HF Sinclair Corporation Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. The statements consolidate HollyFrontier, the acquired Sinclair businesses, and Holly Energy Partners (HEP). Comparability is affected because the Sinclair businesses were acquired on March 14, 2022.
Business Context
HF Sinclair is an independent energy company operating refineries, renewable diesel facilities, branded fuel marketing operations, lubricants and specialty products businesses, and HEP logistics assets. Its refineries serve the Mid-Continent, Southwest, Rocky Mountain and Pacific Northwest markets. The company markets fuel through more than 1,500 branded stations and licenses the Sinclair brand at more than 300 additional locations.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | Change |
|---|---|---|---|
| Sales and other revenues | $8.905 billion | $10.599 billion | Down 16% |
| Income from operations | $1.071 billion | $1.328 billion | Down 19% |
| Net income attributable to HF Sinclair | $790.9 million | $954.4 million | Down 17% |
| Diluted EPS | $4.23 | $4.45 | Down 5% |
| EBITDA | $1.246 billion | $1.463 billion | Down 15% |
| Operating cash flow | $1.399 billion | $872.8 million | Up 60% |
| Capital expenditures | $81.2 million | $99.7 million | Down 19% |
| Metric | Nine Months 2023 | Nine Months 2022 | Change |
|---|---|---|---|
| Sales and other revenues | $24.304 billion | $29.220 billion | Down 17% |
| Income from operations | $2.280 billion | $3.227 billion | Down 29% |
| Net income attributable to HF Sinclair | $1.652 billion | $2.336 billion | Down 29% |
| Diluted EPS | $8.57 | $11.35 | Down 24% |
| EBITDA | $2.771 billion | $3.629 billion | Down 24% |
| Operating cash flow | $2.067 billion | $2.862 billion | Down 28% |
| Capital expenditures | $261.4 million | $417.4 million | Down 37% |
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $2.215 billion at September 30, 2023, compared with $1.665 billion at December 31, 2022.
- Working capital was $3.925 billion, versus $3.503 billion at year-end 2022.
- Total debt was $3.170 billion, compared with $3.255 billion at December 31, 2022. Consolidated long-term debt was $2.862 billion, excluding current debt.
- HF Sinclair had a $1.65 billion senior unsecured revolving facility maturing in April 2026, with no borrowings and $0.3 million of letters of credit outstanding.
- HEP had $578.5 million outstanding under its $1.2 billion secured revolving facility, which matures in July 2025. HEP also had $900 million of senior notes outstanding.
- Standalone HF Sinclair liquidity, excluding HEP, was approximately $3.85 billion, consisting of cash and the undrawn corporate revolving facility.
- The company repurchased $833.6 million of common stock during the first nine months and paid $258.9 million of dividends. The quarterly dividend was increased to $0.45 per share from $0.40 in the prior-year quarter.
- As of September 30, 2023, $825.0 million remained available under the new $1.0 billion repurchase authorization. On October 20, 2023, the company repurchased an additional $75.0 million of shares from REH Company.
Material Changes Versus the Prior Comparable Period
- Revenue and earnings declined primarily because of lower refined product prices, lower refined product sales volumes and lower refinery margins.
- Consolidated refinery gross margin declined to $26.59 per produced barrel in the third quarter from $31.47, and to $24.25 for the nine months from $27.97 in the prior-year period.
- Refinery utilization declined to 88.8% in the third quarter from 95.2%, and to 81.4% for the nine months from 92.2%. Management attributed the nine-month reduction partly to a significant turnaround program, with turnarounds completed at six of seven refineries.
- Renewables performance improved. Third-quarter renewables net operating margin was $0.11 per gallon compared with negative $0.26, while the nine-month margin improved to approximately breakeven from negative $0.79 per gallon.
- Marketing gross margin increased to $28.8 million in the third quarter from $11.6 million, and branded site count increased to 1,535 from 1,358.
- Lubricants and Specialty Products operating income increased to $93.4 million in the third quarter from a $5.0 million loss, aided by product-mix optimization and a favorable FIFO impact.
- Operating cash flow decreased for the nine months because of lower operating income and higher turnaround spending. Turnaround expenditures were $471.1 million compared with $97.8 million in the prior-year period.
- Interest expense increased to $141.5 million for the nine months from $118.7 million, primarily because of HEP debt issued in April 2022 and higher borrowing rates.
Guidance, Outlook and Unusual Items
- Fourth-quarter 2023 refinery crude runs were expected to be 590,000 to 620,000 barrels per day, reflecting planned maintenance at the Tulsa refineries. Management expected typical seasonal weakness in fourth-quarter gasoline margins.
- Renewables management expected improved throughput, reliability and feedstock optimization, with a target of normalized run rates by year-end 2023.
- Marketing management expected annual branded-site growth of at least 5%.
- Management expected favorable lubricant product mix and seasonal transportation-lubricant demand, partially offset by softness in certain finished products.
- Expected 2023 capital and turnaround spending was $900 million to $1.060 billion, including $870 million to $1.020 billion for HF Sinclair and $30 million to $40 million for HEP. Management expected spending toward the lower end of the range.
- Renewable Fuel Standard compliance costs were $237.8 million in the third quarter and $596.1 million for the nine months. Open RIN credit obligations were $22.3 million at quarter-end.
- On August 15, 2023, HF Sinclair agreed to merge HEP into an indirect wholly owned subsidiary. HEP unitholders would receive 0.315 HF Sinclair shares and $4.00 in cash per HEP common unit not already owned by HF Sinclair. The transaction was expected to close in the fourth quarter, subject to approvals and other conditions.
- On October 30, 2023, HF Sinclair and HEP launched proposed exchange offers for HEP’s $900 million of senior notes. The offers and proposed indenture amendments are contingent on completion of the HEP merger.
- In October 2023, HF Sinclair repaid at maturity $307.8 million of 2.625% senior notes.
- Environmental liabilities were $194.1 million at September 30, 2023. The company is subject to ongoing environmental proceedings involving the Artesia refinery, the Port of Seattle matter and Renewable Fuel Standard litigation; management stated that the outcomes cannot currently be predicted in certain cases.
- Management reported no goodwill impairment from its July 1, 2023 testing, but noted that further deterioration in operating results or economic conditions could result in future impairment charges.
Most Important Facts to Verify
- Completion timing and final terms of the HEP merger, including required stockholder and unitholder approvals.
- Whether the proposed HEP debt exchange and amendments increase HF Sinclair’s consolidated obligations or alter debt covenants and guarantees.
- Refinery margin, utilization and turnaround trends, particularly the effect of planned Tulsa maintenance on fourth-quarter results.
- Renewables run rates, feedstock economics, RIN costs and progress toward normalized operations.
- Cash usage for share repurchases, dividends, turnarounds and capital expenditures relative to operating cash generation.
- Potential financial exposure from environmental matters, EPA proceedings, Renewable Fuel Standard litigation and RIN obligations.
- Comparability of 2023 results with 2022, given the March 2022 Sinclair acquisition and the inclusion of HEP in consolidated results.