Welcome to the first quarter 2014 earnings call. My name is Christine, and I will be the operator for today's call. [Operator Instructions] Please note that this conference is being recorded. .

I will now turn the call over to Brice Tarzwell, Senior Vice President and Chief Legal Officer of Par Petroleum. Mr. Tarzwell, you may begin. .

Good morning, and welcome to Par Petroleum's earning call for the first quarter of 2014. By now, everyone should have access to our amended 10-K restating 2013, our first quarter 10-Q and our earnings release. Each of these documents are available on our website at www.par-petro.com.

This call is being recorded, and a replay will be available on our website. .

Before we begin, we'd like to remind everyone that management's comments today may contain forward-looking statements.

These forward-looking statements address expectations, estimates and projections that may involve significant risks and uncertainties, which could cause actual results to differ materially from the results discussed in these forward-looking statements.

Information about the risks we face and the uncertainties associated with Par Petroleum's forward-looking statements can be found in the company's annual and quarterly reports filed with the SEC. Because of these risks and uncertainties, investors should not place undue reliance on forward-looking statements.

We disclaim any intention or obligation to update or revise any forward-looking statements. .

We will next turn to remarks from our Chairman and Chief Executive Officer, Will Monteleone.

Will?.

a few general comments on the state of the business, then a review of the first quarter, followed by a Q&A session. Thank you for joining us this morning. We appreciate your support as key stakeholders in growing the business. .

This has been an exciting few months inside Par, highlighting the opportunities that exist for us to grow the business. As presented in our restated 10-K, when preparing our first quarter results, we identified a miscalculation related to our year-end inventory, the correction of which reduced inventory and increased cost of revenues in that period.

We have implemented procedures to ensure our inventory takes into consideration all appropriate adjustments so the measurements are comparable to prior periods. .

The first quarter was an important period for the continuing transformation and development of the company. We established new supply relationships, which are beginning to yield improvements in the refinery's profitability.

We are re-establishing our market presence in Hawaii and building our accounting, information systems and commercial platforms for future growth. Further, we have agreed to acquire Mid Pac Petroleum, which will enhance on-island sales, reduce distribution cost per barrel and will provide additional flexibility in crude sourcing for the refinery.

With respect to our Hawaii business, our first quarter results improved by $16 million compared to the 2013 results for the same business segment. .

While the headline first quarter numbers are negative, there are several underlying factors that I believe signal improvement of the business. Our first quarter crude cost continued to be impacted by carryover inventory of high-priced crude that, by the end of the first quarter, we had processed. Our crude cost trended lower as the quarter progressed.

Despite increased throughput in 2014 compared to 2013, we did have a 10-day outage in our hydro-cracker. While the costs of repair were minimal, the team did an excellent job moving quickly to complete the repairs, and the primary impact to our profitability was the reduction in our distillate production during the period. .

During May, we successfully assumed operational control of our accounting and information systems by terminating the Transition Services Agreement with Tesoro.

Bringing these processes in-house will allow us to expedite and improve our quarterly financial closing processes and begin to provide necessary feedback loops to improve our operational effectiveness. Until we cut over to our own systems, we incur duplicative costs in our preparation and transition efforts.

We expect these costs to decline during the second half of 2014. .

one, through varying arrangements, the company has access to over 80 additional retail outlets, more than 2.5x our existing retail presence of 31 outlets; two, their existing terminal footprint opens new markets and allows us to optimize our existing logistics and distribution costs; three, there is excellent underlying value in Mid Pac beyond real estate portfolio; and four, increased downstream presence provides additional refinery flexibility in procuring a wider range of crudes.

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Turning to our primary upstream asset, our investment in Piceance Energy. We have agreed to fund our share of a 1-rig drilling program, which will be approximately $3 million net to us. We expect this capital infusion to be accretive and allow Piceance to grow production over the next 12 to 24 months.

Piceance plans to drill 24 wells under this program over the next 12 months. .

$3 million of acquisition and integration costs; $4 million in interest and financing charges, most of which is noncash; $2 million in gains related to fair value of our common stock warrants; and $3 million in gains associated with our estimate of the contingent consideration related to the HIE acquisition. .

Moving on to the refining, distribution and marketing segment. During the first quarter, we reported revenues of $722 million, gross margin of $27 million and segment operating loss of $12 million, which includes DD&A expense of $2 million.

