Greetings, and welcome to the Par Pacific Holdings Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ashimi Patel, Manager, Investor Relations for Par Pacific Holdings. Thank you. Ms. Patel, you may begin.

Thank you, Melissa. Welcome to Par Pacific's second 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 to our 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, and welcome to all of our conference call participants. The COVID pandemic has brought serious challenges to almost every person in the world. Like many industries, the energy sector has been hit pretty hard, and furthermore, the pandemic has impacted Hawaii's economy more than most regions, given the high reliance on air travel and tourism. While our geographic diversity and vertical integration has helped to offset the unprecedented impact on our operations in Hawaii, our second quarter results reflect difficult market conditions. During the second quarter, we reported negative adjusted EBITDA of $50 million, and an adjusted net loss of $1.70 per share. These results were driven principally by losses in our Hawaii refining unit, which had negative adjusted EBITDA of $70 million due to low throughput and negative realized gross margin. In response to weak demand, global refining throughput has been cut to near minimum rates, and yet supply continues to outpace demand for refined products, resulting in some of the most significant inventory builds in history. For this same reason, many refineries in the U.S. and elsewhere have permanently shut their operations, which is promising for well-positioned refineries like ours. With the virtual halt of commercial air traffic, jet fuel demand has dropped to record lows. Refiners are dropping all possible jet into diesel. Consequently, distillate inventories are currently at the highest level in 40 years. Finally, restrictions on mobility have greatly reduced the gasoline demand. Rising case levels in major demand areas in the U.S. like Texas and California have stifled the increase from the partial reopening that had taken place in the early part of the summer. On the crude supply side, both inland and waterborne crude differentials experienced extreme volatility. While crude differentials initially widened to reflect a surplus of…

Thank you, Bill, and good morning, everyone. In the second quarter, our system operated safely and efficiently to meet the customers’ demand and mitigate COVID-19 market headwinds. Our refineries are well tuned to produce what the market needs, and our cost structure continues to reflect strong reliability and cost control by our team. In the second quarter, our refining segment operating expense for the three refineries combined was approximately $9 million, or 16% under our average 2019 quarterly expenses. Starting with Wyoming. Our second quarter refinery throughput averaged approximately 13,000 barrels per day. Our 3-2-1 Index for the second quarter was $17.39 per barrel, and our realized adjusted gross margin was $6.22 per barrel. Our capture in Wyoming was negatively impacted by products pricing in Rapid City and the elevated crude diffs early in the quarter when oil price couldn't support production. On the other hand, FIFO increased our margin capture in Wyoming by approximately $3.70 per barrel. Our second quarter production costs in Wyoming were $7.72 per barrel. Improved gasoline demand with the challenged distillate market in the Rocky Mountains have supported refining utilization increase in PADD IV, up to 87% in July, well below the 100% in July of last year. So far in the quarter, the 3-2-1 Index has averaged just under $21 per barrel. Our 45 days turnaround in Wyoming is scheduled to start mid-September per plan. This is a five-year cycle major turnaround, and our team is well prepared to execute a scope. Our target throughput for the third quarter, including the turnaround impact is in the 13,000 to 14,000 barrels per day range. In Washington, our second quarter refinery throughput averaged approximately 36,000 barrels per day. Our second quarter throughput implies a relatively strong 85% utilized capacity compared to the 62% average for PADD…

Thank you, Joseph. Second quarter adjusted EBITDA and adjusted earnings were loss of $50 million and $91 million or $1.70 per fully diluted share. Focusing on accounting items first, Wyoming refining results include an approximate $3 million FIFO accounting benefits. In addition, solely impacting GAAP net income was the reversal of a non-cash lower of cost from market charge of approximately $158 million. Shifting to segment results. Retail segment's adjusted EBITDA contribution was $19 million driven by increased fuel margins and steady merchandise margins exceeding our prior record quarter by approximately $2 million. Same-store sales fuel volumes were down roughly 30% while merchandise sales were up approximately 1% compared to the second quarter of 2019. Gasoline demand has rebounded to approximately 80% of prior-year from the April troughs in the 50% range. Our merchandise sales have been much stronger as customers turn to our stores at times when social distancing measures make larger format retail locations more cumbersome to access. The logistics segment adjusted EBITDA contribution was $12 million, down $7 million from the 2019 quarterly average with reduced throughput in Hawaii causing most of this decline. Washington and Wyoming locations performed in line with throughput and sales. The refining segment recorded a segment adjusted EBITDA loss of $72 million. Hawaii results reflect the impact of elevated crude differentials paired with record low crack spreads. Q2 Hawaii crude differentials declined from Q1 peaks. However FIFO accounting and a slowing sales profile increased the weighting of higher cost crude procured before the pandemic versus cheaper crudes procured after the pandemic. As we look forward to the third quarter, while we expect to lose approximately 30 days of manufacturing activity due to the turnaround, our storage flexibility and make up capacity allow us to partially mitigate loss manufacturing gross margin. Washington and…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Neil Mehta with Goldman Sachs. Please proceed with your question.

