HF Sinclair Corporation (NYSE:DINO) Q1 2024 Earnings Call Transcript

HF Sinclair Corporation (NYSE:DINO) Q1 2024 Earnings Call Transcript May 8, 2024

HF Sinclair Corporation beats earnings expectations. Reported EPS is $1.58, expectations were $0.55. HF Sinclair Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the HF Sinclair Corporation’s First Quarter 2024 Conference Call and Webcast. Hosting the call today is Tim Go, Chief Executive Officer of HF Sinclair. He’s joined by Atanas Atanasov, Chief Financial Officer; Steve Ledbetter, EVP of Commercial; Valerie Pompa, EVP of Operations; and Matt Joyce, SVP of Lubricants and Specialties. At this time all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions] Please note, that this conference is being recorded. It is now my pleasure to turn the floor over to Craig Biery, Vice President, Investor Relations. Craig, you may begin.

Craig Biery: Thank you, Kathleen. Good morning, everyone, and welcome to HF Sinclair Corporation’s first quarter 2024 earnings call. This morning, we issued a press release announcing results for the quarter ending March 31st, 2024. If you would like a copy of the earnings press release, you may find one on our website at hfsinclair.com. Before we proceed with remarks, please note the Safe Harbor Disclosure Statement in today’s press release. In summary, it says statements made regarding management expectations, judgments, or predictions are forward-looking statements. These statements are intended to be covered under the Safe Harbor provisions of Federal Security Laws. There are many factors that could cause results to differ from expectations, including those noted in our SEC filings.

The call also may include discussion of non-GAAP measures. Please see the earnings press release for reconciliation to GAAP financial measures. Also, please note any time sensitive information provided on today’s call may no longer be accurate at the time of any webcast replay or rereading of the transcript. And with that, I’ll turn the call over to Tim.

Tim Go: Good morning, everyone. We are pleased to report our first quarter 2024 results with you today. We continue to advance our corporate strategy focused on improving reliability, optimizing and integrating our portfolio, and generating strong cash flow to support our cash return strategy. During the quarter, our business maintained safe and reliable operations, representing another quarter of successful turnaround and maintenance execution. We also returned $269 million in cash to shareholders during the quarter and today announced a new $1 billion share repurchase authorization, demonstrating our commitment to shareholder returns. Now, let me cover our segment highlights before turning over to Atanas. In refining for the first quarter of 2024, we generated solid financials despite experiencing seasonal demand weakness for transportation fuels.

We continue to focus on the operations excellence of our assets, resulting in improved reliability during the winter months, and successful execution of our planned maintenance. The scheduled turnaround at our Puget Sound refinery in the first quarter that continued into April was completed on time and on budget. On the commercial side, we optimized our crude slate in order to capture the favorable differentials for heavy Canadian and [thin] (ph) crude oil. The year-over-year improvements in our throughput rates, increased heavy sour crude oil runs, and lower OpEx per barrel illustrate the progress we’ve made towards our reliability and optimization priorities. In renewables for the first quarter of 2024, weakened RINs and LCFS credit prices resulted in a 16% decline in our renewable diesel indicator compared with the fourth quarter of 2023.

Despite the economic headwinds in the quarter, we continue to focus on feedstock optimization by increasing low CI feedstocks and reducing our high cost feedstock inventory. In addition, we continue to improve our renewable diesel operations by improving reliability and decreasing operating costs. In the marketing segment in the first quarter of 2024, we saw strong value in our Sinclair branded sites as the marketing business continued to provide a consistent sales channel with margin uplift for our branded fuels. We continue to target 5% or more annual growth in the number of branded sites and are encouraged by what we are seeing in our store growth pipeline for 2024. In lubricants and specialties, our focus on the sales mix optimization across our finished products portfolio resulted in another strong quarter, despite weakened base oil prices in the period.

Our integrated business model continues to deliver stable margins in a volatile market, resulting in a consistently strong EBITDA run rate over the past three years. In midstream, we are pleased with the progress of integrating the HEP assets into our consolidated portfolio, and will continue to look for opportunities to optimize our logistics business. In the first quarter, we returned $269 million to shareholders through share repurchases and dividends. As of April 30, 2024, we have repurchased an additional $296 million from REH Co. in the second quarter, reducing our share count by over 7.9 million shares year to date. Since March 2022, we have repurchased over 53 million shares, or roughly 89% of the shares issued for our Sinclair transaction.

