PBF Energy Inc
NYSE:PBF
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PBF Energy Inc
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Good day, everyone, and welcome to the PBF Energy Fourth Quarter 2022 Earnings Conference Call and Webcast. [Operator Instructions] Please note this conference is being recorded.
It's now my pleasure to turn the floor over to Colin Murray of Investor Relations. Sir, you may begin.
Thank you, Kevin. Good morning, and welcome to today's call. With me today are Tom Nimbley, our CEO; Matt Lucey, our President; Karen Davis, our CFO; and several other members of our management team. Copies of today's earnings release and our 10-K filing, including supplemental information are available on our website.
Before getting started, I'd like to direct your attention to the Safe Harbor statement contained in today's press release. Statements in our press release and those made on this call that express the company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the safe harbor provisions under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we described in our filings with the SEC. Consistent with our prior periods, we will discuss our results today, excluding special items.
In today's press release, we described the noncash special items included in our quarterly results. The cumulative impact of the special items increased fourth quarter net income by an after-tax amount of approximately $60 million or $0.45 per share related primarily to net changes in fair value of contingent consideration. Additionally, please note that our fourth quarter tax rate was elevated relative to prior quarters as a result of the activities in the quarter and fiscal year adjustments. For modeling purposes, please use 26% as an effective tax rate for 2023.
Also included in today's press release is guidance information related to our operations for the year. For any questions on these items or follow-up questions after today's call, please contact Investor Relations. For reconciliations of any non-GAAP measures mentioned on today's call, please refer to the supplemental tables provided in today's press release.
I'll now turn the call over to Tom.
Thanks, Colin. Good morning, everyone, and thank you for joining our call. Fourth quarter capped off a transformative year for PBF. In 2022, our assets generated almost $3 billion [ph] of income and earned over $22 per share. PBF ended the year with cash in excess of debt. The market with its tight supply and demand balance, provided tailwinds and the operations of our refineries enabled us to capitalize on the opportunity. Our operations and the focus on strengthening our balance sheet over the course of 2022, allowed us to begin to generate incremental returns for our investors. In addition to renewing our dividend at $0.20 per share for the third quarter of 2022, we announced a $500 million share repurchase program. Under that program, we have purchased just over 5 million shares for approximately $189 million.
With favorable market conditions and a solid operating performance, we expect to be positioned to further reward shareholders with increasing returns. To deliver on these commitments, PBF remains focused on our operations and strengthening our financial position. Our assets require continual reinvestment to sustain high levels of safe, reliable operations to meet demand for our essential products. While remaining committed to our core refining business, we are also investing in and exploring new opportunities to produce low carbon fuels. Refiners follow the markets and responds to demands of the consumer because we are price takers rather than price makers. In 2022, the market was telling us to provide as much refined products as possible. We did. 2023 has picked up where 2022 left off. We are going through normal seasonal gyrations when it comes to specific product demand across our regions. But overall, the market is continuing to call for refined products, and as a result, requires high utilization rates from refiners.
Many of the key themes that emerged throughout 2022 are continuing to set the stage for 2023. Global inventories of oil remained low, but are gradually building off a very low base. The market needs this to happen, but it has been proven difficult for inventories to rise to normal levels in the face of demand keeping pace with supply. This is true on the refining product side as well. Refineries are being called to run at high utilization to meet demand. And in 2023, this will be more of a challenge with higher-than-average industry-wide maintenance activity. Global trade patterns are continuing to adjust to the sanctions in embargoes of Russian crude oil and products. We are seeing the impacts of this on the crude side but have yet to witness how the market will accommodate disruptions on the product side. The prospect of China reopening has led to projections of increasing demand in the Asia Pacific region that will have a knock-on impact globally. We remain constructive on product balances in the Atlantic Basin, especially as we look ahead to peak driving season.