Great. Can you guys hear me okay?

Yes. Good morning, Neil.

Good morning. Well, first question is around Hawaii, not surprisingly, and obviously, very challenging results in the second quarter, consistent with the economic environment and the crude differentials. Bill, maybe you could start off by talking about how you think about the pace of recovery? And when we talk about recovery, the demand side, but also the margin side. And then related to that, if you could also make some comments about capacity and whether you think you need to right-size the Hawaii business or you think you have the right – this business has the right scale for the long-term?

Sure. Let me start by saying that, I think the issues that we're dealing with in Hawaii relate principally to crack, which obviously relate to contracts as well, more so than volume. Volume obviously helps, as I mentioned, some resumption in air travel would actually help our logistics network, it probably wouldn't have a significant impact on our refining business with the shutdown of Par West. We have the flexibility to run that crude unit when the demand from – for jet fuel is high, but in the current environment with the shutdown of that unit, we can actually run quite efficiently with our existing units. And so then the question really becomes when do cracks come back. We took the perspective and continue to believe that the cracks are going to be determined largely by global inventories, and given the pandemic, you can't wait for that to happen. So we have been working aggressively with our customers in the community. And as contracts have rolled over, we've been working with our customers to improve the economics associated with our sales to ensure that we get additional profitability even without a resumption in cracks. And I think the worst is behind us. The other – the other advantage, I think we're going to see is diffs have actually – they were very high at the beginning of the year, going into the calendar year because of IMO 2020. As Will noted, when the sales slowed down, we were essentially consuming on a FIFO basis, some higher cost crude, that's largely behind us. As Joseph noticed, that our diffs have improved materially from Q2 over Q1, and of course from Q3 over Q2. And so I think that's going to help us as well. And then in terms of capacity, let me just address that quickly, I mean I think I've already answered it, but with the two crude units, our ability to restart the West unit if capacity ramps up is there, but I would point out that the real the determination for the restart of the crude unit is going to be economic, which is going to relate to the cracks in the environment.

That's very clear, Bill. Thank you for those comments. The follow-up is just on the retail side. You had a great quarter there for whatever some departures worth. We think the retail business is worth $8 a share, the level in the stock is trading below that which might represent highlights just the value of your stock at these levels, but how do you think about unlocking the value of retail? Is there anything you can do to continue to highlight and illuminate the value there? Because it's a large driver of the business and people often think of you as refining first and retail second when there’s a lot of value in retail.

Yes. We continue to believe as a operator downstream systems in niche markets, but it's very important to be integrated. And certainly, the profitability of our retail business was very strong in the second quarter; not just in Hawaii, we also had good profitability in the Pacific Northwest. And as we grow our business, we want to grow our retail business in line with it, but with trailing EBITDA that's north of $65 million, we have a very strong franchise and we believe that franchise is a significant contributor of free cash flow to our overall enterprise. So for us, we think the value really will be realized as the free cash flow of the enterprise is recognized. And I think that the key is going to be getting through these turnarounds and ultimately a resumption of the global economy. And with that in hand, I don't know why we shouldn't be a significant producer of free cash flow.

Thanks, guys. I appreciate it.

Thank you. Our next question comes from the line of Matthew Blair with Tudor, Pickering, Holt. Please proceed with your question.

Hey, good morning, Bill and Will. Can you guys hear me okay?

Yes. Clearly.

Good morning.

