Title

Presentation

Operator: Greetings, and welcome to the CVR Energy Fourth Quarter 2022 Conference Call. . As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Richard Roberts, Vice President of Financial Planning and Analysis and Investor Relations. Thank you, sir. You may begin.

Richard Roberts : Thank you, Christine. Good afternoon, everyone. We very much appreciate you joining us this afternoon for our CVR Energy fourth quarter 2022 earnings call. With me today are Dave Lamp, our Chief Executive Officer; Dan Newman, our Chief Financial Officer; and other members of management. Prior to discussing our 2022 fourth quarter and full year 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. You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and 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. Let me also remind you that CVR Partners completed a 1 for 10 reverse split of its common units on November 23, 2020. Any per unit references made on this call are on a split adjusted basis. 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 2022 fourth quarter earnings release that we filed with the SEC and Form 10-K for the period and will be discussed during the call.

That said, I’ll turn the call over to Dave.

Dave Lamp: Thank you, Richard. Good afternoon, everyone, and thank you for joining our earnings call. For the full year of 2022, we reported a consolidated net income of $644 million, earnings per share of $4.60 and an EBITDA of $1.2 billion. At the segment level, we generated $905 million of EBITDA at the Petroleum segment and $403 million of EBITDA at the Fertilizer segment. In addition to our strong results for the year, we are proud to report that we continue to improve — continued improvement in our environmental health and safety metrics in 2022, we with a 63% year-over-year reduction in total recordable incident rate and a 7% decline in environmental events across the company. We completed the planned turnaround at the Wynnewood refinery in the spring on time and on budget, during which we also completed the startup — completed and started up the renewable diesel unit.

With the conversion of Wynnewood’s hydrocracker to renewable diesel service, we reconfigured the refinery to enable it to efficiently run 100% of shale oil. We also completed turnarounds at both our fertilizer plants in the third quarter on time and on budget. We saw strong utilization rates at both fertilizers in the fourth quarter, with the East Dubuque achieving record ammonia production for the month of December. We also published our first external ESG report in December, which is available on our website. Fourth quarter consolidated net income was $172 million and earnings per share were $1.11. EBITDA for the quarter was $313 million. Our solid results for the quarter were driven by both Refining and Fertilizer businesses, with high utilization across all our facilities, along with strong pricing for refined products and nitrogen fertilizers.

We are pleased to announce that the Board of Directors has authorized a 25% increase in the fourth quarter regular dividend to $0.50 per share, which will be paid on March 13, 2023, to shareholders of record at the close of market on March 6, 2023. For the full year 2020, the Board authorized regular and special dividends totaling $5.30 per share for a payout ratio — a total payout ratio of 55% of operating cash flow generated for the year. Total shareholder return for 2022, including dividends, was approximately 115%. In our Petroleum segment, combined total throughput for the fourth quarter of 2022 was approximately 221,000 barrels per day. Crude utilization for the quarter was approximately 97% of nameplate capacity and light product yield was 103 on crude oil processed.

Benchmark cracks remained elevated during the fourth quarter, with the Group 3 2-1-1 averaging $37.42 a barrel. Distillate crack remained significantly above the gasoline crack in the quarter, and we continue to operate the refineries in max distillate mode. RIN prices continued to be stubbornly high at $8.45 a barrel for the fourth quarter. With the release of the proposed RVOs early in December, the EPA missed yet another opportunity to modernize the RFS to focus on carbon reduction. The RFS is a Liquid Fuels Regulation and enabling EVs to earn rents is just another subsidies — subsidy for EV industry, which is nowhere near carbon neutral. The point of obligation under the RFS also remains a significant issue and should be changed to align incentives between refiners, large retailers and blenders.

The bottom line is that the American consumers are paid more at the pump because of EPA’s mismanagement of the RFS. We have filed petitions in the Fifth Circuit, seeking judicial review of EPA’s ridiculous and misguided denial of Wynnewood’s small refinery exemptions for 2017 through 2021. We are encouraged by the recent Fifth Circuit ruling to stay the compliance obligations of 2 other small refiners after noting EPA’s June 2022 SRE denial was likely contrary to the law. We continue to fight for the rights we believe Wynnewood is entitled to, and yesterday, we filed our own motion first day in the Fifth Circuit. We also filed our 2022 petition for small refinery exemption at Wynnewood in December, and we expect to continue to accrue a liability on our balance sheet related to Wynnewood’s RFS obligations, while we pursue legal remedies.

We completed our first catalyst change at the Wynnewood renewable diesel unit in the quarter, which limited processing to approximately 13 million gallons of vegetable oil feedstocks. The HOBO spread averaged a negative $1.97 per gallon for the fourth quarter, a decline from the third quarter as soybean prices increases outpaced diesel prices for the quarter. As a reminder, our renewable diesel business is currently reported in our Corporate and Other segment. In the Fertilizer segment, both facilities ran well following the completion of planned turnarounds in the third quarter. Fertilizer prices also increased in the fourth quarter, and we took advantage of tight market conditions to sell our fourth quarter production and more than half of our first quarter production at attractive prices.

Fertilizer prices have softened some recently. However, we continue to expect strong fertilizer demand in the spring due to strong grain prices and farmer economics. Let me turn the call over now to Dan to discuss our financial highlights.

Dan Newman: Thank you, Dave, and good afternoon, everyone. For the fourth quarter of 2022, our net income attributable to CDI shareholders was $112 million, earnings per share was $1.11 and EBITDA was $313 million. Our fourth quarter results included an unfavorable inventory valuation impact of $39 million, a negative mark-to-market on our estimated outstanding rent obligation of $26 million and unrealized derivative losses of $10 million. Excluding the above-mentioned items, adjusted EBITDA for the quarter was $388 million and adjusted earnings per share was $1.68. Adjusted EBITDA in the Petroleum segment was $282 million for the fourth quarter, driven by high utilization rates at our refineries and strong product cracks in the Mid-Con.

Our fourth quarter realized margin adjusted for inventory valuation, unrealized derivative losses and RIN mark-to-market impacts was $21.01 per barrel, representing a 56% capture rate on the Group 3 2-1-1 benchmark. RINs expense for the quarter, excluding the mark-to-market impact, was $116 million or $5.70 per barrel, which negatively impacted our capture rate for the quarter by approximately 15%. The estimated accrued RFS obligation on the balance sheet was $692 million at December 31, representing $397 million RINs mark-to-market at an average price of $1.74. As a reminder, our estimated outstanding RIN obligation excludes the impact of any small refinery exemptions. Direct operating expenses in the Petroleum segment were $5.52 per barrel for the fourth quarter compared to $4.84 per barrel in the fourth quarter of 2021.

The increase in direct operating expenses was primarily due to higher repair and maintenance expenses, personnel costs due to stock-based compensation and increased natural gas and electricity costs. Adjusted EBITDA in the Fertilizer segment was $122 million for the fourth quarter with the strong results driven by high utilization at both facilities and increased pricing for UAN and ammonia. Partnership declared a distribution of $10.50 per common unit for the fourth quarter of 2022. As CVR Energy owns approximately 37% of CVR Partners common units, we will receive a proportionate cash distribution of approximately $41 million. Cash provided by operations for the fourth quarter of 2022 was $99 million, and free cash flow was $44 million. Material uses of cash in the quarter included $131 million of RIN purchases, $55 million of capital and turnaround spending, $39 million of cash taxes and $18 million of cash interest, in addition to $141 million paid for the CBI third quarter regular and special dividends.

Total consolidated capital spending for the full year 2022 was $203 million, which included $86 million in the Petroleum segment, $41 million in the Fertilizer segment and $69 million on the RDU and the pretreater. For the full year 2023, we estimate total consolidated capital spending to be approximately $200 million to $225 million and turnaround spending to be approximately $50 million to $60 million. Turning to the balance sheet. We ended the quarter with a consolidated cash balance of $510 million, which includes $86 million of cash in the Fertilizer segment. Total liquidity as of December 31, excluding CVR Partners, was approximately $675 million, which was comprised primarily of $423 million of cash and availability under the ABL facility of $252 million.

Looking ahead to the first quarter of 2023, for our Petroleum segment, we estimate total throughput to be approximately 180,000 to 195,000 barrels per day, which will be impacted by the planned turnaround at Coffeyville in the quarter. We estimate direct operating expenses to range between $95 million and $105 million, total capital spending to be between $40 million and $50 million and turnaround spending to be between $35 million and $45 million. For the Fertilizer segment, we estimate our first quarter 2023 ammonia utilization rate to be between 95% and 100%, direct operating expenses to be approximately $55 million to $65 million, excluding inventory impacts, and total capital spending to be between $5 million and $10 million. For renewables, we estimate first quarter 2023 total throughput to be approximately 20 million to 25 million gallons, direct operating expenses to be between $2 million and $4 million and total capital spending to be between $20 million and $30 million.

With that, Dave, I will turn it back over to you.

Dave Lamp: Thank you, Dan. In summary, we had another strong quarter with solid contributions from both Refining and Fertilizer segments. Although refining market conditions softened towards the end of the year, we are cautiously optimistic about the near-term outlook. Starting with refining, overall, refining product demand in the U.S. is down compared to pre-COVID levels, although the Group 3 market has bucked that trend with gasoline demand essentially flat and diesel demand higher relative to 2019. Inventories for gasoline, diesel, jet fuel are all at the low end of 5-year averages, which has been supportive of cracks. Gasoline cracks have been seasonally strong for much of the winter despite high — the high RVP season, partially driven by turnaround activity and weather-related operating problems across the industry.

On the crude side of the equation, commercial crude inventories have recovered to within the 5-year average range. Although if you include the strategic reserve draws, inventories are significantly below the low end of the 5-year range. Crude oil productivity in the U.S. is continuing to increase slowly. However, the inventory of DUCs has significantly decreased. Crude oil exports are continuing to rise, and we believe the incremental barrel produced in the United States is like crude oil that needs — that will need to clear the markets via the exports. Crude differentials continue to be influenced by crude exports and high-sulfur fuel oil discounts, which has driven the bBrent-TI spread to $5 per barrel or higher since mid-2022. Our volumes on the gathering system have averaged approximately 120,000 barrels per day for the fourth quarter, which was impacted somewhat by weather-related outages.

We expect to see our gathering volumes pick up over the next few months. Turning to the Fertilizer segment. Production was strong at both facilities in the fourth quarter coming out of turnaround, which were completed in the third quarter. As we approach the spring planting season, we expect demand for fertilizer to be strong, with ag analysts, currently projecting an increase in planted corn acreage of approximately 2 million to 4 million acres. In early January, we closed the transaction on — with tax equity investors related to 45Q tax credits generated at the Coffeyville facility. CVR Partners received an initial net cash payment of about $18 million with the close of that transaction, and could — which — and could generate up to $60 million additional proceeds over the next 7 years related to 452Q tax credits if certain conditions are met.

Moving to our renewable business. With the recent catalyst change, we have demonstrated design rates and yields for the Wynnewood renewable diesel unit. We continue to make progress on the pretreater at the Wynnewood unit — at Wynnewood, with the completion still expected to be early third quarter at a capital cost of approximately $95 million. I’m happy to announce that we have completed the internal restructuring of the company to segregate our renewable business. This transaction should provide us with more flexibility and optionality and as we contemplate growing our renewables business over the next few years. Looking at the first quarter 2023, quarter-to-date metrics are as follows: Group 2-1-1 cracks have averaged $34.50 per barrel, with the Brent-TI spread of $6.06.

A Midland — the Midland differential at $1.63 over WTI and the WCS differential at $22.92, under TI. The HOBO spread has averaged a negative $1.55 a gallon, while LCFS prices have averaged $63 per ton, and D4 RINs have averaged $1.66. Fertilizer prices have softened somewhat from the fourth quarter 2022 levels, with quarter-to-date ammonia prices over $800 per ton and UAN prices over $400 a ton. As of yesterday, Group 3-2-1-1 cracks were $30.91 per barrel. The Brent-TI was $6.89 per barrel and WCS was $18.75 under WTI. RINs were approximately $8.26 per barrel, and the HOBO spread was a negative $1.92 per gallon. Ammonia prices were approximately $750 per ton for spring shipment, and UAN prices were approximately $300 per ton. As I mentioned, we are cautiously optimistic about the outlook for our refining and renewables and fertilizer business in 2023.

We’ll continue on — continue to focus on operating our plants in a safe, reliable and environmental responsible manner, while looking for opportunities to invest in high-return projects across our business. In the fourth quarter, the Board approved a project intended to replace HF acid in the alky unit at the Wynnewood refinery. We expect this project to cost approximately $120 million over the next 3 years, and we’ll — we will — and we estimate our alky capacity will increase by 2,500 barrels per day once online. We are also continuing engineering design work on the diesel improvement yield improvement project and the brownfield fertilizer expansions we have discussed previously, and look forward to providing additional details as we progress these projects.

Finally, we believe it’s important to return cash to shareholders as demonstrated by our increased regular dividend for the fourth quarter. We will continue to evaluate with the Board how best to prioritize our uses of cash between investing in the business and returning to shareholders going forward. With that, operator, we’re ready for questions.

Operator: Our first question comes from the line of Neil Mehta with Goldman Sachs.

Neil Mehta: I guess the first question was just around return of capital. Great to see the dividend back to $0.50 a share a quarter, so congrats on that. Just, Dave, talked about the decision to bump it from $0.40 to $0.50. And then also, how do you think about the special dividend going forward given the environment and the balance sheet?

Dave Lamp: Well, Neil, I think I described — we’ve always described ourselves as a cash machine. That’s what we do, and we generate returns for our shareholders on a regular basis. That’s what we’re in business for. Looking at specials, I think the reason that we did specials was because we viewed the the cracks that we were experiencing as somewhat unusual and not sustainable. And so they were onetime deals. We view a little bit today that, with the shortage of refining capacity out there, the inventories where they’re at, the backlog of turnarounds that the industry is experiencing and yet to execute that we’re cautiously optimistic of the outlook. So that’s the reason that I think the Board had pretty good confidence that the regular dividend should be increased.

We did have heavy spending this quarter on RINs because we were catching up on some in the Coffeyville obligation. But our capital spend was not out of line with normal, but fourth quarter is always a drain on cash. So that’s the thoughts around the dividend.

Neil Mehta: Yes, that’s helpful, Dave. And then the follow-up is just around UA and monetizing the fertilizer business. You announced late last year, you’re exploring options around it. Recognize there are probably some sensitivities, but maybe you could just step back big picture and talk about why you think it makes sense to at least explore the spin-off, and then where you stand around that process?

Dave Lamp: Well, I think the cycle that fertilizer is in has shown us that probably not getting the sum of the parts quite as much value out of the fertilizer business as we think we could and the potential of the idea of evaluating the spin is around just that concept, can — is it better off as a separate company, or is it sufficient to be within CVI? And a lot of that work is still going on, no conclusion has been made yet. But the whole purpose of it is, is really — is to try to get a higher multiple for that business and upgrade both stocks in doing so.

Operator: Our next question comes from the line of John Royall with JPMorgan.

John Royall: So just looking at your throughput guidance for 1Q, I know you have the turnaround at Coffeyville, will that straddle 2Q and have an impact on throughput there? And then I realized you did Wynnewood last year. So should we expect the second half to be relatively full from a run rate perspective on the throughput side with no major maintenance?

Dave Lamp: Yes. I think the — this is the only turnaround we have planned other than another catalyst change on the renewable diesel in sometime in the — probably the second quarter. But this is kind of what we call a small turnaround at Wynnewood — or at Coffeyville, excuse me. It’s really the coker is the main piece of that and a couple of hydrotreaters and a few other auxiliary equipment. So it’s a mini turnaround from the standpoint of what we did in Wynnewood last year. That was a main cat alky turnaround. So the impact is kind of muted. But that’s all the maintenance we really have planned.

John Royall: Okay. Great. And then on the fertilizer side, you mentioned pricing has come down and — but you do have a bullish view on the planting season. So how do you expect the year to shape up overall from a price perspective? And I think you’ve spoken in the past about European breakevens helping pricing due to high natural gas costs, similar to what we see in refining. So are you seeing the opposite of that now with low gas prices?

Dave Lamp: Yes. I think, yesterday, natural gas was $2.10, and that’s pretty low. And prices have responded to that to some degree in fertilizer. I think prices are still pretty high in Europe. They’re not near as high as they were due to — mainly due to a warm winter. But I don’t know that this cycle is over yet. I don’t think it is. And the fact that farmer economics are so strong that — and I think the other thing I’d mention is we found a — where the — where you start to see demand go down around $600 UAN is where farmers stop buying it and find other alternatives. And we certainly experienced that towards the end of last year.

Operator: Our next question comes from the line of Paul Cheng with Scotiabank.

Paul Cheng: Dave, some of your peers set have a, maybe for this big approach in the cash return, talking about maybe 50% or 60% of the cash will return to shareholders. Is that something that you guys would consider? And if not, is there any reason that may not be applicable to CVR?

Dave Lamp: Well, I think, Paul, I don’t know that we focus on 1 number because we’re — the Board is making decisions on whether to invest in the business or to return to shareholders. So I think that number will go up and down with us. I don’t know that we have a set target, and it just depends on how much they want to put back in the business.

Paul Cheng: Okay. And you have I think that we structure and set up the legal entity for the business. Do you have a — I know that you are still evaluating what you really want to do that business. But any kind of early read that is that going to be a growth engine and that — or that how the business — I mean, I think that’s the number of moving parts and so far, the result in that have not been that great. So how would that impact your thinking about the longer-term view of that business?

Dave Lamp: Yes, Paul, I think it’s still — it’s a very intriguing area for us. I think we’ve stated before that we’re not going to invest a lot of money in refining going forward, certainly not on new capacity, but we will maintain our assets and continue to invest in the assets where it made sense for upgrading the barrel for higher capture rates and better blending and mitigation of RINs and other factors. But most of our new capital is going to go to renewables. And I think we’ve got a really interesting situation where we’re at and some competitive advantages that others don’t have. Let me give you some examples. One, we’re in the ag belt. All of our plants are in the ag belt. We have some synergies with the fertilizer business in that we own 2 gasifiers today that basically provide hydrogen to our fertilizer business that sequester CO2 off of that process to make blue ammonia that’s probably the only one really in service today.

And we can use that infrastructure to — and what we’re really exploring is how to get to negative CI on renewable diesel, where really the money is, frankly, to use the gasifiers and use our infrastructure to accomplish that at Coffeyville. We’re pretty happy with where we are on renewable diesel at Wynnewood. If you look at the margins today, without a pretreater, they’re probably in the $0.60 to $0.70 a gallon range. And then with a pretreater they’re more $1 to $1.50 range. Convert that to something comparable in the refining business is a $42 to a $50 crack. Doesn’t have the scale that you get with refining, but if you can get to low CI, that’s what matters. And we think we’re uniquely positioned to make that happen. And part of our project to break out renewables is similar to what we’re thinking in the fertilizer business.

If we can build a big enough business and some scale to it, that we could potentially spin that off also. So that’s the ultimate long-term plan.

Paul Cheng: And one of your peers recently got a pretty high price for their how the unit that is still under construction. Is that a role that you guys will consider? Or have you go into that and trying to see whether you can find a good partner or that’s not really for you guys?

Dave Lamp: No, I think we’re — I think part of the whole concept of breaking out renewables is just that is we’re interested in partnerships if they make sense. We’re not the best partner in the world, I’d say, just from the standpoint that we’re in the Mid-Con. We don’t have water access. Some of these other deals were really continued on bringing feedstock to the play. And I think PBF did that. Marathon did that very effectively. The multiples that came out of that are impressive. And particularly, in our case, we have about, what, $275 a gallon in our renewable diesel plant at Wynnewood, and that’s sold for $5.50 roughly. I think we’re around that number, $5.20, maybe it was. But that’s a pretty hefty number and that’s a conversion just like ours lose.

So the difference is we’re not on the Gulf Coast. But that said, there’s still plenty of low CI material in our area, and we still have the view that CI will trade into the feedstock prices. And frankly, it already is there, and freight will take over where the materials go, and we’ll trade for Gulf Coast or back — imports or whatever, however we need to ultimately in the market. So I think the future is right there. If we can get the negative CI, that would just be all that much better.

Paul Cheng: Right. A final question, I think it’s just for clarification. So I have to apologize. I think you go through what is view on your balance sheet at the end of the year? And also whether you have a time schedule, how much you have to pay or set for that RVO for this year and next year?

Dan Newman: Yes. So Paul, just to reiterate, as of year-end, we had 397 million RINs. That was the liability on the balance sheet for $691.6 million or $692 million. In terms of schedule, just a reminder that, that is the short — the predominant amount of that short is for Wynnewood for the prior 3 years. So you can really back out 3 years of Wynnewood obligation to come up with what the remainder for Coffeyville was at year-end, and that assumed that we need to settle that by the compliance dates.

Operator: We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.

Dave Lamp: Again, I’d like to thank you all for your interest in CVR Energy. Additionally, we’d like to thank our employees for their hard work, commitment towards safe, reliable and responsible operations. We look forward to reviewing our first quarter 2023 results during our next earnings call. Thank you.

Operator: Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.