During the first quarter, we operated at an approximate throughput of 67,000 barrels per day or 69% utilization, and our manufacturing costs have averaged $4.53 per barrel throughput. Our gross refining margin per barrel for the first quarter was $3.17. .

When looking at the quarterly gross refining margin in more detail, the results were negatively impacted by higher ethanol costs during the quarter, driven by logistics constraints in the Midwest. In addition, we shifted to a heavier crude slate due to market opportunities in our existing contractual customer base.

Another variable that impacts our results is backwardation in the global Brent market due to the length of Hawaii's supply chain. During the first quarter, based on market data, the impact of backwardation between month 3 and month 1 was between $0.80 and $0.90 per barrel. .

At a more macro level, the average crack spreads for the Singapore 4:1:2:1 index and the San Francisco 4:1:2:1 index for the first quarter of 2014 compared to the first quarter of 2013 declined by $1.26 and $2.02 per barrel, respectively.

Sequentially, the Singapore and San Francisco index increased by $0.89 and $2.78 per barrel between Q4 2014 (sic) [ 2013 ] and Q1 2014. Looking at this in more detail, gasoline margins during the traditionally weaker months were lower for a longer period of time, while distillate margins have remained relatively steady during this period. .

As stated in our 10-Q, we expect our 2014 capital expenditures for Hawaii to total $16 million. During the first quarter, we invested $2 million, primarily consisting of information technology expenditures and tank repairs. .

Moving on to Texadian. During the first quarter, Texadian, our petroleum logistics business focused in Canada and the Lower 48, revenue was $20 million compared to $63 million for the first quarter of 2013.

During the first quarter of 2014, segment operating income was approximately $226,000, which included approximately $506,000 of DD&A expense, versus $6 million of operating income for the first quarter of 2013, which included $498,000 of DD&A expense. The full delivery of the tank farm and dock in the St.

Louis area has been delayed, and we are currently renegotiating with the developer of that facility regarding our level of interest in throughput-ing barrels. .

Moving on to Piceance Energy, which we account for using the equity method. During the first quarter of 2014, Piceance generated revenue of $20 million versus $14 million for the first quarter of 2013, an increase of approximately $6 million.

During the first quarter of 2014, Piceance generated an operating loss of $1 million, which included approximately $7 million of DD&A expense, versus an operating loss of $7 million for the first quarter of 2013, which included $6 million of DD&A expense.

The change in operating income was largely driven by higher natural gas and natural gas liquids pricing versus the comparable period. .

Looking at Par overhead activity. For the first quarter of 2014, our acquisition and integration costs were $3 million. Overhead costs remained elevated due to acquisition and integration costs associated with closing the Hawaii acquisition. We expect these costs to start to decrease during the second half of 2014. .

This concludes my prepared remarks. And at this time, I'd like to turn it back over to the operator for Q&A. .

[Operator Instructions] Our first question comes from Andrew Shapiro from Lawndale Capital. .

A few questions here, and I'll back out in the queue.

In -- with respect to your acquisition of Mid Pac, before this acquisition, to what extent has your refinery previously sourced product to these acquired stations? Or is this all incremental market share gain?.

Thanks for the question, Andrew. This is all incremental volume that we'll be adding on the gasoline side of the equation. We do provide them diesel today. The vast majority of their volumes are -- roughly 80% of their volumes are gasoline. .

Okay. And with respect to the terms on the deal, we know the cost. When you're making these investment allocations, and we have this huge NOL, presumably, you're out there trying to get as much pretax cash flows as you can have.

Is there a type of investment hurdle rate or a valuation multiple on cash flows that you anticipated that this deal falls within some type of range that you can share with us?.

That's a good question.

As it relates to the acquisition, I would say, before I start, there are going to be ongoing communications that we'll be making as it relates to the financing plans and time frame that we have, as well as -- I know that there are probably many questions as it relates to the timing, pricing and general terms of the rights offering, so there will be additional communications.

But what I can tell you at this point is we expect the acquisition to be accretive, and we look at our hurdle rates and our capital and ultimately target returns that are in excess of 15% to 20% on incremental capital that we're putting to work.

And a few thoughts on the acquisition, is that Hawaii is a unique marketplace, where, given its remoteness, the cost of freight is heightened versus other global refineries.

And there have been points in the past where we do export gasoline range molecules, and we do estimate that the cost of freight plus some blending differentials on an exported barrel versus a barrel sold in Hawaii can be between $6 to $10 a barrel.