Great, great. So we've seen some refinery closures in the West Coast and the Rockies. I was hoping you could just provide your perspective on how that might impact supply demand fundamentals both in the short-term as well as the long-term for your markets.

Yes. I mean if you think about it, we've had two refineries that have closed in the last six months, because even though the Dickinson refinery was announced several years ago, I think the actual closure took place this spring and then obviously, Cheyenne had their last crude running through I think in the last 10 days. So that will have an impact on our Wyoming operations. We haven't seen that yet. But – and frankly the shutdown of those refineries in the near terms, probably not going to have a significant impact, because the decline in demand overall nationally has a much more significant impact than the shutdown of those refineries. And I think you've seen the same thing on the West Coast, Martinez has been down for a while, Marathon's announcement that that's going to be converted to an R&D facility and will no longer be producing carbon-based fuels. I think that was already baked into the market. People have always said that the West Coast is 1 to 1.5 refineries long, and I think this just reflects that. But I think when you will see it is in the long-term as demand picks up and in particular as the export opportunities on the West Coast pick up, namely, South America, you're going to see more of a draw, and I think you're just going to have more tightness on the West Coast market. I don't know if you'd add anything to that, Joseph?

No, I think Will is right, long-term impact for the industry, short-term, we will be patient waiting for the demand to come back.

Sounds good. And then just to recap on the crude differential at Hawaii. So the third quarter, was your guidance at $1.88 benefit? And do you have any, I guess, early indication on what the fourth quarter might look like?

Yes, $1.88 is our guidance for third quarter, and we don't give a fourth quarter estimate, at this point, the market is so volatile and many things can change as we purchase our crude. So we find it premature.

Got it. Okay, thank you very much.

Thank you, Matthew.

Thank you. Our next question comes from the line of Brad Heffern with RBC Capital Markets. Please proceed with your question.

Hey, good morning, everyone. Thanks for taking the question.

Good morning, Brad.

So, I was curious about some of the comments you made on the contract. But I think in the past, you talked about having the $1 per barrel, Hawaii improvement this year, obviously, that goal is set in a very different environment. But I'm just curious, if what you're getting on the contract front is sort of over and above that prior target that you had?

It's a component of the prior target, but I think our forecast is substantially more than $1 at this point. It will – it really started with contracts that were rolling over on June 30. There are more contracts that are – have amended terms that become effective in July and late-August. And I think for Q4, we'll have the full impact of those contracts helping our business.

Okay, got it. And then just on the liquidity front, obviously, you guys did the debt offering and liquidity looks good right now. I'm just curious if we are in a significantly prolonged downturn, what are some of the other levers that you could pull that maybe wouldn't be obvious to us?

Hey, Brad, this is Will. I think the most evident one or most attractive assets that we hold is probably the real estate underlying a handful of our locations in Hawaii. So I think that's a – unencumbered assets that we hold up at the parent company level that we could monetize. We do have some debt on that at the parent company level, but believe that, that's an attractive real estate portfolio.

Okay, got it. Thank you.

Thank you. Our next question comes from the line of Manav Gupta with Credit Suisse. Please proceed with your question.

Hey, guys. On the retail front, you had a good 2Q. I'm just trying to understand between July and August, has that trend continued both on the fuel side and the merchandise side? Or has there any need of change versus 2Q in terms of retail segment?

Yes, Manav, I'd say that retail demand bottomed in April and then it gradually picked up almost on a linear basis week-by-week from the bottoming at the end of April. At this point, in Hawaii, demand is about 80% of the prior year. And in Spokane demand is closer to 90% of the prior year in terms of fuel sale. Merchandise in both cases is above our budget and at this point kind of above prior year, so we're seeing very strong store traffic, we're still seeing some reduction in demand, I don't really expect the demand, it changed dramatically from here. And needless to say, margins were very strong when crude prices declined with the lag there, and those have firmed up some, but it's been – continues to be a very strong and profitable business segment for us.

Thank you. A quick follow-up on the logistics side, given all the turnaround activity and lower throughput, should we assume 3Q earnings, something closer to the 2Q earnings or it should be more comparable to last year?

