Holly Energy Partners, L.P. (NYSE:HEP) Q2 2023 Earnings Call Transcript

Holly Energy Partners, L.P. (NYSE:HEP) Q2 2023 Earnings Call Transcript August 3, 2023

Holly Energy Partners, L.P. misses on earnings expectations. Reported EPS is $0.4 EPS, expectations were $0.47.

Operator: Welcome to HF Sinclair Corporation and Holly Energy Partners Second Quarter 2023 Conference Call and Webcast. Hosting the call today is Tim Go, Chief Executive Officer of HF Sinclair. He is 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; along with John Harrison, Chief Financial Officer of Holly Energy Partners. 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] We ask that you please limit yourself to one question and one follow-up. [Operator Instructions] Please note this conference is being recorded. It is now my pleasure to turn the floor over to Craig Biery, Vice President of Investor Relations. Craig, you may begin.

Craig Biery: Thank you, Adera. Good morning everyone and welcome to HF Sinclair Corporation and Holly Energy Partners second quarter 2023 earnings call. This morning, we issued a press release announcing results for the quarter ending June 30th, 2023. If you would like a copy of the press release, you may find them on our website at hfsinclar.com and hollyenergy.com. Before we proceed with remarks, please note the Safe Harbor disclosure statement in today’s press releases. In summary, it a 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 releases for reconciliations 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 will turn the call over to Tim Go.

Tim Go: Good morning. Today, we reported second quarter 2023 net income attributable to HF Sinclair shareholders of $508 million or $2.62 per diluted share. These results reflect special items that collectively increased net income by $4 million. Excluding these items, adjusted net income for the second quarter was $504 million, or $2.60 per diluted share compared to adjusted net income of $1.3 billion or $5.59 per diluted share for the same period in 2022. Adjusted EBITDA for the second quarter was $868 million, a 53% decrease compared to the second quarter of 2022. In our refining segment, second quarter 2023 EBITDA was strong at $703 million compared to $1.7 billion in the same period last year. This decrease was primarily driven by lower refining margins in both the West and Mid-Continent regions and lower refined product sales volumes due to higher maintenance activity.

Operating expenses of $427 million in the second quarter of 2023 improved versus the $469 million recorded in the same period last year as we benefited from lower natural gas costs. We continue to focus on controllable operating expenses as well as streamlining and optimizing our operations. Crude oil charge averaged 54,000 barrels per day in the second quarter of 2023 compared to 627,000 barrels per day in the second quarter of 2022, due to higher maintenance activity during the period. I’m pleased to report that the two turnarounds at our Navajo and Parco refineries in the period were completed on-time and on-budget, and we continue to make progress on our long-term reliability improvement initiatives. In our Renewables segment, we reported EBITDA of $23 million for the second quarter of 2023, compared to negative $63 million for the second quarter of 2022.

Excluding the lower cost of market inventory valuation adjustment, the segment reported adjusted EBITDA of negative $11 million for the second quarter of 2023, compared to negative $28 million for the second quarter of 2022. Total sales volumes were 50 million gallons for the second quarter of 2023, as compared to 26 million gallons for the second quarter of 2022. Utilization rates were impacted this quarter by two hydrogen plant turnarounds at Navajo and Parco which are co-located with two of our renewable diesel plants. We continue to improve the performance of this business with a target of achieving normalized run rates by the end of 2023, which will allow us to optimize advantaged feedstocks from our pretreatment unit and improve the profitability of this business.

Our Marketing segment reported EBITDA of $25 million for the second quarter of 2023, compared to $24 million in the second quarter of 2022. Total branded fuel sales volumes were a quarterly record of 364 million gallons compared to 335 million gallons in the same period last year. Gross margin per gallon was also a quarterly record at $0.09 in the second quarter as we saw strong demand for branded fuels across our regions. We added nine new branded sites in the second quarter and continue to expect to grow our branded sites by 5% or more per year. For Lubricants & Specialty Products segment, reported EBITDA of $72 million for the second quarter of 2023, compared to EBITDA of $156 million for the second quarter of 2022. This decrease was largely driven by a lower FIFO benefit from consumption of lower-priced feedstock inventory for the second quarter of 2023 of $0.5 million, compared to the $71 million benefit in the second quarter of 2022.