And as we referenced, historically, Mid Pac's gasoline range throughput has totaled about 4,200 barrels per day. And one other fact as it relates to looking at each opportunity that we evaluate, we're constantly evaluating the downside protection that, that acquisition provides.

And so when you look at the underlying fee-owned real estate portfolio and the terminal assets, we believe there's significant underlying value to us. They have 22 fee-owned locations, the majority of which are located on Oahu, and we believe these hard assets provide a nice floor to us. .

Our next question comes from Mark Bankert from Chatham Asset Management. .

Could you just -- in terms of the synergies, I think you just talked about it a little bit.

But could you sort of prioritize the synergies you expect to get and sort of the time frame that you may get them in? And I guess, specifically, could you sort of talk about general size, whether it's crude sourcing or storage -- or how would you prioritize the synergies you're going to get with the acquisition? And over what sort of time frame would you get them?.

Sure. As it relates to general timing of the acquisition, we have to go through a HSR review process, that our current expectations are the acquisition would close in late third quarter time frame. And that's obviously the earliest point in time where we could receive any benefit from the Mid Pac acquisition.

As it relates to broader synergies, I would put them into several buckets at this point in time. One would be -- consolidating office space is one. I think there's IT implementation savings that we see.

We believe there are duplicative insurance costs, and I think a large contributor here would be the distribution and logistics savings that we see on a per-barrel basis with additional scale.

And so as you're all aware, we serve all of the islands of Hawaii, and additional volume to spread across our distribution costs helps lower our OpEx per barrel -- or distribution cost per barrel.

And as it relates to the timing of realizing those, ultimately, I can't comment specifically on Mid Pac's existing supply arrangement, except that we do not provide supply to them and we don't expect that we'd be able to provide supply to them until 2015 begins.

And ultimately, the synergies that we see as it relates to consolidating office space and IT implementations and duplicative insurance costs, we believe we can start to realize during the fourth quarter, assuming a end of third quarter close.

However, the logistics and freight savings I don't think will begin to flow through our results until fiscal 2015. .

Our next question comes from Al Novak [ph] from Advent Capital. .

It's Tom Novak [ph] at Advent. Just longer term, looking out, I guess, post '15, is part of the play here -- in terms of your focus on Hawaii and refining, I -- what -- can you just share your thoughts on accessing U.S.

Gulf crude via the expanded Panama Canal? Is that part of the play here? Or do you have any thoughts on that?.

I think a more -- just general comments that I would make as it relates to what we're seeing in the crude markets is that you have a significant amount of change happening on the West Coast as it relates to many of the refineries.

They're sourcing additional barrels via rail from both Canada and from North Dakota, and we're also seeing changes in crude flow patterns that I think is exhibited by our announcement that we are sourcing barrels from Mexico. And again, I would say that the Mexican production has traditionally found its home on the Gulf Coast.

And we're starting to see producers in South America begin to look westward towards the Asia Pacific area, and Hawaii is clearly square in the path of those movements. .

Our next question comes from Andrew Shapiro from Lawndale Capital. .

Yes, a follow-up. I realize you may be limited in what you can say, but maybe you can give at least a broad spectrum here on the rights offering you've discussed as a source of financing for the acquisition. You've done a past rights offering where participation was limited to the largest shareholders.

Will all shareholders be able to participate this time? And who -- or how will the backstop be configured?.

Sure. On the rights offering, our intent is for it to be available to all shareholders. Other items that I can provide at this point is we anticipate the size will be approximately $75 million.

And as it relates to the backstop, at this point in time, as we referenced in our press release, we have a bridge facility and a term loan commitment in place that we feel like adequately provides capital commitments that, in the event that we're unable to successfully complete the rights offering, we would be able to close the acquisition with the financing that we have in place today.

So the backstop is really structured through the bridge facility, and we will provide any additional details if we feel like it's necessary to have a broader backstop for the rights offering. .

Okay. And then a follow-up on your operating results here. From the higher-costing inventory, you've cited as one of the reasons for the margin -- the gross profit, I don't know if it would be called a weakness. It had strengthened, but we're still not making enough money here.

What abnormal or nonrecurring lower crack spreads or margin do you feel Par suffered from in Q1 in the aggregate that appears not to be present in our current Q2? So what kind of bps difference are we talking about in Q2's performance that might come from clearing out that high-cost inventory?.