Global capacity additions are expected to commence operations throughout 2023, which should help meet rising demand. The cumulative effect of all this is that we are constructive on the refining environment in 2023, notwithstanding the amount of work to be completed in our refining system. With safe and reliable operations, we expect to continue the improvement in our financial position and be in a position to potentially increase shareholder returns. PBF is also pleased to announce a partnership with Eni sustainable mobility and the St. Bernard renewables project. We have been committed to the project from the asset and are proud to have a world-class partner joining us in this venture.
Lastly, I want to thank all of our employees. The market demanded a lot from PBF in 2022. In turn, PBF asked a lot from our employees, and they delivered. The efforts of our employees to keep our assets running safely and tanks for the products constantly on the move to our customers. enabled us to achieve this remarkable transformation. Thank you.
And with that, I will turn the call over to Matt.
Thanks, Tom, and Tom is correct. Our operating and financial results for 2022 in the fourth quarter are a direct reflection of the tireless work of our employees.
In 2022, we produced more than 340 million barrels of total products, the highest level of production our system has achieved with a utilization of over 92%. Again, a testament to the investments we made and continue making our refineries and the dedicated workers who make it happen every day. In 2023, consistent with industry peers, we have an above-average maintenance cycle to execute. That work has already started in Toledo, Chalmette and Martinez. The deep freeze in December directly impacted Toledo and Chalmette. But fortuitously, we were able to advance maintenance that had been planned for the first quarter, which will help mitigate the impact of the downtime. We will have these turnaround activities completed at Toledo and Chalmette in the coming weeks. We are currently conducting plan work at Martinez, which will be finished by the end of this month and have a turnaround starting soon on the East Coast. We have additional work at Torrance and Toledo in the fall.
One of the benefits of our geographically diverse, highly complex refining system is that we're able to strategically plan our maintenance to ensure we remain active in all markets and continue to provide needed products to our customers. Supplying the markets with our essential products is what we do and it was demanded of us by our consumers. Over 80% of the world's energy currently comes from fossil fuels. The energy supply cannot be rapidly changed through policies attempting to force premature transition without significant costs and supply disruptions. It is the impacts of changing laws, policies and politics that are mandating or incentivizing scarcity in parts of energy stack. Innovation and transition are good for society with -- when approached deliberately.
We should be looking at energy addition rather than a forced transition. All stakeholders need to engage constructively to focus on the goal of providing cleaner fuels while maintaining reliable and affordable energy sources that are the cornerstone of our high quality of life while elevating people into the middle class in developing regions. With that, we are more than pleased to have entered a partnership with Eni in our St. Bernard renewable project. This strategic partnership leverages the complementary experience and expertise of PBF and Eni. PBF brings experience in large capital project execution and fuels manufacturing as well as access to the California renewables market through our existing logistics footprint. Eni brings experience in sustainable feedstock sourcing and renewable fuels manufacturing, coupled with access to international markets beyond PBS' domestic footprint.
The joint venture reflects both partners commitment to deliver sustainable transportation fuels using low-carbon intensity feedstocks. As we have stated previously, we were intent on finding a partner that would add strategic value to the enterprise, and we believe we have done just that. We absolutely believe SBR will be even more successful with PBF and Eni working in concert. We have gone to great lengths in structuring the partnership to ensure a proper alignment of interest between the partners.
As I've stated, we could not be more pleased in forming this partnership with Eni. In further pursuit of increasing the potential energy options provided by PBF, we are also and separately part of a large consortium referred to as Mach 2, that's Mach 2, referring to the 2 Hs. We stand -- which stands for Mid-Atlantic clean hydrogen hub that is pursuing the development of a clean hydrogen hub in Delaware, Southeastern Pennsylvania and South Jersey. Our footprint in Delaware with established manufacturing and transportation infrastructure, provides an opportunity to generate incremental value for diversifying our product line with another fuel of the future, in this case, hydrogen.
While this project is in very early stage development, Mach 2 has received the encouraged designation from the Department of Energy and will continue to move the project forward. While the Mach 2 consortium has passed 1 hurdle, we are now in the process of submitting the application for funding with the DOE. The acceptance of that application will determine any funding allocation from the government and subsequently, the extent of future capital expenses in relation to any potential hydrogen business. While we continue to expand our alternatives, the forward refining market looks very favorable. We expect current volatility to persist but increasing consumer demand will continue to support high refinery utilization.
Now for the financial overview, I'd like to introduce and welcome our new full-time CFO, Karen Davis, No, I said full time as opposed to interim. The transition with Karen has been seamless, and we are thrilled she has agreed to take on the role. Karen brings on a wealth of industry experience as well as deep familiarity with PBF.
Karen?
Thanks, Matt.
As Tom mentioned, 2022 was a transformative year. PBF entered the year looking forward to an above mid-cycle environment and with plans to implement a multiyear process post pandemic strengthening of the balance sheet. We repaid $2.3 billion of debt in 2022 and have now reduced our debt by more than $3 billion since the pandemic after including our recent redemption of the 525 million notes of PBF Logistics. During the fourth quarter, we also completed the buy-in of PBF Logistics which will capture approximately $40 million of cash that was leading our system annually as distribution while saving approximately $10 million in annual expenses. Additionally, PBF will now recognize 100% of the earnings due to the elimination of the noncontrolling interest related to PBF Logistics.
For the fourth quarter, we reported adjusted net income of $4.41 per share and adjusted EBITDA of over $1 billion. Our full year 2022 adjusted EBITDA was $4.7 billion. You should note that our fourth quarter EPS was impacted by a higher tax rate driven by several items. The largest of which related to unwinding the tax valuation allowance and adjustments related to the buy-in of PBF Logistics. We fully released our deferred tax valuation allowance during the first 3 quarters of the year, which had reduced our effective tax rate for those quarters below our normalized rate of 26%. Going forward, we expect our tax rate to return to a more normalized level as provided in our guidance.
Consolidated CapEx for the fourth quarter was approximately $327 million, which includes $184 million for refining and corporate and just over $140 million related to the continuing development of the St. Bernard renewables facility and $3 billion for PBF Logistics. Over the last 3 years, we used all available levers to maintain liquidity and demonstrate our commitment to prudent balance sheet management. As we sit here today, PBF's balance sheet is its strongest ever, and we are committed to maintaining that position. We have excess cash in excess of debt with sufficient liquidity to serve the needs of the business. Through the pandemic to the present, PBF maintained a level of cash above what is needed to operate the business and ensure sufficient liquidity.
As we progress through our punch list of the remaining items we plan to address we anticipate that over time, our cash should return to more normalized levels in the $750 million to $1 billion range. Our gross debt is now below pre-pandemic levels and at a level that we believe is currently appropriate and sustainable for our business.
Our financial performance over the past 1.5 years sets the stage for a re-rating of our future prospects. Quantitatively, we meet or exceed many investment-grade metrics. Our refinery should continue to demonstrate through cycle earnings power, and we are adding diversified earnings streams as we enter the low carbon fuel space. We will continue to exercise balance sheet discipline targeting rating agency-driven metrics. With our balance sheet 4 to 5 during the fourth quarter, we reinstated our quarterly dividend and implemented an active share repurchase program, returning over $180 million to our shareholders. With the macro backdrop for refining translating in higher mid-cycle financial performance, our highly complex and geographically diverse refining and logistics systems are well positioned to generate significant value and provide increased shareholder returns.
Operator, we completed our opening remarks, and we'd be pleased to take questions.
[Operator Instructions] Our first question today is coming from Roger Read from Wells Fargo.
Karen, welcome back, I think we get to say to PBF, not just welcome to. Question I'd love to dive into here is the most obvious one, which is this joint venture agreement with Eni, recognizing that it's a definitive agreement it hasn't closed I'm just curious when you expect it to close, is it an all-cash transaction up front? And where do you think the product goes? Does this mean it's more likely to go to Europe than to California, which I think most of us have assumed from the get-go?
Thank you, Roger. I'm going to turn that over to Matt. He and his team have done unbelievable work in bringing this to fruition, but I do want to reaffirm how pleased we are because all along, we had -- with the good year we had financially, we knew we could fund this project ourselves if we had to, but we had a strategic objective of finding a partner that would bring value to the JV. And as Matt mentioned, that's exactly what we did. So we have the right partnership going forward.
So Roger, I think you asked maybe 3 different questions, and feel free to follow up if there's anything else. But when -- look, we have to go through customary approval processes. We signed the agreement just over the last 24 hours. And so there's customary approval processes within our country, whether it's HSR/CFIUS [ph], there may be 1 or 2 other jurisdictions outside the U.S. that any needs to work through. So I expect it will be a couple of months before closing. It could be a little bit faster, it could be a little bit slower, but we do have to go through those sort of approval, regulatory processes. It is all cash -- the cash will be paid to PBF -- sort of split half and half between signing and -- I'm sorry, between closing and when the pretreatment unit becomes operable and so at closing, any will contribute to PBF about half of the purchase price. And then once the renewable diesel unit, which we expect to come online over the next month. And then once the pretreatment facility comes online, in both our operating in concert, the second payment will be made.
In regards to where the products go, this is very important, and it was very important in finding a partner where there's alignment of interest, as I mentioned, the products will go to whatever the highest netbacks wherever the markets are calling for the products the most. And so over the course of last year, that's been California. But it's very possible over the course of next year. It could be in Europe, regardless of where it is, the 2 partners are committed to delivering the products to what will be the highest economic benefit for the entity. And clearly, to the extent that Europe is going for the product, there's no question that Eni will be able to add significant value on our execution of that.
Appreciate that. And yes, I mean we're all kind of skilled and managed to put 3 parts in 1 question. My only follow-up is, Tom, I think you mentioned Atlantic Basin looks still pretty tight on the product side. Just what are your thoughts as we head towards spring and gasoline season, spring and early summer in terms of what may be competing product-wise imports from Europe, things like that.
Very good, Roger. And once again, you've demonstrated your ability to get a number of questions in. Congratulations. We are constructive. Obviously, all built on the fact that the inventories while I've been building, and I can't make sense of the stat numbers that came out yesterday. I don't know how we built $16 million accrued, but I'll leave that aside. The fact is inventories pretty much across the board across the -- in the U.S. and across the globe are tight. They remain well below the 5-year averages in most cases. And in PAD 1 [ph], even though there was a big build in PAD 1 [ph] in both gasoline and distillate yesterday, below the 5-year averages on gasoline and distillate. So we see -- we are constructive.
We are also constructive on or believe that we're going to see some tailwinds behind gasoline as we move into the driving season. We're going to obviously be going to low RVP gasoline. We're going to be taking the butanes out of gasoline. We're going to be taking octane away when we do that. because butane has a high octane, so we're going to wind up having some strength likely a widening of the ARPOB/PBOB [ph] spread. So overall, we think that things are looking reasonably positive for products and perhaps gasoline will be leading the way there.
Tom, would you have anything you would add to that?
I mean I think just to reiterate your point there, I mean, as gasoline's got a constructive setup as we're heading into the driving season. distillate has clearly been the market leader. It's gone through a little bit of a wobble with a mild winter and as we're really trying to work through with the Russian balances of gas oil is going, but certainly leadership at this point is -- could be moving towards gasoline, but the distillate balances still remain constructive as well.
Our next question is coming from Neil Mehta from Goldman Sachs.
Congrats, Karen and congrats on the joint venture. Maybe I'll start on the joint venture I think on the last call, the team indicated you think of the project is $400 million of normalized EBITDA. Just wanted to get a now cast of that number and remind us how much capital is left to be spent on the project at this point?
So if you look over the last year, EBITDA has ranged between $1 and $1.50 a gallon EBITDA margin. And we're going to be generating or producing just over 300 million gallons a year. So that being said, markets will tighten and loosen at different times. But that's what's happened over the last year, and that's sort of what it looks like currently. So we'll stick with that. In regards to how much of the project has been spent on, we have approximately $200 million left to spend, thereabouts. And then obviously, Andy will come in sort of when we close and when we become operable, that will offset the spending for PBF clearly.
Yes, that's really clear. Okay. And then on cash balances, you're at $2.2 billion. Karen, you had indicated you want to get to $750 million to $1 billion of cash over time. Do you have -- how should we think about the cadence of how long it takes to get to your normalized cash balance, especially because you got incremental cash coming in associated with the joint venture? And then what is your preferred way of getting that cash down? Is it through buybacks?
Again, multiple questions. But first, a reminder that although we did finish the year with a pretty high cash balance at $2.2 billion, there are a number of calls on that cash First of all, a reminder that we did redeem $525 million in additional debt just a few weeks ago. Matt mentioned completion of the project about $200 million, and we have a very heavy turnaround schedule in addition to repurchasing shares. So there will be a very disproportionate use of cash in the first half year. With respect to return of capital, financial resilience in the balance sheet are always going to come first. We're going to ensure that the base business is sufficiently funded and prepared to weather adverse marketing market conditions. And you should also be thinking that included in that we'll be funding our annual capital program, which should average in the $600 million to $650 million [ph] range over the long term.
Like 2023, where we have a heavy turnaround schedule, it will be more other years it will be less. And as the cash generates cash or as the business generates cash beyond that, then we'll expect to be in a position to continue and potentially increase shareholder returns. But given that we just restarted our dividend and approved our first buyback program. We're not in a position to comfortably provide an additional guidance on the pace of returns. Having said that, we believe it's important to maintain a competitive dividend with room to grow and to fund buyback programs when it's appropriate.
Your next question is coming from Doug Leggate from Bank of America.
Karen, congrats on the permanent seat. Now you have to deal with all of us. Forgive me for beating on Neil's question, but let me maybe just ask it differently. Why should we not think about the proceeds from the joint venture translating directly to share buybacks? Because your operating cash flow takes care of all the other things you talked about. So are we looking at a 15% buyback with the cash inflow from the JV?
Well, first of all, I'd say we are just delighted to be partnering with Eni and at the moment, just focused on closing the deal.
You're not discouraging me from thinking that way?
We would never discourage you to think any way you want. It's a futile -- any attempt would be futile. But look, we've been very, very focused on getting the transaction to the point where we are today. The transaction hasn't closed yet, and I learned a long, long time ago not to figure out ways to spend money that you don't have in your pocket yet. Clearly, the company will put forward policies that are appropriate at the appropriate time, but we have nothing else to add at the moment.
Terrific outcome regardless. Guys, my second question is kind of a micro question, but a little nuanced. At the end of last year, folks were getting pretty agitated about the heating oil position in the Northeast. And it seemed to us that was like the first normal winter without -- since COVID without Philadelphia Energy Solutions refinery in place, which there's clearly a change in dynamics of the East Coast market. So I guess my question is, what are your expectations for where I say the first normal driving season in the Northeast, which is obviously your backyard. Do you think the dynamics of that market of permanently shifted but perhaps not become fully apparent yet given we've had 3 years of COVID since that refinery shop. I'm just curious for your opinion.
That's a great question, Roger. I'll tell you my view.
It's Doug, Roger is the other guy.
I am sorry. Roger has already had his turn. I'm sorry, he does. Actually, I believe what you said is correct. We should go back to the fact that there's a couple of things that work in all benefit. But PES going down, it was a big deal. We -- that was obviously the largest refinery in PAD 1 [ph]. The pipelines are pretty much coming up from the Gulf Coast. So when you get -- and that was certainly the case with the distillate situation, as people were concerned that we would not be able to fill in the market. In addition to PES, we had come by chance go off-line as a result of the pandemic. So PAD 1 [ph] has gone into a situation where chronically, it was always been you all know this. It's a dumping ground for Europe to move gasoline in. Now we've got a different situation in Europe, and we have a significantly different situation in PAD 1 [ph] and in fact, in the U.S. and of course, the gold because of the amount of capacity that's been rationalized. So, I think it's got the potential to be a structurally short market.