We continue to look for ways to optimize the Lubricants business, and we remain focused on sales mix optimization of our base oils and finished products. HEP reported EBITDA of $82 million in the second quarter of 2023, compared to $80 million in the same period of last year. This increase was mainly driven by strong transportation and storage volumes in the Rockies region. At this time, we do not have an update regarding the proposed buy-in of HEP, as we are still in discussions. We do not intend to disclose developments with respect to the proposed transaction unless and until on HF Sinclair and HEP have entered into a definitive agreement to effect the proposed transaction. For this reason, we will not be able to discuss any specifics during Q&A.

During the second quarter, we announced and paid a regular quarterly dividend of $0.45 per share to stockholders totaling $87.3 million. Subsequent to quarter end, we announced earlier this week that we repurchased 1.2 million shares for an aggregate price $411 million from REH Company. This puts our year-to-date total cash return including dividends and share repurchases at over $834 million. On a trailing 12-month basis, we’ve returned over $2 billion in cash to shareholders as of August 2, 2023. Overall, we are very pleased with our strong second quarter results. With the majority of the planned turnaround behind us, we believe our diversified portfolio is well positioned to capture margins available to us the remainder of the year. Our long-term commitment to returning excess cash to shareholders has not changed, and we continue to target a payout ratio of 50% of net income to shareholders while maintaining an investment-grade rating.

We remain focused on the reliability and integration of our asset base to further strengthen the earnings portfolio and free cash flow generation of HFC. 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. Net cash flows provided by operations for the second quarter of 2023 totaled $480 million, which included $183 million of turnaround spend in the quarter. HF Sinclair’s stand-alone capital expenditures totaled $72 million for the second quarter of 2023. As of June 30, ’23, HF Sinclair ‘s stand-alone liquidity stood at approximately $3.3 billion comprised of a cash balance of $1.6 billion, along with our undrawn $1.65 billion unsecured credit facility. As of June 30, ’23, we have 1.7 million being a stand-alone debt outstanding with a debt-to-cap ratio of 15% and net debt-to-cap ratio of 1%. HEP distributions received by HF Sinclair during the second quarter of 2023 totaled $21 million.

HF Sinclair owns 59.6 million HEP limited partner units, which following the acquisition of Sinclair Transportation represents 47% of HEP’s outstanding LP units at a market value of approximately $1.2 billion as of last night’s close. Let’s go through some guidance items. With respect to capital spending for full year 2023, we have lowered our total capital guidance range from $940 million to $1.15 billion to a new range of $900 million to $1.06 billion. We now expect to spend between $250 million to $270 million in refining, $25 million to $30 million in renewables to $45 million in lubricants and specialty products, $20 million to $30 million in marketing, $40 million to $60 million in corporate and $500 million to $585 million for turnaround and catalyst.

At HEP, we expect to spend between $25 million to $30 million in maintenance and $5 million to $10 million in expansion and joint venture investments. For the third quarter of 2023, we expect to run between 585,000 to 615,000 barrels per day of crude oil in our refining segment and we have planned turnaround scheduled at our Castberg and Tulsa refineries during the period. Let me turn the call over to John Harrison for an update on HEP. John?

John Harrison: Thanks, Atanas. HEP posted another solid quarter of earnings, driven primarily by strong crude and product volumes in the Rockies region. HEP’s second quarter 2023 net income attributable to Holly Energy Partners was $50 million compared to $57 million in the second quarter of 2022. The year-over-year decrease was primarily attributable to higher net interest expense. HEP’s second quarter 2023 adjusted EBITDA was $103 million compared to $104 million in the same period last year. A reconciliation table reflecting these adjustments can be found in HEP’s press release. HEP generated distributable cash flow of $73 million and we announced a second quarter distribution of $0.35 per LP unit, which is payable on August 11 to unitholders of record as of July 31, 2023.

