Good morning, and welcome to the Par Pacific Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Ashimi Patel, Senior Manager, Investor Relations. Please go ahead.

Thank you, Gary. Welcome to Par Pacific's Fourth Quarter Earnings Conference Call. Joining me today are William Pate, President and Chief Executive Officer; Will Monteleone, Chief Financial Officer; and Matt Vaughn, EVP, Retail. . 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, and good morning, everyone. We certainly live in interesting times. Market conditions in refined product demand improved significantly in all our regions during the second half of 2021. Full year adjusted EBITDA was $61 million and adjusted net loss was $1.72 per share. These results include a $46 million noncash mark-to-market expense for our 2019 and 2020 RFS compliance. Excluding this impact, refining segment adjusted EBITDA improved by over $160 million last year. Operationally, our teams performed well to close out the year. Wyoming production costs were $5.50 per barrel as the refinery ran extremely well through the fourth quarter. Full year production cost came in at a record low $6.22 per barrel. Given winter demand, first quarter throughput is expected to be 15,000 to 16,000 barrels per day. Hawaii production costs were $4.24 per barrel in the fourth quarter; and for the full year, production costs averaged $3.98 per barrel. Maintenance costs were $7 million higher in 2021 as we caught up on deferred maintenance from 2020 and energy costs were also a significant factor during the second half of the year. Higher oil prices increased utilities expense by over $0.30 per barrel when compared to the first half of 2021. First quarter throughput is expected to increase to 82,000 to 85,000 barrels per day as we work to meet rising demand in Hawaii. Tacoma production costs were $4.30 per barrel, up from third quarter production cost of $3.60 per barrel due to end of run conditions and related throughput shortfalls. Despite significant flooding and a freeze in the Pacific Northwest that caused widespread outages, our Tacoma refinery continued to receive crude shipments and operated throughout December. We began a major turnaround at Tacoma during early January, and we expect to restart our refinery generally as…

Thank you, Bill. While COVID-19 continues to present challenges to the retail segment, we grew our margins inside the store last year while dealing with several product in inflationary challenges. Retail segment reported adjusted EBITDA of $47.1 million for the full year 2021 compared to $64.7 million in 2020. Fuel volumes increased by 6% over the prior year, but they remain 13% below 2019. We do not expect fuel volumes to rebound until international travel returns to Hawaii. Fuel margins were tempered by rising operating costs, the entire industry is incurring in terms of increased fuel costs, labor and higher credit card fees. Merchandise revenue increased by 2% compared to each of 2020 and 2019. Packaged beverages and edible grocery products continued to perform well. Merchandise sales have been impacted by labor shortages, forcing temporary store closures for periods of time. We have instituted hiring and retention initiatives, including bonuses and other offers as well as increased recruitment capacity. Supply chain issues have persisted across the segment due to shortages of warehouse workers and truck drivers. This has resulted in shelf vacancies for several of our product offerings and challenging our prepared foods category. Our retail team has taken steps to address these issues by sourcing alternative products and working closely with our partners to find solutions. Last year, we successfully completed rebranding our stores in the Pacific Northwest to our proprietary nomnom brand. We are working to expand our brand in that area, including reaching an agreement in principle to construct a new store in the Greater Washington Area. There are several other sites in the region we are evaluating. They're all -- that are attractive for new to industry developments. We believe new sites will provide substantially greater store contribution than older, smaller retail locations. Looking ahead, we are continuing to explore and roll out a variety of frictionless checkout innovations, including self-checkout options in various of our stores. We are currently in the process of implementing localized pricing at our fuel stations in Northwest Retail as well as expanding our prepared food offerings generally across the system. We are also exploring other net initiatives to increase our merchandise revenue across the network. I'll now turn the call over to Will to address the financials.

