Par Pacific Holdings, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. The company operates refining, retail, logistics and commodity-marketing businesses, and holds a 42.3% equity interest in Laramie Energy. Results include Wyoming Refining from its July 14, 2016 acquisition.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $510.3 million | $495.5 million | $1,301.9 million | $1,622.9 million |
| Operating income (loss) | ($21.8 million) | $26.3 million | ($44.8 million) | $71.6 million |
| Net income (loss) | ($27.8 million) | $14.7 million | ($59.5 million) | $26.9 million |
| Diluted EPS | ($0.67) | $0.39 | ($1.44) | $0.72 |
| Adjusted EBITDA (non-GAAP) | ($1.7 million) | $34.3 million | ($3.1 million) | $87.6 million |
| Cash provided by (used in) operating activities | Not separately presented for the quarter | ($41.2 million) | $144.3 million |
At September 30, cash and cash equivalents were $56.3 million, restricted cash was $11.2 million, and current assets and current liabilities were $389.6 million and $385.2 million, respectively. Debt had a $413.0 million principal balance and a $380.8 million carrying value, net of discounts and financing costs. Inventory-financing obligations were a further $237.9 million. The company reported $76.1 million of available liquidity at September 30 and $78.5 million at October 28. It said available resources and operating cash flows should cover current capital, working-capital and debt-service needs for the next 12 months.
Nine-month capital expenditures were $19.3 million; the company also invested $55.0 million in Laramie Energy. Its 2016 capital budget was $50–55 million, increased by approximately $11 million following the Wyoming acquisition. The filing does not provide a clear consolidated gross-margin percentage.
Material changes and operating drivers
- Compared with 2015, Q3 operating results shifted from profit to loss; nine-month results also moved from profit to loss. Management attributed the deterioration principally to lower refining crack spreads and the Hawaii refinery turnaround.
- Hawaii refinery throughput was affected by turnaround and subsea-pipeline work. The company reported higher production costs per throughput barrel in Q3 ($5.42 versus $4.18) and imported about 8,000 barrels per day of refined products during the turnaround. Approximately $35.0 million of turnaround costs were deferred for amortization.
- The Mid-Pacific crack spread was $4.45 per barrel in Q3, down from $7.93 a year earlier. Improved crude differentials partly offset weaker spreads and turnaround impacts.
- Wyoming Refining contributed $83.9 million in revenue and $1.4 million in net income from acquisition through September 30. It contributed $3.7 million of refining-segment operating income in Q3. Retail operating income declined year over year, while Texadian’s loss narrowed, in part because 2015 included an impairment charge.
- Revenue rose 3% in Q3, reflecting the Wyoming acquisition, but fell 20% for the nine-month period, primarily due to lower crude prices and reduced Hawaii and Texadian third-party revenue. Higher interest expense reflected new acquisition-related debt.
Debt, outlook, risks and unusual items
- The July Wyoming acquisition was funded using convertible notes, bridge notes, a $65 million secured term loan, and cash. The $115 million 5% convertible senior notes mature in 2021. The bridge notes were largely repaid with rights-offering proceeds; the remaining principal and interest converted into shares. The company reported covenant compliance at September 30.
- Management provided no specific earnings guidance. It stated that liquidity should be sufficient for the next 12 months, while noting that additional capital may be needed for significant business changes or refinancing and may not be available on acceptable terms.
- Wyoming Refining’s environmental matters include estimated response costs of about $20 million for certain understood remediation work, plus estimated wastewater-pond and replacement-system costs of $2.1 million and $11.6 million. Some remediation costs remain unestimable. The company also anticipated a PHMSA civil penalty exceeding $100,000.
- A Hawaii refinery Clean Air Act consent decree is expected to require about $30 million of compliance spending. Tesoro is responsible for eligible pre-acquisition expenditures and applicable fines and penalties; by September 30, it had reimbursed $4.7 million of $7.1 million incurred.
- Key business risks include volatile crude and refined-product prices and crack spreads, refinery downtime and seasonal performance, acquisition integration and unknown liabilities, environmental and regulatory compliance, renewable-fuel credit costs, and interest-rate and counterparty exposure. A 1% increase in variable rates was estimated to increase annual costs by about $1.9 million in cost of revenues and $2.7 million in interest expense.
- Unusual accounting items include a $10.8 million nine-month gain from remeasurement of contingent consideration, driven by lower expected Hawaii refinery cash flows, and an $8.6 million tax valuation-allowance release. The company continued to maintain a full valuation allowance on its net deferred tax assets.
Important facts for investors to verify
- Whether Hawaii refinery operations and margins recovered after the turnaround, and the realized cost and timing of the remaining work.
- Wyoming Refining’s post-acquisition operating performance, integration progress, debt-covenant headroom and final purchase-price allocation, including environmental liabilities.
- Cash generation, available liquidity and financing needs, including obligations under inventory-financing arrangements and the effect of floating-rate debt.
- Actual environmental compliance and remediation costs, Tesoro reimbursements, and outcomes of the Wyoming pipeline and other legal or regulatory matters.
- How refining crack spreads, crude differentials, retail margins and Laramie Energy results affect future earnings and cash flows.