Yes, Manav, I think it's going to be tied closely to throughput, but as you heard in Joseph's guidance, in Hawaii, we're at 60,000 a day, throughput, and then again there is modest impact in Wyoming with a small part of the quarter being impacted by the turnaround activity. So I think you've got a pretty good proxy for what the Logistics segment looks like with lower throughputs with our second quarter results.

Thank you for taking my questions.

Thank you.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Jason Gabelman with Cowen & Company. Please proceed with your question.

Hey, good morning. I wanted to ask about the working capital impact from the quarter. It seemed like that helped cash flow, can you just disclose what that amount was and if that kind's of now, a sustainable amount or if there is going to be some volatility where that could reverse going forward? And I have a follow-up. Thanks.

Sure. So just to remind you, below the cash flow from operating sections of cash flow statement, we've got roughly $20 million of outflows that I referenced in my prepared remarks in the financing section of the cash flow statement. So that's one component piece, that's related to the changes in working capital. And if you look at the aggregate change in working capital, netting down all the LCM charges and all the other impacts, it's roughly $60 million, a benefit and again there's about the $20 million outflow that's there. And in terms of the forward impact, I think, difficult to predict the working capital swings. I think with changes in price and refined product builds and draws.

Yes, I guess the spirit of the question was, is some of the working capital benefit in 2Q expected to reverse in normal course, absent volatility in crude prices or not?

I don't think we expect it to reverse imminently.

Okay, great. And then just my follow-up on 2021 CapEx clearly this is an elevated year of maintenance. So I guess firstly, was there any thoughts around pushing this maintenance out to 2021 to defer some of the spent or did you like to take maintenance exactly, because what you said on the call that margin environment is weak right now. And then given the high turnaround spend this year, what does that mean for 2021 spending? Does that go back toward more of our run rate sustaining CapEx? Thanks.

Yes, this is Bill. Let me say that, yes, all three turnarounds, while the financial issues around it, we probably could differ that certainly could reduce the scope in some cases and reduce the capital, but given the environment, and given the opportunity to invest in our refineries at this point, we think that's the right decision to make going forward. And to your question about 2021, I think coming out of these turnarounds, if anything, CapEx should go down. We have no major capital requirements post these turnarounds. We've invested a fair amount this year in a facility in Tacoma that facilitates the movement renewable fuels through – across our dock in Tacoma. With that out of the way, with the turnarounds out of the way, I would think, once we complete the Tacoma turnaround early next or late next winter, we should have a considerable period of time when we have high free cash flow.

Great. Thanks.

Thank you. Our next question comes from the line of Andrew Shapiro with Lawndale Capital Management. Please proceed with your question.

Hi, guys.

Hey, Andrew.

Pardon me, if you mentioned in your prepared comments, was a little late to the call. Commercial jet fuel demand for you in the Hawaii area, what kind of levels is it at 50%, 20%, 80%. And similarly, where is the military demand, that's probably remains near the same or is it dropped as well?

No military demand is about the same and military demand in Hawaii is probably 30% of our contractual demand. Overall in the Hawaii market, the market is running right now at about 30% of pre-pandemic demand and that's up from a bottom and when it was – it bottomed at about an 80% decline or 20% of pre-pandemic demand.

Okay. And has there been guidance at all from the government – the state authorities as to stages and the timing of reopening things?

There has, but it's all dependent on improvements in the case rate, I mean, and the case rate has been growing in Hawaii recently and Andrew, you may have missed this part of the conversation earlier, but the key question for us in Hawaii is really not going to revolve around volumes, with the shutdown of the Par West unit we really don't need a full resumption of air traffic to generate profitability there. It's much more relates to cracks and our contracts with our customers in that market.

Okay. Great, thank you.

Thank you.

Thank you.

Thank you. Thank you. Our next question comes from the line of Patrick Sheffield with Beach Point Capital Management. Please proceed with your question.

Hey guys, thanks. My questions have been answered.

Thanks, Patrick.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Pate for any final comments.

Thank you, Melissa. While the market has been difficult over the past few months, I believe we're well-positioned for the future with a diversified business model and will generate significant free cash flow once we complete these three upcoming turnarounds and we see an improvement in the global economy. On behalf of our management and our customers and our communities, I also just want to thank our employees for their dedication and hard work. Have a good day.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for participation.