistics and planning and the movement of products even between those 2 locations. And I think the real opportunity there will be as that market evolves, having that expanded capability in the products that we can offer into the marketplace. We think there'll be some continued growth and profitability in that market as well, which will play out over probably 2 to 3 years.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [41]

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Okay. And with respect to, I guess, the IES, which probably contributed to this, I noticed on the defense department contract site, I guess it was within the last 2 days, you guys were named for, I think it's the next -- the upcoming governmental fiscal year of a sizable increase in the DoD supply contract. Are these high-margin products in our sales mix? And this should enhance our sales mix and margins? Or is it just a bigger movement of volume, and we see the benefit that way but it's on the lower margin sales mix?

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William C. Pate, Par Pacific Holdings, Inc. - President, CEO & Director [42]

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I don't want to comment on the profitability of specific contracts. But we obviously value our relationship with the DLA. We're fortunate to have 3 pipelines that are connected to major defense installations. And we were very pleased to, again, win a contract with the DLA in Hawaii, where I think we have a great relationship with the local military forces and community. The volumes, keep in mind, are not necessarily indicative of what the military will actually purchase during the year. It's -- they do on occasion buy more, and they do on occasion buy less. But we don't see a material change to our operations as a result of that contract. And we're very pleased to continue to be their major supplier in the state of Hawaii.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [43]

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Okay. When's the first year that Par's substantial tax NOLs start expiring?

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William C. Pate, Par Pacific Holdings, Inc. - President, CEO & Director [44]

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Will, you want to answer that?

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William Monteleone, Par Pacific Holdings, Inc. - CFO & Director [45]

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Yes. I mean I think the time horizon is listed in the filings of 2027. Again, I think there are a variety of strategies that we can deploy to ensure that we optimally consume the NOL over time as we generate taxable income.

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William C. Pate, Par Pacific Holdings, Inc. - President, CEO & Director [46]

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And Andrew, this is Bill. I think given the assets we have today and the earnings power we have today, I don't see any reason why we would have NOLs that expire.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [47]

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Excellent. So you're chewing them as fast as they're coming up. And lastly, can you highlight and identify for us for our calendar upcoming non-deal road shows and investor presentations that you're planning?

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Suneel Mandava, Par Pacific Holdings, Inc. - SVP of Finance [48]

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Andrew, this is Suneel. We just registered for the Seaport Global Securities Chicago Energy and Industrials conference. That will be held in late August, 27, 28. And then we're going to be picking up our planning here for the fourth quarter of additional conferences, and we'll be announcing those as we confirm them.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [49]

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Okay. Is there any way you can either announce them on your website or -- that's why I usually ask on the call, a little ahead of time? Because otherwise, your press releases for them only come out basically the week of or the week before.

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William C. Pate, Par Pacific Holdings, Inc. - President, CEO & Director [50]

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Yes. That's a good point, Andrew. We'll try to accelerate that announcement going forward, those announcements.

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Operator [51]

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(Operator Instructions) 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 [52]

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Joseph, why'd you put up a very low $280 million OpEx number once again in Q2? After Q1, you sounded a little cautious on whether that was sustainable. Now it sounds like it might be sustainable. Is that the right read from your comments there?

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Joseph Israel, Par Pacific Holdings, Inc. - Director [53]

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Yes. First half cost structure for combined refinery in Hawaii has been very low, $2.82 per barrel. Strong reliability and mainly planned and unplanned repairs have been the main reason. For the third quarter, we already mentioned we estimated $0.30 per barrel of incrementally costs through OpEx associated with the planned maintenance. Also throughput barrels are going down in the third quarter due to the maintenance, which will elevate everything reported on a per barrel basis. Long term, probably most important, other average budget and throughputs in the low $3 per barrel production cost is probably still our best guidance at this point.

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Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research [54]

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Sounds good. And then could you talk about where Par stands on Tier 3 compliance at each refinery, and your outlook on octane spreads next year?

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Joseph Israel, Par Pacific Holdings, Inc. - Director [55]

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From a Tier 3 standpoint, we are already there. And from an octane standpoint, as a system, we produce 20 -- over 22% of our source gasoline is our premium gasoline. And probably more important, we have different move to increase our premium and octane blending if we choose to and market is there. So we are really comfortable there.

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Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research [56]

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Great. And then last question. Some refineries have noted that weak NAFTA cracks had a negative impact on margin capture. And I was just wondering about your exposure here. What is your NAFTA yield? And is there anything you can do to offset the weak pricing?

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Joseph Israel, Par Pacific Holdings, Inc. - Director [57]

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Yes. I think the NAFTA problems are really more relevant for West Coast refineries associated with more Eagle Ford, Permian Basin type of blending. We have less of that, but we still have some elevated C5s in our cold feedstock, which our equipment can handle without minimum noise.

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Operator [58]

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Since there are no further questions left in the queue, I would like to turn the floor back over to Mr. Bill Pate for any closing remarks.

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William C. Pate, Par Pacific Holdings, Inc. - President, CEO & Director [59]

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Thank you, operator. Thanks for joining us this morning. This has been the first reporting cycle when we believe that our financial statements reflect the benefits of our recent acquisitions. We achieved record financial and operating results despite difficult market conditions in Asia, largely due to the excellent performance from our Mainland acquisitions over the past few years. Conditions in Asia are improving into the back half of the year as IMO 2020 approaches, and we believe our Hawaii business is well positioned to capture this market improvement. Have a good day.

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Operator [60]

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