Good day, and welcome to the Par Pacific First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Ashimi Patel. Please go ahead..

Thank you, Matt. Welcome to Par Pacific’s first quarter earnings conference call. Joining me today are William Pate, President and Chief Executive Officer; Will Monteleone, Chief Financial Officer; and Joseph Israel, President and Chief Executive Officer of Par Petroleum.

Before we begin, note that our comments today may include forward-looking statements. Any forward-looking statements are subject to change and are not guarantees of future performance or events. They are subject to risks and uncertainties and actual results may differ materially from these forward-looking statements.

Accordingly investors should not place undue reliance on forward-looking statements and we disclaim any obligation to update or revise them. I refer you to our investor presentation on our website and for filings with the SEC for non-GAAP reconciliations and additional information.

I’ll now turn the call over to our President and Chief Executive Officer, Bill Pate..

Thank you, Ashimi. Good morning to our conference call participants. Our first quarter results reflect the continuing demand suppression brought out by the global pandemic.

However, we noted several positive developments in the United States during the first quarter, an increase in vaccination rates, improving mobility trends, growing employment and increasing business openings. These factors indicate that our industry is at a key inflection point.

First quarter adjusted EBITDA was a loss of $43 million and adjusted net loss was $1.55 per share. These results included a $47 million non-cash prior period mark-to-market expense. In March, we were pleased to see substantial improvement in our refineries profitability.

This was a welcome change and market conditions continue to improve early in the second quarter. Air travel to Hawaii increased significantly with the advent of spring break. This growth boosted our Logistics segment utilization and profitability as neighbor island demand approached normal.

Passenger arrivals to the state are now approximately 65% of pre-pandemic levels, primarily driven by increases in domestic travel from the U.S. Mainland. International arrivals continue to lag domestic trends due to lower vaccination rates in key nations like Japan.

Despite the slow international tourist recovery in Hawaii, we can operate our refinery in the range of 85,000 barrels per day and easily place all our refined product in local markets. On the mainland product cracks have improved seasonally as inventories have returned to normal levels and refined product demand recovers.

Cracks are improved over prior year, even when adjusted for the record RINs prices. The Texas freeze has not got a number of refining units and as a result inventories are now at normal and even low levels in some paths. Wyoming has particularly benefited from the improving environment.

We expect our retail segment to rebound from the weaker Q1 performance as crude oil prices stabilized and traffic volumes increase. Our Northwest retail unit began rebranding to our proprietary nomnom convenience store brand this winter and we expect this initiative will boost segment profit in coming quarters.

In Washington State, several pieces of legislation have been passed to help reduce greenhouse gas emissions. If these bills are signed by Governor Inslee, they will enact cap-and-trade limitations on greenhouse gas emissions and low carbon fuel standard regulations similar to the California framework.

We expect these regulations will have a significant impact on the industry, although, establishing the regulatory framework will take time. We’re confident that our operations are well-positioned for these new regulations, given our low scope one greenhouse gas emissions, our newly completed renewables logistics system and our unique product yield.

During the first quarter, we closed two significant transactions to continue to increase our liquidity. We completed a $116 million sale-leaseback of certain real estate properties and an $87 million equity issuance. Our liquidity and net debt position are in the best shape, since the closing of our Tacoma refinery acquisition in January 2019.

Our current liquidity of $287 million is substantially greater than liquidity levels at the end of 2019, when we faced three major turnarounds and unbeknownst to us a historic refining downturn. Our net debt position is also down to $462 million, more than $45 million below our net debt level at year end 2019.

Overall, we anticipate improving profitability as the economy recovers. Forward cracks in Singapore are in steep contango anticipating increasing demand. Going forward, we expect much of the global demand growth to be distillate. Refined product demand softness is now largely concentrated in jet fuel.

The largest domestic jet fuel markets like the United States and China are rapidly recovering to pre-pandemic levels. Remaining demand recovery will largely revolve around international travel as countries open their borders to other markets.

While there is a limited global recovery underway, there are occasional setbacks like the current surge in India. Volatility is high as the market attempts to identify recovery trends. Nonetheless after the market has fully recovered, we expect a balanced market with high utilization as a result of the refinery closures during the pandemic.