Thank you, Matt. Fourth quarter adjusted EBITDA and adjusted earnings were $27 million and a loss of $13 million or $0.22 per fully diluted share. Focusing on accounting items first. Refining results include a $1 million noncash mark-to-market loss related to the 2019 and 2020 RFS compliance shares. Excluding the mark-to-market RINs expense, our adjusted EBITDA and adjusted earnings per share was $28 million and a loss of $0.20 per share, respectively. Shifting to segment results. The Logistics segment adjusted EBITDA contribution was $19 million, consistent with last quarter. Steady volumes kept our logistics assets well utilized during the quarter. Excluding the RIN mark-to-market impact, refining segment adjusted EBITDA was $10 million compared to $35 million in the third quarter. Focusing on Hawaii, first. The fourth quarter Singapore 3-1-2 Index increased approximately $4.30 per barrel to $10.49. Feedstock costs were approximately $2.66 premium to ICE Brent compared to the initially provided estimate of $2.88. Putting the 3-1-2 and the feedstock indexes together, the overall margin environment improved about $3.90 per barrel versus the third quarter. The third quarter was a strong performance for the Hawaii adjusted gross margin relative to market conditions, so a difficult comparison. However, a few items to call out that impacted our adjusted gross margin during the fourth quarter versus the third quarter: one, approximately $8 million crack spread hedging loss or about $1 per barrel; two, approximately $0.50 per barrel impact of price lag; and three, approximately $0.50 per barrel impact related to increased backwardation; and four, increased ethanol blending costs of about $0.10 per barrel. Collectively, these reduced our capture by approximately $2 per barrel. I'd like to take a few minutes to discuss the rationale of our product crack hedging framework. The length of Hawaii's supply chain requires forward crude commitments up to…

The first question is from Carly Davenport with Goldman Sachs.

Just wanted to kind of start on your comments around the share buybacks. We know you've got the NCIB in place and have kind of started to execute there. So just wanted to kind of get your thoughts on potential trajectory of executing on that program throughout the year. And is there any other options that you're looking at to sort of address some of the valuation dislocation that we've seen over the last few months?

It's Will. I think with respect to the share repurchases, I think we're going to continue to be opportunistic and price sensitive with respect to when we enter the market. And again, I think the program that we put in place, again, was really to address activities that we may undertake while we are in a blackout period. With respect to kind of closing future gap -- valuation gap items, again, I think driving core business performance across each of our key segments, I think is a critical aspect of really going forward free cash flow and improving our overall capital structure, also turn it over to Bill for any additional comments you'd like to make.

No. Will, I think you hit the nail on the head. The key thing is we have to get back to profitability. Market conditions are good. Our team actually had a very strong year operationally last year. If we execute this year the way we did last year, and we have the permissive market conditions, I expect will be generating significant cash flow and that will give us options in a number of different areas. But I think as we return to profitability, we also have to refocus our efforts on growth.

Great. And then I guess kind of going off of that, just kind of around broader capital allocation. There has been a number of reported assets on the market in a few niche markets in the U.S. from a refining perspective. So just kind of curious to get your temperature around what you're seeing in the M&A environment, particularly in the refining space or perhaps even retail and kind of where you'd rank that piece in terms of your capital allocation priorities?

Well, I think as we've said, our first priority always has been reducing our cost of capital, but I also believe that with the levels of debt that we have right now, we can start to think about growth. I think we've been very clear about the areas that are of strategic interest to us. And the PADD IV, the Rockies, the Pacific basin, there are circumstances where I think they are existing operations that are a very good fit with our current portfolio, and we'll continue to evaluate those opportunities, also taking into account our limited access to capital.

The next question is from Phil Gresh with JPMorgan.

My first question would just be around Hawaii. Obviously, Will, you talked about a lot of the different moving pieces here, especially in the first quarter. But if we step back and think about where the crack spreads are, the differentials, the backwardation. Just in general, how do you think about longer-term levels of potential EBITDA that you think you could generate there? Or just any color just how you think about the framework for Hawaii?

This is Bill. Let me start, and I'm going to turn it over to Will to get into some of the capture issues. But I would just say, generally, our team has made a lot of progress in repositioning Hawaii over the last few years. And if you think about where our breakeven is today versus where it was circa 2017, 2018, it's changed materially. It's changed because the market's imbalance, and it's changed because we're still the best supplier, the low cost and highest quality supplier appeals to a market that is in dire need of our product. I personally also just I believe that the change in the Asian marketplace has benefited us with the Chinese reforms that I mentioned and just generally a more balanced market in Singapore and the rest of Asia. All of that augurs well for our position in the market going forward. Will, do you want to cover the capture issue?

