HF Sinclair Corporation — Q1 2024 Form 10-Q Summary
Business Context and Reporting Period
HF Sinclair is an independent energy company operating refining, renewables, marketing, lubricants and specialties, and midstream businesses. It operates refineries in six states, markets Sinclair-branded fuels, produces renewable diesel, sells specialty lubricants and provides pipeline, storage and terminal services. The filing covers the unaudited three months ended March 31, 2024, compared with the three months ended March 31, 2023.
The prior-year comparison is affected by the December 1, 2023 merger that made Holly Energy Partners, L.P. a wholly owned subsidiary. Segment information was also recast beginning in the first quarter of 2024.
Financial Performance and Key Metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Sales and other revenues | $7.027 billion | $7.565 billion | Down 7% |
| Income from operations | $410.8 million | $504.2 million | Down 19% |
| Net income | $316.6 million | $385.0 million | Down 18% |
| Net income attributable to HF Sinclair | $314.7 million | $353.3 million | Down 11% |
| Basic and diluted EPS | $1.57 | $1.79 | Down $0.22 |
| EBITDA | $617.4 million | $652.8 million | Down 5% |
| Operating cash flow | $316.9 million | $177.7 million | Up $139.2 million |
| Capital expenditures | $89.1 million | $100.1 million | Down $11.0 million |
Revenue declined primarily because of lower refined-product prices and lower excess crude oil sales, partly offset by higher refined-product volumes. The approximate consolidated operating margin was 5.8%, compared with 6.7% in the prior-year quarter; net margin attributable to HF Sinclair was approximately 4.5%, compared with 4.7%.
- Refining throughput increased to 643,300 barrels per day from 558,130, and utilization increased to 89.2% from 73.5%.
- Refinery gross margin declined to $12.70 per produced barrel from $23.20, while net operating margin declined to $4.48 from $12.39.
- Renewables sales volume increased to 61.2 million gallons from 46.0 million, but net operating margin declined to negative $0.28 per gallon from positive $0.09, reflecting weaker RIN and LCFS prices.
- Marketing gross margin increased to $0.07 per gallon from $0.04, despite lower sales volumes. Branded sites increased to 1,547 from 1,511.
- Midstream operating income increased to $85.4 million from $69.9 million, benefiting from tariff increases.
- A $220.6 million reversal of the prior-year refining lower-of-cost-or-market inventory reserve increased Q1 2024 earnings. Renewables recorded a $1.2 million inventory valuation charge.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $1.241 billion at March 31, 2024, down from $1.354 billion at December 31, 2023.
- Total long-term debt, net, was $2.679 billion, down from $2.739 billion at year-end. Debt primarily comprised senior notes and $394.0 million outstanding under the HEP Credit Agreement.
- HF Sinclair had no borrowings under its $1.65 billion senior unsecured revolving facility, with $0.3 million of letters of credit outstanding. The facility matures in April 2026.
- The HEP Credit Agreement provides $1.2 billion of commitments, matures in July 2025, and had $806.0 million of remaining availability at March 31, 2024. HF Sinclair and HEP were in compliance with applicable covenants.
- Management reported total liquidity of approximately $3.70 billion, consisting of cash, the undrawn HF Sinclair facility and available HEP facility capacity.
- Financing cash outflows included $169.6 million of treasury-stock purchases, $99.4 million of dividends and $61.5 million of debt repayments.
- Working capital changes and lower turnaround spending drove the increase in operating cash flow. Turnaround expenditures were $70.4 million versus $163.7 million in Q1 2023.
Material Changes, Outlook and Commentary
- Management attributed weaker refining results to seasonal transportation-fuel demand weakness and lower regional refining margins, partially offset by constrained product supply and higher volumes.
- For Q2 2024, management expects crude runs of approximately 620,000 to 650,000 barrels per day. Planned maintenance at the Puget Sound and Parco refineries is expected to affect the quarter.
- Management expects refined-product margins to strengthen with the summer driving season, but expects continued weakness in RIN and LCFS prices and planned renewable diesel-unit maintenance to pressure Renewables results.
- Management continues to target annual growth of at least 5% in branded sites. Lubricants and Specialties remained strong despite weaker base-oil prices, supported by sales-mix optimization.
- Expected 2024 cash spending is $875 million, including $800 million of sustaining capital and turnaround/catalyst spending and $75 million of growth capital.
- The company declared a $0.50-per-share quarterly dividend payable June 5, 2024. On April 1, 2024, it repurchased 5.0 million shares from REH Company for $296.1 million. On May 7, 2024, the company authorized a new $1.0 billion repurchase program.
Risks, Contingencies and Unusual Items
- Key risks include crude oil and refined-product price volatility, refining-margin compression, renewable-credit prices, operational outages, turnarounds, transportation constraints, environmental regulation, cyberattacks, weather and geopolitical disruptions.
- RIN costs were $106.6 million in Q1 2024, with $29.6 million of open RIN credit obligations at March 31, 2024.
- Environmental remediation liabilities were $191.6 million at March 31, 2024. Management stated that existing legal and regulatory matters are not expected to have a material adverse effect, but estimates may change as investigations develop.
- The company continues to challenge EPA decisions concerning small-refinery exemptions under the Renewable Fuel Standard. The filing states that the potential outcome and costs cannot currently be estimated.
- A $7.4 million civil penalty related to the Osage Pipeline crude-oil release was paid on April 5, 2024 after entry of a federal consent decree.
- Management stated that disclosure controls were effective as of March 31, 2024 and that there were no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether summer driving demand and constrained supply improve refining margins after the Q1 decline.
- The effect of Puget Sound, Parco and renewable diesel-unit maintenance on Q2 volumes, costs and cash flow.
- RIN and LCFS pricing, renewable diesel profitability and future RIN compliance obligations.
- Execution of the $875 million 2024 capital and turnaround spending plan and its effect on liquidity.
- Debt refinancing or repayment requirements, particularly the HEP facility maturity in July 2025 and senior notes maturing beginning in 2026.
- The pace and funding of share repurchases, including the April REH transaction and the May 2024 repurchase authorization.
- Developments in EPA small-refinery exemption litigation, Artesia refinery compliance discussions and other environmental matters.
- The comparability of year-over-year results given the HEP merger and the segment-information recast.