At this time, I’ll turn it over to Joseph to discuss our operations in more detail..

Thank you, Bill. In the first quarter, our system demonstrated safe and reliable operations, along with the smooth execution of our planned turn around in Washington. No additional major maintenance is planned for the rest of the year for our entire system.

Demand recovery has supported margins improvement in all three markets, which has accelerated with a typical seasonal trend, mostly for our Wyoming and Washington refineries. Our post structural and contractual repositioning, mainly in Hawaii continue to support the lower margins capture. Wyoming 3-2-1 Index in the first quarter was $20.97 per barrel.

And our refinery throughput averaged approximately 15,000 barrels per day. Our realized adjusted gross margin in the quarter was $2.35 per barrel, including an approximately $8.50 per barrel of prior period month-to-month expense. Our production costs were slightly elevated at $8.10 per barrel due to timing.

But as mentioned in the past, we are expecting to average close to $6.50 per barrel on annual basis. So far in the second quarter, our Wyoming 3-2-1 Index has average over $28 per barrel and we are well-positioned to supply the strong demand, as we transition to the gasoline season in the Rocky Mountains.

Our second quarter throughput target is in the 17,000 to 18,000 barrels per day range. In Washington, we executed our planned 20 days oil-to-oil turn around on time and on budget. Our first quarter Pacific Northwest 5-2-2-1 Index was $11.46 per barrel on ANS basis.

And our refinery throughput, including the turnaround impact averaged approximately 32,000 barrels per day.

Our realized adjusted gross margin was a negative $1.33 per barrel, including an estimated negative $1.30 per barrel of turnaround impact and then approximately $3.38 per barrel period, mark-to-market of previous – prior period mark-to-market expense, production costs were $4.36 per barrel in the quarter.

So far in the second quarter outlook, 5-2-2-1 Index has averaged close to $15 per barrel and our plant throughput is approximately 39,000 barrels per day. NOI, our Singapore 3-1-2 Index in the first quarter of $3.80 per barrel on brent basis and our realized crude differential averaged $1.02 per barrel premium to brent.

Our throughput average approximately 81,000 barrels per day and our realized adjusted gross margin was a negative $0.46 per barrel including an approximately $3.57 per barrel of prior period mark-to-market expense.

Our production costs were $3.97 per barrel including approximately $0.40 per barrel of non-recurring maintenance and transition costs from our west. The fresh wave of COVID in Asia, demand recovery has slowed down and our Singapore 3-1-2 Index has averaged approximately $3.65 per barrel so far in the second quarter.

However, two reason, an activity surge NOI mainly from the U.S. Mainland is triggering higher demand for our products. Our estimated crude differential is $1.92 per barrel, premium to brent. And our second quarter through target is in the 82,000 to 85,000 barrels per day range.

The refinery team is focused on the bottle-necking opportunities to support crude flexibility, as we increased utilization and get closer to our $94,000 barrels per day nameplate capacity. In summary, we are excited to post turnaround activities behind and maximize our assets utilization, as we transition back for positive profitability territory.

And with that, I’ll turn the call over to Will to review our consolidated results..

Thank you, Joseph. First quarter adjusted EBITDA and adjusted earnings were a loss $43 million and $84 million or $1.55 per fully diluted share. Focusing on accounting items first, we’re finding results include a $47 million prior period, mark-to-market expense related to the 2019 and 2020 renewable fuel standard compliance years.

In addition, Wyoming refining results benefited from a $7 million first in first out benefit in a rising price environment. Impacting our GAAP results was a $64 million gain related to the sale of certain Hawaii retail real estate as well as approximately $1.5 million in debt extinguishment costs related to redeeming property level financing.

Shifting to segment results. Retail segment adjusted EBITDA contribution was $8 million compared to $16 million in the fourth quarter of 2020. The reduction was largely driven by margin compression and a rising price environment, while volumes remained below pre-pandemic levels.

The month of March showed a material improvement over the early part of the quarter with margin stabilizing and volumes beginning to grow compared to recent months. Same-store sales fuel volumes were down roughly 13%, while merchandise sales were up approximately 3%, compared to the first quarter of 2020.

The Logistics segment adjusted EBITDA contribution was $16 million, up $7 million from the fourth quarter of 2020. The improvement was driven by a full quarter of Hawaii neighbor island demand growth as well as increased Wyoming sales post turnaround. Washington throughput was marginally impacted by the turnaround activities during the quarter.

Hawaii neighbor island activity levels increased throughout the quarter culminated in March. Looking forward, a full quarter of March level demand would bode well for the second quarter Hawaii contributions. The Refining segment recorded segment adjusted EBITDA loss of $55 million.

The prior period non-cash mark-to-market expense of $47 million was split $26 million in Hawaii, $10 million in Washington and $11 million in Wyoming. Excluding the prior period mark-to-market expense Refining segment adjusted EBITDA would be a loss of $9 million.

Notwithstanding a rapidly increasing price environment that squeezed Hawaii refining to gross margins on fuel oil, we continue to see improvements in our adjusted gross margins relative to our Benchmark Indices.

Washington results were negatively impacted by compressed margins on asphalt in a rising flat price environment as well as lower sales due to turnaround activities. Wyoming saw improvement throughout the quarter with volumes and margins expanding steadily.

Laramie generated adjusted EBITDAX of $54 million and net income $40 million for the first quarter of 2021. The largest driver of this improved financial performance was gas price realizations of $6.83 related to favorable market positioning during winter storm Yuri.

First quarter cash consumed from operations was $31 million, excluding the impact of RINs and deferred turnaround expenditures, networking capital was a use of approximately $8 million. Capital expenditures were $8 million and accrued deferred turnaround expenditures were $6 million, totaling approximately $14 million.

Accrued cash interest equaled $16 million. Our quarter end liquidity, totaled $287 million, made up of $215 million in cash and $72 million in availability. This reflects the completion of the $116 million sale leaseback, repayment of the $53 million in property level obligations and the issuance of $87 million in common stock.

In addition, we have recently extended the J. Aron agreement by one month and expect to enter into a multi-year extension shortly. With our liquidity on hand, we are well-positioned to cash settle the upcoming convertible note if required, as well as consider other alternatives to reduce our funding costs.

First quarter total operating expense plus Logistics segment cost of goods sold increased approximately $4 million compared to the Q2 through Q4 2020 average.

The increase was largely driven by increased R&M expense, utility costs due to higher flat prices, insurance and approximately one month of a lease expense associated with the sale-leaseback transactions partially offset by reduced logistics commitments and other cost savings initiatives. This concludes our prepared remarks.

Operator, I’ll turn it back to you for Q&A..

We’ll now begin the question-and-answer session. [Operator Instructions] Our first question will come from Phil Gresh with J.P. Morgan. Please go ahead..

Yes. Hi, good morning. My first question would be just how you – you commented a bit in the prepared remarks about how you see things trending here in a second quarter.

Some of your peers have been willing to talk about April EBITDA performance, wasn’t sure if you’d be willing to lean out there and share any information there and in particular, how things are going in Hawaii. It looked like if you back out the mark-to-market effects it was a pretty strong capture rate in the first quarter. So, any color there..

Sure. Thanks, Phil. This is Bill. We’re definitely seeing a pretty significant change in profitability, especially if you compare January and February to March and on, but I think, we started to see really increased runs at all of our refineries in March.

And by the end of March, we’re really pushing the refineries and operation reliability then becomes the key factor to achieving nameplate. And so it’s more a matter of market trends. And you can see that in all of our markets with our market indices cracks have been improving.

And we believe we can improve our capture overtime in Hawaii, its largely related to some of the contractual improvements, but there are other factors as well. And obviously, by increasing throughput at every refinery, we also think we can get our operating costs down to a more manageable level.

So I think we’re at a point in the cycle where the profitability for our refining business will improve materially and you started to see the improvement from logistics in Q1, I’d point out that improvement was really on the backs of increased throughput in sales in March. And so we expect to see additional improvements in logistics going forward so.

Over all things, look pretty good. Retail obviously we did – we had a rougher quarter, but keep in mind that was on the back of an almost a record quarter in Q4. We also you’re starting to see some of the impact to the sale-leaseback because we closed that at the end of February.

So that will be a factor going forward and then we started transitioning our Northwest retail stores to our own brand and that has some disruption. But I do think going forward as we transition to that brand and that actually allows us to change our supply relationship and improve our profitability.

I think we’re really well positioned in all of our units as we move forward, as long as the market cooperates, and we’re starting to see that cooperation..

Okay, great. My second question would be a bit of a macro one. Appreciate all the updated colors that you’ve provided the slides around sensitivities et cetera. If I look at the Singapore crack spread, relative to the two U.S. crack spreads, they’ve all gotten – the two U.S.

crack spreads have gotten back to the five-year average levels, but were closer to it, whereas Singapore has lagged. And I think you’ve touched on some of the factors there.

But do you think that Singapore cracks can get back to normalized levels just with a demand recovery or do you see supply factors in Asia needing to come to bear to help balance the market..

Certainly, there’s been a significant increase in supply over the last year and a half, but keep in mind, there’s also been a lot of rationalization and even in the last 24 hours, Shell accelerated the reduction in their Singapore refinery.

It’s a 500,000 barrel a day refinery, they were supposed to ratchet it back to 300,000 barrels at the end of 2023. They announced in the last 48 hours that they’re going to do that at the end of July. So we are seeing supply change in the market.

I’d also point out that when you look at the Singapore cracks, keep in mind, it does not include the impact of RINs. And so a lot of the impact we’re seeing in the local in the mainland U.S. market is driven by higher RINs prices and higher agricultural prices, which drive ethanol and biofuels. You don’t have that impact in the Singapore Market.

And then the Singapore Market, I think there’s just more of an international factor there given international travel and the relationship of nations and how lockdown the countries are there. So I think that market will return to some kind of historical means but we’re going to – we’re in for a lot more volatility everywhere whether it’s the U.S.

or Asia just given all of the changes that are affecting the industry..

And let me add, a common theme in all of our markets, gasoline crack spread of course are strong as consumers are back on the road, but really the wild-card is jet fuel recovery, as we lost $3 million to $4 million barrels per day of demand in 2020.

And we’re having a harder time to recover there, especially with international flights and the challenge with jet fuel and this is a global challenge.

It holds the diesel crack spreads and down even with the very healthy demand profile, even today, it’s out for the diesel crack spreads to go up as long as the refineries need to continue and put jet fuel into diesel..

And to Joseph’s point I think what we typically track as a pretty good barometer of really that incentive is really just the jet regrade, basically the spread between jet fuel and Singapore diesel.

And again we’ve seen that narrowing over the last two weeks and again I think that’s a positive indicator for the relative value of those two products and ultimately, I think that’s a pretty good pretty good barometer to watch with respect to ultimately when jet starts getting produced on purpose is what I would say..

That make sense. Thanks a lot..

Our next question will come from Neil Mehta with Goldman Sachs. Please go ahead..

Hi, this is Carly on for Neil. Thanks for taking the questions this morning. Wanted to start off on retail.

The quarter was a little lighter than normal there and you touched on it a bit in the prepared remarks, but can you just walk through the moving pieces that impacted results in 1Q and then talk a little about how those dynamics have evolved into 2Q here across both your markets..

Sure. Carly, this Will. Yes, I think first on the volume inside, you can see in the first quarter our volumes even lagged, we were in the fourth quarter. Part of that is fewer days in the first quarter, but I think we also had just a little bit of a lull that occurred in our markets.

And so as I referenced, I think we view March as being materially different than probably January and February from a volumetric standpoint. And then you heard Bill reference this, we are also in the process in the Northwest of transitioning our brand really during the early part of the quarter and there’s some disruption that occurs with that.

And then the probably additional impactful pieces the rapid increase in crude prices compressed margins as we see typically see street prices are sticky and supply costs move faster.

So in a rapidly rising price environment like we are in Q1 we tend to see margin compression, so those are the biggest factors that impacted the compression on the retail side. And as Bill referenced, the stabilization of the crude flat prices as well as the ongoing recovery in our markets is positive for a rebound on the retail segment..

And Carly, this is Bill. I’d just add one other thing which is especially with respect to gasoline in Hawaii. It’s really a – it’s consumed largely by the local population. So, the employment trends are probably a bigger driver of gasoline consumption.