Good question. The cost that we incurred, and was, I would say, front-end weighted during the quarter, primarily rolled into the January time frame. And I think it's -- again, this would be an estimate on my part here as to what the impact is, but I think it's in the $5 million range as it relates to the higher-cost crude impact.

And then you've got a number of other issues, such as the hydro-cracker outage and ethanol. And there is a mandate in Hawaii that 10% of the gasoline is blended ethanol, and ultimately, the costs that you probably heard a lot of other West Coast distribution systems referencing in terms of ethanol did impact Hawaii as well.

And so I think if you include those costs, as well as the hydro-cracker items, it's likely another $5 million that's in addition to the incremental crude costs. .

Our next question comes from Edward Colliary [ph] from Arbiter Partners. .

You actually just answered my question.

But if I could ask, could you repeat what the Singapore and San Francisco representative crack spreads were for this quarter?.

Sure.

You're looking for the absolute dollar versus the relative range [ph]?.

Yes. .

Sure. Give us 1 second. Actually, if you have another question, I'll get someone to pull that right now, and we'll come back to you. .

That's -- actually, that's all I have at the moment. .

Okay. Well, if you want to get back in the queue, and then we'll come back and address it. .

Our next question comes from John Debs from Bodri Capital Management. .

I'm surprised you haven't talked about your oil and gas properties, you haven't talked about your large tax losses as important parts of the value of this company.

Could get some comments on those 2 areas, please?.

Sure. I think, starting on the tax loss, we currently have approximately a $1.3 billion net operating loss carryforward that's unrestricted at this point in time. And again, we actively manage that asset, and we feel like it gives us a unique advantage in evaluating additional opportunities, such as the Mid Pac acquisition.

And ultimately, that's something that's captive inside of Par, and we feel like allows us to generate internal funds and ultimately have a significant amount of flexibility that I would say, even other tax-advantaged entities, like an MLP, wouldn't have.

We're able to recycle cash and ultimately look for additional acquisition opportunities that we view as accretive. .

Yes, [indiscernible] the acquisition you've announced is certainly not going to have much of an impact on that $1.3 billion. You're going to have to think a lot bigger to take advantage of that asset. .

I think stabilizing the Hawaii business and growing that side of it, I think it's one step at a time for us. And again, growing this business is really one day at a time. And ultimately, we do have large aspirations for what Par can become and obviously feel like we have a unique asset that can allow us to evaluate larger opportunities in time.

And then as it relates to the oil and gas assets, we primarily focus on Piceance Energy. And again, we've got over 40,000 net acres that are primarily held by production in the Piceance Basin. About 80% of the production is natural gas by volume, and about 20% of it's natural gas liquids. We feel like we're in a repeatable basin.

We've got over 300 producing wells there and a very high success rate and feel like we've got a excellent partner and management team in the Piceance Energy and Laramie Energy II folks. Bob Boswell is the CEO of Piceance Energy, who I think has a tremendous background experience in the Piceance Basin.

And ultimately, the drilling program, the $3.3 million of capital that we're infusing into the business, we feel like is an accretive start to growing the production there and unlocking the undeveloped reserves that we have, a numerous number of locations there that we feel like we can ultimately pursue with significantly more capital than we're deploying today.

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Our next question comes from Edward Colliary [ph] from Arbiter Partners. .

I was just wondering if you had the spreads. .

Yes, sure. So when you look at the absolute spreads for Singapore, during Q1 '14, that was $6.59 a barrel. And when you look at San Francisco, it was $9.29. .

Our next question comes from Andrew Shapiro from Lawndale Capital. .

It's a direct follow-up. I just wanted to get clarification on your answer to my last question that you were speaking of $5 million in crack spread or inventory cost plus $5 million of the combination of ethanol and the outage. .

Correct. .

Our next question comes from John Craver [ph] from Waterstone Capital Management. .

I was just wondering if there was any update on the Wood River terminal. .

Sure. Thanks, John. Good question. As it relates to the Wood River terminal, the full development of that facility has been delayed at this point in time, and we are re-evaluating and renegotiating the level of commitment that we're interested in, in terms of the number of barrels that we'll throughput through that facility.

We're currently moving barrels through there today, albeit on a smaller scale than what we would ultimately -- or what we originally anticipated doing. So at this point in time, I'll come back to you with an update once we have it, but we're in active negotiations at this point in time. .

What do you think the timing on something like that is going to look like?.

I'll probably have a better feel for it at next quarter's conference call. .

[Operator Instructions] Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect..