Holly Energy Partners, L.P. (NYSE:HEP) Q3 2022 Earnings Call Transcript November 7, 2022
Holly Energy Partners, L.P. misses on earnings expectations. Reported EPS is $0.33 EPS, expectations were $0.46.
Operator: Welcome to HF Sinclair Corporation and Holly Energy Partners Third Quarter 2022 Conference Call and Webcast. Hosting the call today is Mike Jennings, Chief Executive Officer of HF Sinclair and Holly Energy Partners. He is joined by Tim Go, President and Chief Operating Officer of HF Sinclair. Atanas Atanasov, Chief Financial Officer of HF Sinclair; and 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 opened for your questions following the presentation. 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.
Photo by Zachary Theodore on Unsplash
Q – Craig Biery: Thank you, Rob. Good morning, everyone. And welcome to HF Sinclair Corporation and Holly Energy Partners third quarter 2022 earnings call. This morning, we issued press releases announcing results for the quarter ending September 30, 2022. If you would like a copy of the press releases, 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, 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 Mike Jennings.
Mike Jennings: Hey. Thanks, Craig. Good morning, everyone. Today, we reported third quarter net income attributable to HF Sinclair shareholders of $954 million or $4.45 per diluted share. These results reflect special items that collectively decreased net income by $29 million and excluding these items, adjusted net income for the third quarter was $983 million or $4.58 per diluted share, compared to adjusted net income of $210 million or $1.28 per diluted share for the same period in 2021. Adjusted EBITDA for the current quarter was $1.5 billion, an increase of more than $1 billion compared to the third quarter of 2021. Our third quarter results reflect strong contributions from our Refining segment, driven by safe and reliable operations that resulted in record throughputs and a 65% increase in gasoline and distillate sales volumes year-over-year.
Solid demand in the regions we serve, coupled with low inventories and improved crude differentials resulted in Refining EBITDA of over $1.4 billion in the third, compared to $295 million in the same period last year. In our Renewables segment, we continue to methodically ramp-up operations across our facilities with higher utilization rates quarter-over-quarter. Total sales were 52 billion gallons in the third quarter and we are encouraged by strong demand for Renewable Diesel and solid margins driven by D4 RIN price strength. We also expect to realize additional contribution from our pretreatment unit in Q4. Lubricants and Specialty Products reported EBITDA of $15 million for the third quarter, compared to adjusted EBITDA of $82 million for the third quarter of 2021.
This decrease was largely driven by FIFO impact from the consumption of higher priced feedstock inventory resulting in lower margins. Our Lubricants business is still performing well above our mid-cycle guidance on an annual basis as a result of strong demand for base oils and finished products. Marketing segment reported EBITDA was $10 million for the third quarter and total branded fuel sales volumes were 362 million gallons, representing a $0.03 per gallon margin. We continue to make progress expanding the DINO brand as our number of branded sites grew by 29% during the third quarter. HEP reported adjusted EBITDA of $110 million in the third quarter, compared to $83 million in the same period last year. This increase was primarily driven by contributions from the Sinclair Transportation assets, which were acquired in March of 2022.
We returned $952 million in cash to our shareholders through repurchases and dividends during the quarter and another $152 million in the month of October. Since the closing of the Sinclair acquisition on March 14, 2022, we have returned over $1.1 billion, which is well ahead of our initial target of returning $1 billion to our shareholders by the end of the first quarter of 2023. With the announcement of our new $1 billion share repurchase authorization in September, we remain fully committed to our cash return strategy and payout ratio, while maintaining a strong balance sheet and investment grade credit rating. To-date, we have achieved our target of annualized run rate synergies of over $100 million relating to the Sinclair acquisition, an additional $100 million of working capital synergies.
We achieved these annual run rate synergies through a combination of commercial improvements, operating expense reductions and SG&A optimization. We also announced today that our Board of Directors declared a regular quarterly dividend of $0.40 per share, payable on December 5, 2022 to holders of record November 21, 2022. Looking ahead, we are constructive on refined product margins supported by low product inventories and wider crude differentials. We remain focused on maintaining safe and reliable operations across our fleet, and our diverse portfolio of assets provides us the opportunity to generate strong free cash flow through the cycle. And with that, let me turn the call over to Atanas.
Atanas Atanasov: Thank you, Mike, and good morning, everyone. Let’s begin by reviewing HF Sinclair’s financial highlights. As previously mentioned, our strong third quarter results included a few unusual items. Pre-tax earnings included a $17 million charge for lower cost to market inventory valuation adjustment, HF Sinclair’s pro forma — pro rata share of HEP’s share Osage pipeline environmental remediation costs of $10 million and acquisition integration cost of $11 million. A table of these items can be found in our press release. Net cash provided by operations totaled $873 million, which included $28 million of turnaround spending in the quarter. HF Sinclair standalone capital expenditures totaled $92 million for the third quarter.
As of September 30, 2022, HF Sinclair’s total liquidity stood at approximately $3.1 billion, comprised of a standalone cash balance of $1.45 billion, along with our undrawn $1.65 billion unsecured credit facility. As of September 30, we have $1.74 billion of standalone debt outstanding with a debt-to-cap ratio of 16% and net debt-to-cap ratio of 3%. HEP distributions received by HF Sinclair during the third quarter 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 $1.1 billion as of last Friday’s close. Let’s go through some guidance items. We have slightly reduced our expected capital spending guidance for 2022 to the range of $740 million to $885 million from the previously shared range of $785 million to $950 million.
We now expect to spend between $225 million to $245 million in Refining, between $230 million to $260 million in Renewables, $35 million to $50 million at Lubricants and Specialty Products, $10 million to $15 million in Marketing, $75 million to $90 million on corporate and $110 million to $150 million for turnaround and catalyst. At HEP, we expect to spend $55 million to $75 million in total capital. For the fourth quarter of 2022, we expect to run between 620,000 to 650,000 barrels per day of crude oil in our Refining segment. We have no major turnarounds at our fuel refineries scheduled for the remainder of 2022. And with this, I will turn the call over to John for an update on HEP.
See also 10 Countries with the Largest Nickel Reserves and 10 Cash Rich Stocks To Buy.
John Harrison: Thanks, Atanas. HEP’s third quarter 2022 net income attributable to Holly Energy Partners was $42 million, compared to $49.2 million in the third quarter of 2021. The year-over-year decrease was primarily attributable to our share of incurred and estimated remediation expenses associated with the Osage pipeline crude oil release. Higher interest expense and operating costs partially offset by strong earnings related to the recently acquired Sinclair transportation assets. HEP’s third quarter 2022 adjusted EBITDA was $110.1 million, compared to $83.3 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 $78.7 million and we announced a third quarter distribution of $0.35 per LP unit, resulting in a distribution coverage ratio of 1.8 times.
The distribution will be paid on November 11th to unitholders of record as of October 31st. Capital expenditures and joint venture investments during the quarter were approximately $13 million, including $5 million in maintenance CapEx. As we look to the remainder of the year and into 2023, we anticipate strong performance across our asset base, driven by strong refinery utilization rates. Safe and reliable operations continues to be our highest priority. We remain committed to our capital allocation strategy and expect to reach our short-term leverage target of 3.5 times in the first half of 2023. We are now ready to turn the call over to the Operator for any questions.
To continue reading the Q&A session, please click here.