And when you see -- we'll see, we're going to demonstrate it right now. Bayway FCC [ph] is going through a turnaround. That's a big gasoline producer, obviously, very large cat cracker. But we saw that manifest itself. We've seen it manifest itself in spiking jet prices and distillate prices where there was a concern about supplying the market. We're not going to see what we had last year, I don't believe. But in fact, I do think that is a strategic shift in capacity utilization. And we're going to have to run off or hard to meet the product demand in the country, in the world and in PAD 1 [ph].
[Operator Instructions] Our next question is coming from John Royall from JPMorgan.
I just had a question on the $8 to $8.50 per barrel OpEx guidance in 2023. It looks like a top fair amount from '22, which is already elevated despite lower natural gas. So has this increase all on maintenance? Or are there other drivers you should be thinking about?
Certainly, there are other drivers. And that right now, obviously, Henry Hub [ph] on gas prices, but that's not necessarily the true for the other regions in the country. So we've got some increases in energy cost, but we also are seeing inflationary pressures in a lot of the business that have resulted from the fact that inflation is high. So -- and the other thing we've got is the increase in turnarounds that obviously there's -- that's capital cost, but there were some other additional maintenance costs that go along with that.
Great. That's helpful. And then I think, Tom, you mentioned in the opener, you've spoken about the Europe sanctions the February 5 date is come and gone so far, it felt like a nonevent, but still very early days. And so how do you expect those actions to impact the market as we get deeper into the year?
Well, it's going to be -- I'll ask Tom O'Connor can to add value on this, but it's a work in progress right now. Obviously, Russia came out last whether is a Friday, and said to Thursday, that they are going to decrease crude production by 500,000 barrels a day. And they said that was because their payback on the sanctions that have been put on them. Some people have said that they think that's because the fact that the export ban on products went into place or the caps that in fact, they have to start to shed runs because they're starting to build inventory. Recognize that Russia pumped a bunch of diesel into Europe in January in advance of the February 5 date. And in fact, that has had an impact on the marketplace. It's just simply too early in my mind for us to see whether or not which way this is going to go. I think there's some chance that it could be like crude. They're going to find ways to get trade flows done they are going to sell more barrels to Africa, that's clear. But whether or not they can sell all of the barrels that are being displaced because they can supply the European market is something that remains to be seen. Tom [ph]?
Yes. I mean I think what adds to that is the front-loading, as you Tom described, is really important to talk about at this point. I mean Europe really did front-load an awful lot of demand in December and January. And now we got to find a home for the marketplace needs to find a home for, just call it, 600,000 barrels a day of diesel that had been going into Europe. We've seen so far, about half of that seems to have found some homes, whether it's been in South America or in West Africa. The other half is less observant at this point. So I mean, to call it a nonevent. I think we don't really know the outcome of the event. I think what we can say is prices have come off, but I think that's kind of the combination of the buildup and in front of it. And then also once again getting back to the mild winter. But I think, as Tom said, really kind of over the next several months, we'll have a little bit more transparency in terms of the data that we can see where those trade patterns have adjusted, which would include Europe at that point, taking more product from the U.S. or from east of Suez to satisfy the supply that they've lost.
One thing we can definitively say is as a result, both on the crude side and on the product side as a result of the trade patterns being dislocated. The cost of transportation to get to the marketplace is going up. Freight is going on. And that will ultimately put a foundation about -- as an advantage if you are in a trip area where you are producing your products and not having to put them on a boat and selling them into a marketplace.
We've reached end of our question-and-answer session. I'd like to turn the floor back over to Tom Nimbley for closing remarks.
Thank you very much, everyone, for joining the call. We look forward to updating you further at the end of the -- when we do the first quarter call. Have a great day.
Thank you. This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation today.