(Citgo, 17.Aug.2020) — Citgo Petroleum Corporation reported a net loss of $5 million for the second quarter of 2020, which includes the benefit from the reversal of a previously recorded lower of cost or market (LCM) inventory adjustment discussed further below. During the same period, Citgo reported EBITDA of $203 million1 and, excluding the impact of the LCM inventory and other similar adjustments, adjusted EBITDA1 of $(132) million.
The economic effects of the COVID-19 pandemic continued to drive the Company’s second quarter results and impacted the industry as a whole. With prices increasing during the second quarter, the Company recovered in full the previously recognized LCM inventory charge of approximately $332 million.
“We knew the industry would feel the full impact of COVID-19 in the second quarter,” said President and CEO Carlos Jordá, “so we adjusted cash spending according to plan, aggressively managed expenses, and fine-tuned our operations. Within this challenging environment, we were also able to refinance some of our debt with attractive pricing, giving us added flexibility to fund working capital and other general corporate purposes as needed during this time of economic uncertainty.”
Second Quarter Operational And Performance Highlights
— Refinancing – On June 9, 2020, Citgo successfully refinanced its 2021 Term Loan B with proceeds of a private offering of 7.00% senior secured notes due 2025. The notes offering was oversubscribed, allowing Citgo to upsize the offering to $1.125 billion and provide additional liquidity.
— Continued turnarounds – Citgo successfully and safely executed planned turnarounds at the Lake Charles and Lemont refineries while taking advantage of the low-margin environment to minimize the economic impact.
— Disciplined Investment Spending – Citgo continues targeting at least a 10% reduction in 2020 capital expenditures and is further evaluating additional reductions that could total 15- 20% for the year. The Company is also targeting an approximately 10%-15% reduction in 2020 planned annual operating expenses.
— Refinery throughput – Total refinery throughput in the second quarter was 575,000 bpd, including 87,000 bpd of intermediate feedstocks, resulting in an overall crude utilization of 63% which was also impacted by the planned turnarounds in two of our refineries.
— Exports – Exports in the second quarter averaged 87,000 bpd, a decrease of 52% relative to the first quarter, but have steadily increased since a May low point.
— Operational excellence – Citgo refineries achieved excellent reliability during the quarter while exceeding safety and environmental performance targets. Additionally, the company earned two safety awards:
– The International Liquid Terminals Association (ILTA) 2020 Platinum Safety Award, a distinction CITGO has earned six times in the program’s 14-year history.
– The American Waterways Operators (AWO) Tankering & Barge Operations Subcommittee’s inaugural safety award for industry-leading commitment to workplace safety.
— Special items – As mentioned above, the main effect from one-time or special items impacting our results in the second quarter 2020 is the recovery of the LCM inventory valuation charge which resulted in a current period benefit of approximately $332 million.
Furthermore, on July 6, 2020, the Citgo Board of Directors approved the recommended dividend payment of approximately $63 million to its immediate parent, CITGO Holding, Inc., which was paid on July 29, 2020.
Headquartered in Houston, Texas, Citgo Petroleum Corporation is a recognized leader in the refining industry with a well-known brand. Citgo operates three refineries located in Corpus Christi, Texas; Lake Charles, La.; and Lemont, Ill., and wholly and/or jointly owns 42 terminals, six pipelines and three lubricants blending and packaging plants. With approximately 3,400 employees and a combined crude capacity of approximately 769,000 barrels-per-day (bpd), Citgo is ranked as the sixth-largest, and one of the most complex independent refiners in the United States.
CITGO transports and markets transportation fuels, lubricants, petrochemicals and other industrial products and supplies a network of approximately 4,600 locally owned and operated branded retail outlets, all located east of the Rocky Mountains. Citgo Petroleum Corporation is owned by Citgo Holding, Inc.
Industry Overview
In an August meeting with the Citgo entities’ ultimate shareholder, the PDVSA ad hoc board, Citgo Board Chairwoman Luisa Palacios detailed the broader economic and market forces driving the second quarter environment. As expected, the effects of COVID-19 were widespread, as the U.S. economy declined at an annualized rate of 33% during the second quarter. Through April and May, the number of new cases of COVID-19 declined steadily as “stay at home” orders in key population centers limited the transmission of the virus. However, as restrictions began to be lifted, new infections grew rapidly, almost doubling during the month of June. As a result, many states have slowed or reversed the pace of reopening which puts the struggling economic recovery at risk, especially since some of the provisions of the CARES act expired at the end of July.
Within our industry, oil prices were extremely volatile during the quarter, doubling from $20 to $40 over the period, recovering to levels just prior to the price war between Saudi Arabia and Russia in early March. In the near term, oil prices are expected to be constrained in the $40-$50 per barrel range due to reduced demand related to COVID-19, some production increases in the United States due to the recent price recovery, and abundant OPEC+ spare capacity.
In the United States, demand for both gasoline and diesel continued their steep decline, bottoming out at the end of April, while jet demand declined even further, reaching its lowest point at the end of May. Gasoline demand, which had fallen by 44% year over year at the end of April, has largely recovered and stands 10% below last year’s demand levels at the end of the second quarter. However, margins have failed to recover in the same way because gasoline stocks remained well above the five-year range for the entire quarter, as excess refinery throughput kept pace with increasing demand.
The margin environment is even more challenging for ultra-low sulfur diesel (ULSD), which only saw a modest demand recovery, reflecting the overall economic weakness related to COVID-19. Also affecting ULSD is the extremely low jet fuel demand, which forced refiners to dump surplus jet fuel production into ULSD, causing distillate inventory to grow rapidly and exceed its five-year range.
Refinery utilization fell to a low of 67% in April but has since recovered to about 76% at the end of the second quarter. While continuing to improve to 80% by the end of July, refinery utilization remains 10-12% below normal. As long as there is significant spare refining capacity available, finished product demand increases will be quickly met with increased supply, keeping refinery margins constrained.
“We were well aware of the looming impact of COVID-19 on refiners in the second quarter and we prepared accordingly,” said Citgo Chairwoman Luisa Palacios. “With the successful completion of our turnaround activities, we are now well positioned for the improving product demand we’re seeing and, consequently, expect our refinery utilization rates to continue improving. We will continue building on these positive results while controlling expenses as we move further into the third quarter and beyond.”
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