A Capital expenditures during the second quarter were approximately $9 million, including $6 million in maintenance, $2 million of reimbursable and $1 million of expansion CapEx. We ended the second quarter with approximately $600 million in total liquidity, comprised of cash plus availability under our $1.2 billion revolving credit facility. We are now ready to turn the call over to Audra for any questions.

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Q&A Session

Operator: Thank you. The floor is now open for questions. [Operator Instructions] . We’ll take our first question from Manav Gupta at UBS.

Manav Gupta : Good morning, guys. We are consistently seeing an improvement in your capture rates both regions, which is very impressive despite the turnaround, help us understand some of the things we have been doing to attain this improvement in capture, which we are seeing over the last six to nine months.

Tim Go: Thanks, Manav, for your question. This is Tim. Let me ask Steve to comment on capture rates here.

Steve Ledbetter: Hey, Manav. Thanks for the question. I think it’s a combination of everything. It’s really around optimization, making sure that we’re taking the right decisions to put the right molecule in the right market. From a margin perspective, we’ve had a bit of support. We look to optimize our laid-in crude structure and take advantage of some of the differentials that we we’ve seen. And then from an operations perspective, it’s about running full, getting the molecules produced and getting them out into the right markets to get to capture where we want it to be. it’s kind of a combination of everything.

Manav Gupta : Perfect. I have a quick follow-up. You have a West Coast asset it can run heavy crude. I want to understand a little bit what would be a next year tailwind for your overall crew slate as it relates to the Puget Sound refinery?

Steve Ledbetter: Yeah. Again, this is Steve. As far as the TMX is concerned, we think when it comes on, it will tightened the differential in the short term. But a few uncertainties include the ability of the dock to handle the capacity, get it off over the water and then timing of production, in terms of outrunning the capacity. So we think somewhere in the next three to five years, could be when a constraint occurs again and differentials widen.

Manav Gupta : But as it relates to future sound, that would be a benefit, right, if that crude lands upon the West Coast?

Steve Ledbetter: Yes. We believe that’s the case.

Manav Gupta : Thank you.

Tim Go: Yeah. We think that will be helpful, Manav. This is Tim because it will also put some pressure on A&S crude as well as they compete for other refinery runs us Coast. — because our Fusion refinery can run both crudes and it can go 100% A&S can go 100%. We believe it gives us an advantage to be able to arm those crudes post TMX.

Manav Gupta : Thank you for the detailed response and congrats a very strong quarter.

Tim Go: Thanks Manav

Manav Gupta :

Operator: We’ll take our next question from Neil Mehta at Goldman Sachs.

Neil Mehta: Yes, good morning team and congrats on a good quarter. I wanted to kick off on return of capital. A lot of moving pieces around share repurchases and the agreement with REH. So maybe you could spend some time walking investment community with what’s been announced here over the last couple of weeks as it relates to REH and then talk about your capacity, you can continue to return capital to shareholders?

Tim Go: Great. I’ll ask Atanas Neil, to start off and then I can come in at the end and share.

Atanas Atanasov: Neil, thanks for the question and good morning. Well, first of all, our business continues to operate at and above expectation, generating robust cash flows. With that, our commitment to returning capital to our shareholders remains a priority and a focus. And as you can see year-to-date, we’ve repurchased with this latest announcement, 13.1 million shares. With respect to capital return to shareholders, we’ve said that our target is 50% payout ratio. We have consistently exceeded that, and our target remains to be at or above that. With respect to the family, we can speak for the family, but we have a constructive relationship. You have — you can see there, you’ve all noticed the 13-D disclosures where they’ve indicated their intent to continue to track directly to us, and we’re very much open and keen on continuing to repurchase shares.