Business context and reporting period
Par Pacific Holdings, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. Its businesses include Hawaii refining, retail and logistics, Texadian commodity marketing, and a 42.3% equity investment in natural-gas producer Laramie Energy.
On July 14, 2016, after quarter-end, Par completed its acquisition of Wyoming Refining Company, which operates an 18,000-barrel-per-day refinery and related logistics assets in Newcastle, Wyoming. The acquired business is not included in the June 30 results.
Financial results and key metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $413.8 million | $583.8 million | $791.6 million | $1,127.4 million |
| Operating income (loss) | $(3.3) million | $27.5 million | $(23.0) million | $45.3 million |
| Net income (loss) | $(13.1) million | $11.7 million | $(31.8) million | $12.2 million |
| Adjusted EBITDA (non-GAAP) | $(6.8) million | $30.8 million | $(1.4) million | $53.2 million |
| Operating cash flow | Not separately presented for the quarter | $(28.8) million | $98.6 million |
- Q2 diluted loss per share was $0.32; six-month diluted loss per share was $0.77.
- Refining Adjusted Gross Margin, a non-GAAP measure, was $16.6 million in Q2 versus $47.2 million, and $48.8 million for the first half versus $91.6 million. The Mid Pacific crack spread was $3.96 per barrel in Q2 and $4.22 for the first half, down 59% and 55%, respectively, year over year.
- At June 30, cash and cash equivalents were $164.1 million; total current assets were $525.9 million and current liabilities were $361.2 million. Current liabilities included $265.6 million of inventory-financing obligations.
- Long-term debt had $274.4 million principal outstanding and a $241.9 million net carrying value, including $115 million of 5% convertible notes due 2021. Par reported compliance with debt covenants at June 30.
- Six-month investing cash outflow was $69.4 million, including $55 million invested in Laramie and $11.7 million of capital expenditures. Financing provided $94.5 million.
Material changes versus the prior comparable period
- Revenue fell 29% in Q2 and 30% in the first half, mainly reflecting lower crude-oil and refined-product prices. Brent averaged $45.57 per barrel in Q2 2016 versus $61.65 a year earlier.
- Management attributed the sharp earnings decline primarily to weaker refining crack spreads, alongside higher transportation, repair and maintenance costs and increased equity losses from Laramie. Improved crude-oil differentials partly offset the refining pressure.
- Q2 refining operating income declined to $1.2 million from $26.7 million; first-half results shifted to a $17.1 million operating loss from $43.2 million income. Retail and logistics remained profitable, while Texadian recorded operating losses in both 2016 periods.
- Operating cash flow moved from $98.6 million provided in the first half of 2015 to $28.8 million used in 2016. The company cited the net loss and changes in working capital; 2015 cash flow also included favorable working-capital movements.
- Par issued $115 million of 5% convertible senior notes in June, using proceeds in part to fund the upcoming Wyoming acquisition and repay $5 million of term-loan principal. The notes’ initial conversion price was approximately $18 per share.
Outlook, management commentary, risks and unusual items
- Management said available cash flows and capital resources were expected to meet capital, working-capital and debt-service needs for the next 12 months. This assessment preceded the Wyoming acquisition’s full effect on liquidity and debt.
- At August 3, reported available liquidity was $77.8 million, including $43.9 million cash, $5 million revolver availability, $8 million Wyoming facility availability and $20.9 million under the J. Aron deferred-payment arrangement. The decrease from $170.2 million at June 30 principally reflected the acquisition, product purchases, refinery turnaround spending and operating results.
- Wyoming was acquired for $213.4 million cash consideration and assumption of $58 million debt. Funding included approximately $52.6 million of short-term Bridge Notes, a $65 million secured term loan, and cash. The Bridge Notes were due October 12, 2016, subject to the specified rights-offering extension or conversion terms. Wyoming’s existing facility also remained in place.
- The Hawaii refinery turnaround was scheduled for Q3 2016. Management estimated turnaround costs of $30 million to $35 million. A July consent decree expanded the work; compliance costs were estimated at approximately $30 million, with Tesoro responsible for eligible pre-acquisition capital expenditures and applicable fines and penalties.
- Wyoming carries material environmental and integration uncertainties. Preliminary estimates included approximately $22.5 million for certain response costs, about $2.1 million to modify or close wastewater ponds, and $11.6 million for a replacement treatment system; some remediation costs were not reasonably estimable. A pipeline inspection could also result in a penalty exceeding $100,000.
- Other key risks include volatile refining margins and commodity prices, renewable-fuel credit costs, environmental regulation, acquisition integration and financing, and potential dilution from convertible securities. Par disclosed no formal earnings guidance in the provided filing text.
- Q2 included an $8.5 million income-tax benefit, primarily from releasing a valuation allowance related to the convertible notes. The company continued to maintain a full valuation allowance on net deferred tax assets. Laramie’s losses increased substantially, including unrealized derivative losses and higher depreciation.
Investor facts to verify
- Whether Wyoming acquisition integration, operating performance and purchase-price allocation meet management’s expectations, including actual environmental obligations and potential seller indemnification.
- Post-acquisition liquidity, total debt and covenant headroom, and how the Bridge Notes were repaid, extended or converted by their October 2016 maturity date.
- Actual Hawaii turnaround and consent-decree costs, timing, operational impact and amounts recoverable from Tesoro.
- Whether refining crack spreads and crude differentials recover, and whether operating cash flow improves from the first-half outflow.
- How Laramie’s operating results and derivative exposure affect Par’s equity-method losses and investment value.