PBF Energy Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2020, compared with the same 2019 periods. PBF operates six U.S. refineries and a logistics business through PBF Logistics LP (PBFX). PBF Energy consolidates PBF LLC and PBFX; PBF Energy owns approximately 99.2% of PBF LLC and PBF LLC owns 48.0% of PBFX. Unless noted, figures below are PBF Energy consolidated and in U.S. dollars.
Key financial and operating metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $2.516 billion | $6.560 billion | $7.793 billion | $11.776 billion |
| Net income (loss) | $413.0 million | $(21.6) million | $(649.5) million | $219.8 million |
| Net income (loss) attributable to PBF Energy stockholders | $389.1 million | $(32.2) million | $(676.8) million | $197.0 million |
| Diluted EPS | $3.23 | $(0.27) | $(5.67) | $1.63 |
| Income (loss) from operations | $620.8 million | $9.5 million | $(746.0) million | $374.1 million |
| Consolidated gross margin | $198.3 million | $66.8 million | $(1,135.9) million | $491.8 million |
| Operating cash flow | Not separately provided | Not separately provided | $(628.8) million | $(27.4) million |
- Q2 crude and feedstock throughput averaged 675,100 barrels per day, down from 854,100; six-month throughput averaged 764,000 versus 798,900 barrels per day.
- Management’s non-GAAP gross refining margin excluding special items was $1.54 per throughput barrel in Q2 versus $9.10 a year earlier, and $4.36 for the first half versus $7.85. This measure is not a GAAP margin.
- Cash and cash equivalents were $1.225 billion at June 30, 2020, versus $814.9 million at year-end 2019. Working capital was $1.350 billion. Investing cash outflow was $933.6 million and financing cash inflow was $1.973 billion for the first half.
- Long-term debt carrying value was $4.093 billion; total debt before unamortized financing costs was $4.143 billion. Gross debt fair value was reported as $3.967 billion. Interest expense, net, was $65.5 million in Q2 and $114.7 million for the first half.
Material changes versus prior comparable periods
- Q2 revenue fell 62.1% year over year, primarily reflecting lower commodity prices and reduced product demand. First-half revenue declined 33.8%.
- Q2 GAAP income was materially affected by a $584.2 million noncash benefit from a lower-of-cost-or-market (LCM) inventory reserve reduction and a $471.1 million gain on the sale of five hydrogen plants. These items, together with a $12.1 million contingent-consideration fair-value gain and $12.9 million of severance costs, make reported earnings a poor proxy for recurring performance.
- For the first half, the LCM inventory adjustment was a $701.4 million charge, partly offset by the hydrogen-plant gain and a $64.9 million contingent-consideration fair-value gain. PBF Energy’s non-GAAP adjusted fully converted loss excluding special items was $384.8 million, or $3.19 per share, in Q2 and $528.0 million, or $4.38 per share, for the first half.
- Debt financing changed substantially: PBF issued $1.0 billion of 6.00% senior notes due 2028, redeemed its $500 million 7.00% notes due 2023, issued $1.0 billion of 9.25% senior secured notes due 2025, and had $600 million outstanding under its revolving credit facility at quarter-end. Interest expense rose year over year.
- The Martinez refinery acquisition closed February 1, 2020 for total consideration of $1.253 billion, including working capital and contingent consideration; it added a sixth refinery and is included in 2020 results only from acquisition closing.
Outlook, management commentary, risks and unusual items
- Management attributed weaker underlying refining conditions to COVID-19 demand destruction, market volatility, reduced throughput and unfavorable crude differentials. Refineries remained at reduced rates; near-term system throughput was expected to range from 700,000 to 800,000 barrels per day, subject to market conditions.
- Management targeted approximately $140 million of 2020 operating-expense reductions and approximately $360 million of 2020 net refining capital expenditures, excluding PBFX. It expected $90–$100 million of refining capex for the remainder of 2020 and had reduced planned 2020 capital expenditures by more than $350 million.
- Management estimated July liquidity at approximately $1.9 billion, including about $1.2 billion of cash excluding PBFX and more than $700 million of availability under the asset-backed revolver. It said available resources and planned actions should meet needs for the next 12 months, while cautioning that prolonged disruption could require additional financing and that funding may not be available on acceptable terms.
- PBF Energy suspended its $0.30-per-share quarterly dividend in March 2020. PBFX reduced its distribution to $0.30 per unit per quarter; a July 2020 distribution at that rate was declared.
- Risks include uncertain duration and effects of COVID-19, volatile crude and product prices, lower demand and margins, potential reduced borrowing capacity, substantial debt and interest obligations, RIN and emissions-credit costs, counterparty exposure, and possible termination of J. Aron inventory intermediation agreements (which could require inventory repurchases and additional funding).
- The company recorded aggregate environmental liabilities of $158.9 million at June 30, 2020. Litigation, environmental compliance and remediation outcomes may involve losses that are not currently estimable. The interim long-lived-asset impairment test found no impairment, but management warned that further deterioration could lead to future charges.
- The hydrogen-plant sale created a transition supply arrangement with Air Products, with a long-term supply agreement still to be reached. The filing also reports a 15-year hydrogen-supply lease beginning in Q3 2020, with estimated future payments of approximately $212.6 million.
Important facts for investors to verify
- Reconcile Q2 GAAP profit with the inventory-reserve benefit and hydrogen-plant sale gain; assess recurring earnings using the company’s non-GAAP reconciliations.
- Track refinery throughput, product demand, regional refining margins and progress toward cost-reduction and capital-spending targets.
- Monitor liquidity, revolver borrowing-base availability, debt service and covenants, and whether cash generation can sustain operations through continued market weakness.
- Review the Martinez acquisition’s integration, contingent earn-out exposure, and the terms and cost of ongoing hydrogen supply.
- Assess the status of environmental and legal matters, RIN and emissions obligations, and renewal or expiry of the J. Aron inventory agreements.