Particularly, for our network because we tend to be Hawaii focused, and so even as we see passenger arrivals ramping up in the neighbor islands, that’s not going to have the kind of impact on gasoline volume to that we’ll see on jet.

And what we really watch when we think about gasoline volumes returning to normal, but really watching a return to employment, because that’s what puts people back on the road in Hawaii.

And that’s probably going to lag and really depend on the international arrivals and a return to of the tourist population and the shopping population, if you will in Honolulu..

That’s helpful. Thank you. And then the follow-up is around RINs and appreciate you breaking out the mark-to-market impact there. We heard the Supreme Court oral arguments in the last couple of weeks.

So, I would love to get your read on the key takeaways from that process thus far and ultimately, how you see Pars exposure to RINs obligations for really the 2019 to 2021 compliance years..

Yes, this is Bill. And I’ll start and I’ll let Will kind of cover any of the granularity. But first of all I think the small refineries council did a great job of explaining why the law permits small refiners that demonstrate hardship to seek an exemption at any time.

And so – as you know, this has been the EPAs established policy, since the inception of the RFS back in 2007 and it’s been that way under three different administrations, two republican and one democratic administration. And only in the last few months, in the wake of the Tenth Circuit opinion had the EPA change that stance.

We certainly expect the Supreme Court to reverse the Tenth Circuit and I think when that happens, the EPA will grant us our waivers for 2019 and 2020. Will can cover how we account for that, but I think that’s why we have referenced the mark-to-market in a different way.

And I think the factors that are driving pricing are somewhat related to this issue. Unfortunately, RINs and this is probably unfortunate for a lot of administrative regulations.

It’s become more of a political instrument than a consistent policy and the only thing worse than government regulation, is government regulation that has become a political football..

Carly with respect to the accounting for the RINs as we referenced the $47 million mark-to-market, our net liability at the end of the first quarter was roughly, a $126 million based on the $1.38 average RIN price.

And so I think one thing you should just keep in mind as well as we look forward to managing this is ultimately the renewable fuel standard allows you to the first settlement for up to two consecutive compliance years. So what this would do is this would allow us to defer settlement of our 2021 compliance here until the 2023 time frame.

Now it’s a based on our operations and commercial activities, we estimate our year-end 2021 RINs would be valued at approximately a $100 million holding prices constant as of 3/31.

And so I think with this asset available to support our prior period settlement obligations, we think our net cash requirement to the extent, the court rules against us would be substantially less than $125 million.

And again, as Bill said, as the oral arguments recently occurred, I think we expect the Supreme Court to reverse the Lower Court’s decision in – and for the EPA to grant us the waivers for the 2019 and 2020 years..

I appreciate the color, thanks..

Our next question will come from Matthew Blair with Tudor, Pickering, Holt. Please go ahead..

Hi, good morning, everyone. Joseph, I was a little surprised if the crude guidance in Hawaii it looks like it’s getting more expensive for you by about $0.90 per barrel in Q2 compared to Q1.

Are there any particular crudes that are moving against you here? And could you also talk about how tanker costs are trending for you?.

Good morning, Matt. It’s not a question of quality and different type of crudes that we’re running this quarter versus the prior quarter.

Just remember the two-three months lag that we have on our crude pricing and in the crude that will be running in the second quarter has already positive of the recovery around the world and it’s built in the price you can see it in the flat price as well as the differentials..

Hi, Matt. This I Will. As Joseph referenced, the crude that we consume during the first quarter was largely procured or committed to during the late third or fourth quarter of 2020. So, reflecting probably more of the, a challenging market environment.

And so, again I think we’re seeing the shape of the curve also shift from contango and backwardation and then so those are the major factors that drive the modest increase on the crude side. And on the freight side, I think it’s been relatively stable. So again, I don’t think anything that we call out there. So….

Sounds good, thanks. And then Laramie put up excellent EBITDA numbers, $54 million, compared to about $12 million last year. But I guess through your accounting that doesn’t affect Pars EPS.

I guess, could you just talk about the economic benefits to Par and as Laramie, what is Laramie going to do with that extra cash generated? Does that go to debt reduction or I guess increased growth? Yes, just overall on Laramie would be great..