Sure. So I think, Phil, quarter-to-quarter is going to continue to be noisy when you think about the complexities around Hawaii. But I think if you look at it annually, which I think is probably the best sort of time horizon and you compare 2021 versus, let's say, 2018. You can see that our adjusted gross margin per barrel compared to the market index minus our provided feedstock cost has improved by nearly $4 per barrel. Now that's $120 million to $140 million annual improvement of kind of capture when you think about it annually. And so again, I think that's really to quantify some of Bill's comments with respect to reposition. I think it's important to keep that in mind. And then I do think with a higher crude price environment like we're currently in, we are probably facing an additional $0.30 to $0.40 per barrel of higher operating costs via indirect cost that flow through OpEx plus our yield, right? So again, I think that's probably the major adjustment that we would suggest in a higher crude price environment to some of the breakeven math that we provided in prior quarters. But otherwise, I think the contract improvements and where the business is heading there still is consistent with our prior thought process and notwithstanding the quarter-to-quarter volatility that we're going to see around rapid changes in flat price, et cetera.

Got it. That's very helpful. And then, obviously, you said you've started the buyback here. But how do you more broadly think about target balance sheet leverage and where you want to get to? And whether you think the deleveraging is just, say, a higher EBITDA? Or you actually want to paydown some debt?

Sure. So I think, Phil, we're more comfortable at this point with the gross amount of debt that we're carrying given our current outlook. And I think we'll continue to be opportunistic on our share repurchases. I think, really, our main objective on the capital structure is to reduce our cost of capital, so we can competitively resume our growth objectives. And so again, I think while our RINS do remain a contingency, we're going to carry some excess liquidity. And again, we're going to also separately be considering some measures to simplify our working capital financing. So those are some of our kind of broader thoughts on capital allocation at the moment. And I don't think gross debt paydown is necessarily as I have a priority as it had been in prior periods given the improvement in outlook.

Right. And with respect to working capital, how much would you expect to reverse from what we saw in the fourth quarter?

Yes. I think it's a dangerous game to forecast with moving prices like we're seeing at this juncture. But again, I think the intermediation that we have should provide ultimately mechanisms for us to catch up again. So I think a decent chunk of that $40 million that we've called out, it's probably a good target to think about. And then I think the other parts are going to move based on flat price and volumes. So again, I think we do need to carry some liquidity cushion to deal with these varying type of movements.

[Operator Instructions] The next question is from Matthew Blair with Tudor, Pickering, Holt.

I wanted to follow up on the co-feed opportunity and see if you could provide any additional incremental details here, which plants would you think about doing this at? Any preliminary cost estimates? Any sort of timing we should think about? And then on the feedstocks, would this be vegetable oils or do you think you could run low [CICs]? And then finally, I just want to confirm, I don't believe that you would get a BTC with the co-feed process. And so if you could just talk about how you think about economics without that $1 BTC.

Sure. And I think to be clear, when we think about co-feed, we're really thinking about an emerging LCFS standard in Washington. So we're sort of targeting renewable diesel to enter that market given our commercial position in the market. There's an opportunity for us. Given the lack of commercial position in other markets with LTFS, I think it's a little harder for a new entrant. But co-feeding is low capital solution. It's small. The opportunity in Washington, for example, is less than 1,000 barrels a day, but it's also less than a couple of million dollars to essentially some modifications to our catalysts in a hydrotreater. So it's low cost. There's a lot of flexibility. We can shift toward fossil fuel hydrocarbons away from plant-based hydrocarbons if we want. And to your point, it really depends on processed RBDSPO, so the CI issues will be significant as well. As to the BTC, still up in the air in terms of the treatment for co-feeding. Certainly won't get a full BTC, but there are opportunities to get a portion of that BTC for co-feeding. I think one of our focuses is just balancing the market given the volatility of RINS and uncertainty over how the EPA is going to address RINS going forward and ensuring that we've got that flexibility.

Great. Sounds good. And then it looks like Hawaii air travel has really picked up in the past month. Passenger counts are back actually to 2019 levels. And I just was hoping you could comment on whether this is coming through in your system and jet demand in your Hawaii refinery.

Yes. I think one of the issues that is evident in our throughput in the fourth quarter was the fact that we did hit an air pocket where air travel did decline, and it was largely related to Omicron. Our hope and from talking to our local managers as well as some of our customers is that as spring picks up, you're going to start to see some international travel. The key one really would be when Japan relaxes standards for quarantining for returning travelers. But we are starting to see as Omicron abates an increase -- and that's why we're focused on increasing our throughput in Hawaii. We scaled it back a little bit because we did we found that some of the nominations in November and December, our customers didn't come through with those as they started to cut back on flights, and now we're starting to see that ramp up again. So again, very happy with where Hawaii is, and I think there's opportunities, we can see a significant profitability or positioning ourselves for significant profitability in that market as the market fully returns.

Got it. And then one final clarification. When you said that at Washington, you could raise the WCS feed by 15%. We normally think of that plant is roughly 2/3 Bakken, 1/3 WCS. So would it be roughly like 50-50 after the turnaround is complete?

No, it's 15% of the 1/3. I think it's probably 1,500 to 2,000 barrels that we're talking about of increased...

The next question is from Jason Gabelman with Cowen.

First, just a clarification on Hawaii OpEx. You mentioned $0.30 to $0.40 higher because of the higher oil prices. Is $4 a barrel then kind of the right number for OpEx moving forward? Or is it a different number? Any other color there. And then secondly, yes. I'll let you answer, then I'll ask my next one.

Yes, what I was going to say, I think that's a pretty good target. The one thing I keep in mind is we're very focused on increasing our throughput. We think there are opportunities to increase throughput, and if we're successful in that effort, that will actually help to bring us down. I think at the current throughput levels, $4 is a pretty good number. We came in roughly at that number for the year. Even with high prices, though, if we get our throughput up, I think we can get back down below $4.

What's the throughput target at the plant?

I think I mentioned in Q1, we're at kind of 82 to 85, and we hope through the year, we can get above that number. Those are the key opportunities for our organization and our team in Hawaii this year.

Great. And then the second one, just on the broader Asian crack trends. I know you mentioned the China tax regime supporting the market there. Can you just provide a bit more detail on that? Is it just lower product exports out of China? Or are there other things at play? And kind of connected to that, we've seen global gas prices remain high, and it seems like that's also kind of supportive of global cracks. Is that another factor supporting the Asian refining market and any other factors at play as we think through the dynamics there?

Yes, this is Bill. Let me start, and I'll let Will jump in. Certainly, natural -- high natural gas prices are a factor globally, and it does affect the Asian market. There are some Asian refineries that are actually relying on natural gas, especially on the mainland. The Chinese tax reforms I think it probably had the biggest impact because once the Chinese started to bring higher complexity refineries on that really are focused on their petrochemical sector, it allowed them to back out of the market some imported intermediates that were used with simpler refineries that were then blending these feedstocks and to produce lower quality gasoline and lower-cost quality diesel. So LCO that was coming in from Korea, for example, started to get taxed. And I think it was a conscious decision on the part of the government as they had these more complex refineries coming up to improve the -- both the quality and the conversion rate of their crude. So -- and I think at the same time, the governments also signaled that exports of refined products is not something they want to be engaged in going forward, and they've even talked about capping the refining capacity in the market, largely to focus on meeting domestic demand as opposed to being an exporter of crude oil and related products. And I think all of that has both had an impact on actual exports in the last 6 to 9 months, which has affected Singapore inventories, which are historically at lower levels and also signals going forward that the Chinese policy is focused on a more balanced production and demand -- supply and demand profile within the market. Will, I don't know if you want to add anything to that?

No, well covered.

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. I want to thank everybody for joining us today, and I want to thank and congratulate our team on an excellent year operationally last year. We look forward to a profitable year in 2022 as a more favorable market for our products continues to emerge. Have a good day.

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