This morning, we announced a new $1 billion share repurchase authorization, replacing our previous $1 billion authorization, of which, approximately $214 million remained, demonstrating our commitment to our long-term cash return strategy and long-term payout ratio, while maintaining a strong balance sheet and investment grade rating. Today we also announced that our board of directors declared a regular quarterly dividend of $0.50 per share payable on June 5th, 2024 to holders of record on May 22nd, 2024. Looking forward, as we head into the summer driving season, we expect a favorable market environment. And combined with further progress against our corporate priorities, we believe we are well positioned to generate strong earnings and cash flow.

With that, let me turn the call over to Atanas.

Atanas Atanasov: Thank you, Tim, and good morning, everyone. Let’s begin by reviewing HF Sinclair’s financial highlights. Today we reported first quarter net income attributable to HS Sinclair shareholders of $315 million or $1.57 per diluted share. These results reflect special items that collectively increase net income by $172 million. Excluding these items, adjusted net income for the first quarter was $142 million or $0.71 per diluted share compared to adjusted net income of $394 million or $2 per diluted share for the same period in 2023. Adjusted EBITDA for the first quarter was $399 million compared to $705 million in the first quarter of 2023. In our refining segment, first quarter adjusted EBITDA was $209 million compared to $537 million of refining segment EBITDA for the first quarter of 2023.

This decrease was primarily driven by lower refinery gross margins in both the West and Mid-Con regions as a result of seasonal demand weakness for transportation fuels, partially offset by high refined product sales volumes. Crude oil charge averaged 605,000 barrels per day for the first quarter compared to 499,000 barrels per day for the first quarter of 2023. This increase was primarily a result of decreased turnaround activities and improved reliability at our refineries compared to the same period last year. In our renewable segment, we reported adjusted EBITDA of negative $19 million for the first quarter compared to $3 million for the first quarter of 2023, principally due to weakened RINs and LCFS credit prices in the first quarter of 2024.

Total sales volumes were 61 million gallons for the first quarter, as compared to 46 million gallons for the first quarter of 2023. Our marketing segment reported EBITDA of $16 million for the first quarter compared to $6 million for the first quarter of 2023, driven primarily by stronger branded wholesale margins. Total branded fuel sales volumes were at 321 million gallons for the first quarter, as compared to 328 million gallons for the first quarter of 2023. Our Lubricants and specialty segments reported EBITDA of $87 million for the first quarter, compared to EBITDA of $98 million for the first quarter of 2023. This decrease was largely driven by lower base oil prices in the first quarter of 2024. Our midstream segment reported EBITDA of $111 million in the first quarter compared to $93 million in the same period last year, primarily due to high revenues of tariff increase in the first quarter of 2024.

Net cash provided by operations totaled $317 million, which included $70 million of turnaround spend in the quarter. HS Sinclair’s capital expenditures totaled $89 million for the first quarter. As of March 31, 2024, HS Sinclair’s total liquidity stood at approximately $3.7 billion, which includes cash balance of $1.2 billion, our undrawn $1.65 billion unsecured credit facility, and $806 million availability on the HEP credit facility. During the quarter, we reduced our debt by approximately $62 million by paying down a portion of the debt outstanding under the HEP revolver. As of March 31, we had $2.7 billion of debt outstanding with a debt to cap ratio of 21% and net debt to cap ratio of 11%. Let’s go through some guidance items. With respect to capital spending for full year 2024, we still expect to spend approximately $800 million in sustaining capital, including turnaround and catalysts.

In addition, we expect to spend $75 million in growth capital investments across our business segments. For the second quarter of 2024, we expect to run between 620,000 and 650,000 barrels per day of crude oil in our refining segment, which reflects plant turnarounds at our Puget Sound and Parco refineries during the period and improve reliability in operations across our fleet. We’re now ready to take questions from the audience. Operator?

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Q&A Session

Operator: The floor is now open for questions. [Operator Instructions] Your first question comes from the line of Neil Mehta of Goldman Sachs. Please go ahead.

Neil Mehta: Yes, good morning, team. I had a couple non-refining questions, actually. The first one was on lubricants, really good quarter at the lube’s business. I just love your perspective on whether that you think this represents a new normal. And then Tim, I think you’ve talked about the potential monetization of this business, but maybe more as a 2025 event. Just any latest thinking around that as well.

Tim Go: Yes, good morning, Neil. Thanks for the question. So, let me start and then I’ll ask Matt to provide some more color on the lube’s business, because we are very pleased and happy with how it’s performing. It’s a good example of our lube’s business of our improved capability that we have to execute and deliver value to our shareholders. Our lube’s team has done a great job integrating and optimizing our lubricant’s business over the past three years. And as you can see, it’s delivering strong financial results, regardless of the base oil cracks, which, by the way, are near bottom of cycle levels that we saw back in 2019. But as I’ve stated previously, optimizing this asset portfolio and continued simplification of our lubricant’s business is a strategic priority.

We believe in the significant value of our lubricants business and we review and evaluate all of our assets on an ongoing basis with an eye for maximizing shareholder value. So Neil, at this time, we don’t have any announcements or updates to provide. What I would like to do, though, is ask Matt to give a little bit more color on how our lube’s business is able to perform despite the macro market environment.

Matt Joyce: Thanks, Tim, and good morning, Neil. Thanks for the question. This is all about a continued focus on our execution of our strategy. First and foremost though, it also begins with safety and it was a perfect safety quarter for us, which is always a catalyst for great performance in the business. We’ve got some outstanding teammates who are working hard to stay safe, execute well, and improve this business every day. But really, we’re building on our strengths of development, in-house development, integration of our base oils and our finished lubricants business together and our ability to recognize and respond to market needs. We’re utilizing these assets that we have more effectively to execute on the strategy and we’re being operationally excellent in delivering that growth that we need to build the business for the future.

Let me give you a couple examples specifically of some synergies that we captured this quarter that really enable that efficiency and growth. One in particular is our Joshua, Texas facility, which had historically been a red giant oil lubricants plant. We’re now moving that into supporting the whole of our finished lubes portfolio. And over the past quarter, we’ve invested in a low cost, quick hit project that’s enabled us to increase our capacity by nearly 50% over the course of the coming year. And this is significant given Joshua, Texas strategic location to the markets where we are winning and we’re wanting to continue to grow and leverage our formulations and developments. On the processed oil side of our business, I give the team a lot of credit.

They found and discovered some market needs to better serve the tire industry. And we approved a capital-light investment in the fourth quarter of last year, and then we’re instituting that, kicking it off in the first quarter this year at our Tulsa facility. And testing is underway with some large tire industry OEMs. And we’ve also found that we can use this technology to go into the construction material markets as well, and we’re doing that. So this investment will enable new technology introduction for first sales to come through in the fourth quarter of this year, and then more in 2025. And then if I look at it, base oil integration, we since have that as a common theme where we’re leveraging that base oil integration. We’ve introduced and developed a new base oil cut in our Mississauga facility that’s giving us a more advantaged total formulated cost to meet the needs of the PCMO markets in the US and abroad and that’s satisfying General Motors specifications.

This is a big deal both for our base oil business, as well as for our own captive finished lubricants business. So if you can tell there’s a number of these pieces that add up together to drive operational excellence, core regional growth, and hopefully in the next coming quarters we’ll be able to share a little bit more about the transformational work that we have underway.

Tim Go: So, Neil, that was probably more detail and more examples than probably you were expecting, but we do want you and others to know that, our lube’s business is performing well and it’s not by accident. This is not something that has just happened. We’ve demonstrated over the last three plus years that the earnings power of our lubricants business has been increased and it’s running in the $300 million to $350 million range right now despite the base oil indicators being at near bottom of cycle conditions.

Neil Mehta: Yes. No, that showed up this quarter, so thank you, Tim and team, for that. On the other side of performance, probably renewable diesel, there was another tough quarter here. And just would love your thought on the path to profitability. And Tim, where are you? You’ve been very frank about not being happy with the performance from a profitability perspective at this point. So where do you think we are in terms of the transformation of that business.

Tim Go: Yes, we are not happy with the results, Neil, as you point out. We are pleased with the progress that we’re making, though. And I’ll let Steve talk about some of the initiatives that we’ve got going on.

Steve Ledbetter: Hey, Neil, this is Steve Ledbetter. As Tim mentioned, challenging Q1 financial performance. Some of the things we’re focusing on in terms of improving our low-CI feedstock across the fleet were more than masked by difficult macro margin pressures. The feedstock lag really is an issue, and we saw that aggressively take place in Q1. We do have some operational improvements that we’re seeing, we’re very happy with. We had zero downtime related to hydrogen issues. February, March were good performance months. Again, we’re trying to run economic utilization. But this is a story that really, in terms of driving the profitability, is all about accelerating our low CI feedstock runs where we think we have some real opportunities to do that.

A couple of big milestones. We’re moving one of the trains at Artesia to full 100% low CI feedstock. We think that’s going to be an advantage. We’re moving some small cap projects to allow some logistical synergies and truck unloading on some of the low CI feedstock. We’re continuously driving our pathways and then placing our barrels into the most favorable markets. Happy to note that we injected our first delivery to the previously announced Rio Tinto mine of RD this month. And our feedstock inventories have gotten quite low on purpose, given the accelerated backwardation in the market, which that allows us to buy prompt barrels and minimize this exposure on a very steep backward market. We’ll continue to drive our catalyst optimization and OpEx efficiencies, and then again, we will look to run at the optimal economic rates to maximize our fleet profitability.

And we think these are the best things to focus on and give us the highest chance of success to deliver the most profitable outcomes.

Tim Go: Yes, thanks, Steve. I will point out that in the first quarter, we were not hydrogen limited in our renewable diesel operations. And I think that’s a big accomplishment for the team in terms of optimizing our operations.

Steve Ledbetter: And look, Neil, it’s impossible to know what the mid-cycle conditions are going to be for renewable diesel right now with the RIMs and with the LCFS numbers of volatility there. But we are focused on the things that we can control. So utilization, advantage feedstocks, product netbacks, lower operating costs. And at the current RINs and LCFS levels, we believe our business can be breakeven and slightly positive, and that’s what the team is working towards.

Neil Mehta: Thanks, Tim. Thanks, Steve.

Operator: Your next question comes from the line of Ryan Todd of Piper Sandler. Please go ahead.

Ryan Todd: Great. Thanks. Maybe I will switch to the refining side and ask if you could maybe just provide updates on a couple of your markets. Talk about what you’re seeing in the Rockies market. It was — I think it was fairly weak during a good chunk of the first quarter, but it seems to be strengthening up late. And then maybe on the West Coast, post- [Indiscernible] closure, what you’re seeing there in terms of general market dynamics in pad 5.

Steve Ledbetter: Yes, Ryan, this is Steve, I’ll take that one. Yes, as you mentioned the Rockies market started off a bit weaker in terms of the crack environment. Demand also was impacted by some pretty significant weather events. As you saw towards the end of the quarter and positioning for driving season, we started to see some support in terms of the crack environment. Our ability to go move barrels into the group or to the front range allowed us to be flexible and take advantage of that. And we continued to look to optimize across the value chain. On the West Coast, I think what you see in terms of the total distillate supply picture with the RD volumes coming on, the distillate picture is challenged across the West Coast.

Gasoline looked better and we look to take advantage of our capabilities in the market in the Pacific Northwest to place local market barrels for gasoline, but also look for distillate movements and export volume where we have capability to go do that. So nothing structurally, and we see some seasonal demand things coming off. We’re seeing margin structure come back, both in the Rockies and the group and in the Pacific Northwest. And we look to take advantage of that moving into Q2.

Tim Go: Yes, Ryan, this is Tim. I’ll just chime in. I don’t know if it’s as much of our Rockies and Mid-Con regions being weaker as opposed to just the Gulf Coast being so strong. There was a lot of maintenance, both planned and unplanned, in the first quarter in the Gulf Coast that created some strength in that region. As you know, we don’t have any assets in the Gulf Coast. So of course, our regions look weak in comparison to that. When we look at the data and the historical trends, we see the same seasonal historical trends that we always see in our regions. We’re not concerned and in fact we are seeing demand pick up significantly right now. As planting season begins, diesel demand is picking up, gasoline demand has been picking up as a result of the [RVP] (ph) transition that just took place.