Matthew, you are correct, it doesn’t impact our financial results. Ultimately, I believe Laramie’s management plans is to take that incremental cash that was generated and use it to pay down debt.

And again I think Laramie is in a position where ultimately its capital structure is improving, but this is still a very challenging backdrop for a natural gas producer notwithstanding the impressive quarter that they had.

And so again, I think we’re continuing to work with Laramie management and the other stakeholders there to ensure that we maximize our potential value of our equity stake there overtime..

Great, thank you very much..

Our next question will come from Manav Gupta with Credit Suisse. Please go ahead..

Hi. I just had a couple of a quick accounting questions I think your mark-to-market number on RINs, you are indicating is $47 million. When we look through your adjusted EBITDA calculations and the number over there is RIN, loss in excess of net obligation at about $29 million.

Can you just help me reconcile those two numbers 47 verses 29?.

Sure Manav. This is Will. So keep in mind, it’s really two separate issues and I think to understand the non-GAAP adjustment, you first need to understand our GAAP accounting. And so again our GAAP accounting today is our liability for our RINs are carried at market. So in a rising price environment our liability is increasing.

Our assets are carried at cost. So the asset value is not increasing and what that non-GAAP adjustment reflects is really in a rising price environment, us increasing the value of our RIN assets to a market price. So again, it’s not related to the $47 million.

The $47 million reflects the fact that we have an open RIN position for the 2019 and 2020 years and the price increase. And so again that’s what the $47 million represents, is really the balance sheet item related to our prior period open position..

Okay, that’s very clear.

And just what is the open position in terms of number of gallons? Not the dollar amount, what’s the actual gallon open position at this point of time?.

We’re not going to share the volumes but just the dollars is approximately $125 million..

And you said that’s 131. Okay, thank you for taking my question. Thank you..

[Operator Instructions] Our next question will come from Jason Gabelman with Cowen. Please go ahead..

Yes, Hi. Thanks for taking my question. I first wanted to ask on the equity raise that you did. Can you just talk about the logic behind it, I mean, it seems like liquidity seems to be in a pretty good position right now.

So why do you decide to go ahead and issue more shares and can you just elaborate on where you’re going to potentially use those proceeds and I have a follow-up? Thanks..

Sure, Jason, thanks for the question. Yes, I think the principal process behind the equity raise was really trying to give us the tools that we need to avail ourselves of lowering our cost of senior debt funding.

Again, if you look at our weighted average cost of debt capital today, it’s around 8.5%, which is substantially higher than I think most of our peers. And so again, I think what the capital raise avails us of is ultimately the pathway towards reducing our cost of debt capital.

So I think that’s the principal thought process behind improving our liquidity and also the path forward that we’re evaluating. It also gives us additional flexibility in the way in which we could address the convertible note that matures in June..

Are you able to pay down certain debt without much pressure in cost?.

Yes. We do have pre-payable debt and we do have debt that can be called per the indentures or credit agreements..

Can you just let us know which one those are?.

We’re not going to get into the specifics of which instruments we would use to pay down, but I think debt reduction and lowering our funding costs is I think one of our principal financial objectives this year..

Got it. And then my second question, just on the Hawaii margin, it does seem like the margin strengthened, excluding the written mark-to-market impacts.

Are you seeing any benefit from these new commercial contracts that you mentioned would be kicking in the first quarter? And can you give us any indication of what those magnitude of that benefit was and if that’s sticky and it’s going to continue into the future..

So Jason this is Will. I think the best way to measure that is to look at our Singapore 3-1-2 Index that we publish subtract the crude differential that we provide. And look at what we’ll say is the available margin and the market compare that against our adjusted gross margin per barrel.

And I think what you’ll see is in Q1, a trend that really started in Q4 but that ultimately are capture, our adjusted gross margin relative to those indices is improving. And that reflects the contractual improvements that we’ve been discussing over the last several quarters..

Great, thanks..

This concludes our question-and-answer session. I would like to turn the conference back over to William Pate for any closing remarks..

Thank you, operator. We ended the first quarter with our refineries running at their highest level since the beginning of 2020. And product cracks are moving upward as the world returns to normal. We look forward to increasing profitability on the back of these trends as we enter the summer driving season. Have a good day..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..