(Citgo, 13.Nov.2020) — Citgo Petroleum Corporation’s third quarter results were driven by the economic effects of the Covid-19 pandemic, which affected the refining industry as a whole, and were further affected by an eight-week shutdown at the Lake Charles, La. refinery due to Hurricanes Laura and Delta. As a result of these factors, Citgo reported a net loss of $248mn for the third quarter of 2020 along with EBITDA1 of $(212)mn and adjusted EBITDA of $(183)mn.
Operations at the Lake Charles refinery were safely shutdown in advance of Hurricane Laura, and the refinery experienced no safety issues or hydrocarbon releases arising from the direct impact of the storm. When Hurricane Delta struck six weeks later, shortly after the repaired refinery had restarted, the facility was secured, shutdown and again experienced no safety or hydrocarbon releases. Post-Hurricane Delta start-up was successfully completed in late October.
“The ongoing impact of Covid-19 and a category four hurricane made the third quarter particularly difficult,” said President and CEO Carlos Jordá. “We were able to quickly adjust our operations throughout our system while Lake Charles was offline, and at the same time continued to adjust cash spending and aggressively manage expenses to cope with the negative conditions affecting the US refining sector. We are very thankful our Lake Charles employees made it through the hurricanes safely, and thanks to their hard work the refinery is now back up and running.”
In this extremely challenging margin environment, the company remains focused on optimizing operations to improve gross margin, reducing costs where possible and deferring discretionary capital to manage liquidity.
Third quarter operational and performance highlights:
— Disciplined Cost Management
– Citgo continues to take aggressive steps to manage costs in order to navigate the challenging environment, including temporarily suspending employer contributions to the company’s 401(k) retirement plan and a 10% reduction in salaries2. These compensation and benefit cuts will be reviewed as improving industry conditions warrant. In addition, in September 2020, Citgo modified the salaried employees defined benefit plan. This resulted in approximately $150 million reduction in future benefit obligations as of the quarter end.
– The company is targeting an approximately 15% reduction in 2020 planned annual operating expenses.
– Citgo remains on target for a 20% – 25% reduction in 2020 capital expenditures versus the original budget of $262mn.
— Refinery throughput – Total refinery throughput in the third quarter was 544,000 b/d, including 83,000 b/d of intermediate feedstocks, compared with 825,000 b/d processed during the same quarter of 2019. One of the primary contributors to the 34% reduction in overall utilization was the Lake Charles refinery being offline more than 1/3 of the quarter due to Hurricane Laura; however, after adjusting operations in September, the utilizations at the Lemont and Corpus Christi refineries were higher, averaging 86% and 97% respectively. Another factor contributing to the lower overall utilization was the continued low-demand environment, which was an opportune time to complete planned turnaround activities.
— Continued turnarounds – Citgo completed planned turnarounds at the Lemont and Lake Charles refineries after developing and implementing strict Covid-19 safety protocols, which allowed the company to take advantage of the low demand environment.
— Exports – Exports in the third quarter averaged 114,000 b/d, an increase of 33% relative to the second quarter, as Latin-American demand has started to recover from the decline experienced during the second quarter.
— Operational excellence – Aside from the effects of the hurricanes, the Citgo refineries operated reliably during the quarter and continue to exceed safety and environmental performance targets. Additionally, the company was recognized by the American Petroleum Institute (API) with its 2019 Distinguished Pipeline Safety Award, the recipient of which is chosen by its peers for demonstrated excellence in safety practice, ideas, and policy.
— Special items – Costs associated with the effect of Hurricane Laura to the Lake Charles refinery were substantially mitigated by insurance recoveries, but resulted in approximately $20mn of net impact in the third quarter, with more additional costs expected be incurred throughout the remainder of 2020 and into 2021.
Citgo announced several notable personnel changes:
— The Board of Directors appointed John Zuklic as CFO and Vice President Finance, effective 4 November 2020, after a thorough search process. Mr. Zuklic joins Citgo with extensive financial and operational experience in the refining industry, having held a number of executive level positions with Phillips 66 including Vice President and Treasurer.
— Bob Shoemaker, who joined the company in 1999 and has held a number of financial management positions at Citgo, was named Controller effective 30 September. Mr. Shoemaker replaces Mr. Barry Treas, who retired after a 40-year career with the company.
While the announcement in early November of a promising Covid-19 vaccine – and subsequent strong rallies in both the oil and equities markets – provide concrete reasons for optimism, significant near-term challenges remain for the refining industry. Here are the main developments during the third quarter:
— Oil prices were relatively stable during the third quarter after experiencing extreme price volatility during the first half of the year.
— Gasoline demand growth has eased after an initial sharp demand rebound through mid-July. As of mid-October 2020, it remains 9% below 2019 for the same time period.
— Distillate demand, which was the least impacted by the pandemic, continued to improve in the third quarter and beyond. For the month of October, it was in the five year range and approximately 7% below the October 2019 level.
— Jet fuel demand recovery has continued to lag and after some improvement at the end of July, has stagnated with the resurgence of infections. For the month of October, jet fuel demand was 45% below the October 2019 level.
— Low margin environment remains, despite the improvements to date in demand and reduced inventories, further indicating that the refining system is still long supply and additional rationalization is necessary.
— Refinery utilization trended higher through late August, reaching a peak of 82% before falling sharply due to temporary shutdowns related to Hurricane Laura and Hurricane Delta. Overall refinery utilization recovered to 77% by the end of the quarter.
While the effects of the Covid-19 pandemic remain the largest risk to energy demand, the refining industry continues to adapt by making significant cost reductions. At the same time, the US economy staged an uneven recovery from the severe recession earlier this year. After falling at an annualized rate of more than 31% in the second quarter, the largest decline ever, US GDP rose by a record 33% in the third quarter. The combination of massive fiscal stimulus provided by Congressional passage of the CARES Act, plus aggressive actions by the Federal Reserve including adoption of near-zero interest rates, has provided a record level of support to counter the economic downturn. Against this backdrop, and given the multiple measures Citgo has taken to exercise cost discipline and complete refinery turnarounds, the company believes it is well-positioned to benefit when refining industry market conditions improve.