HF Sinclair Corp annual report, FY2022

Business Context and Reporting Period

HF Sinclair Corporation filed its Form 10-K for the fiscal year ended December 31, 2022. The company is an independent energy business with refining, renewable diesel, branded marketing, lubricants and specialty products, and midstream operations through its consolidated 47%-owned interest in Holly Energy Partners, L.P. (HEP).

Comparability with 2021 is affected by acquisitions. HF Sinclair included the acquired Sinclair businesses from March 14, 2022, and the Puget Sound refinery from November 1, 2021. The Sinclair businesses contributed $9.835 billion of revenue and $865.1 million of operating income from March 14 through December 31, 2022.

Financial Performance and Key Metrics

Metric	2022	2021	Change
Sales and other revenues	$38.205 billion	$18.389 billion	Up 108%
Income from operations	$4.054 billion	$749.2 million	Up $3.305 billion
Net income attributable to HF Sinclair	$2.923 billion	$558.3 million	Up $2.364 billion
Diluted EPS	$14.28	$3.39	Up $10.89
Net cash provided by operating activities	$3.777 billion	$406.7 million	Up $3.371 billion
Capital expenditures	$524.0 million	$813.4 million	Down $289.4 million
EBITDA	$4.620 billion	$1.307 billion	Up $3.313 billion

Reported net income margin was approximately 7.6%, operating margin was approximately 10.6%, and EBITDA margin was approximately 12.1%. These calculated margins should be interpreted cautiously because acquisitions materially expanded the 2022 revenue base.

Consolidated refinery gross margin increased to $26.78 per produced barrel from $10.89, up 146%. Net operating margin increased to $18.86 per barrel from $3.85.
Refinery throughput increased to 646,970 barrels per day from 431,870 barrels per day, primarily reflecting the Puget Sound, Parco and Casper refineries.
Refining generated $3.775 billion of operating income. Renewables reported a $179.4 million operating loss, Marketing reported $45.5 million of operating income, Lubricants and Specialty Products reported $296.3 million, and HEP reported $223.2 million.
Renewables sold 136.2 million gallons and reported a $0.52 net operating loss per gallon, reflecting $0.30 of gross margin per gallon and $0.82 of operating expenses per gallon.
RIN costs were $903.7 million. A $72.0 million benefit resulted from the EPA’s modification of 2020 and 2021 renewable volume targets.
Income tax expense was $894.9 million, compared with $123.9 million in 2021. The effective tax rate increased to 22.7% from 15.7%.

Liquidity, Debt and Capital Allocation

Cash and cash equivalents were $1.665 billion at December 31, 2022, versus $234.4 million at year-end 2021.
Standalone HF Sinclair liquidity was approximately $3.30 billion, consisting of $1.65 billion of cash and an undrawn $1.65 billion revolving credit facility maturing in April 2026. The facility had $2.3 million of letters of credit outstanding and no borrowings.
HF Sinclair debt principal totaled approximately $1.708 billion, including $307.8 million due in 2023, $1.0 billion due in 2026 and $400.0 million due in 2027. HEP had $668.0 million outstanding under its revolving facility and $900.0 million of senior notes.
HEP issued $400.0 million of 6.375% senior notes due 2027 and used the proceeds primarily to repay borrowings.
HF Sinclair repurchased 25.7 million shares for $1.313 billion during 2022, including $750.0 million of privately negotiated purchases from REH Company. Remaining authorization under the new $1.0 billion program was $662.0 million at year-end.
Dividends paid during 2022 were $255.9 million, or $1.20 per declared common share. The quarterly dividend was increased to $0.45 per share in February 2023.
Expected 2023 cash spending is $940 million to $1.150 billion, including $910 million to $1.105 billion for HF Sinclair and $30 million to $45 million for HEP. Turnarounds and catalyst spending represents $530 million to $630 million of the HF Sinclair range.

Material Changes Versus the Prior Comparable Period

Strong refining margins, higher product prices and higher volumes drove the substantial increase in revenue, operating income, cash flow and earnings.
The Sinclair Transactions added two refineries, renewable diesel capacity, branded marketing operations and midstream assets, while increasing HF Sinclair’s scale and reported debt, assets and noncontrolling interest.
The company’s crude processing capacity increased to 678,000 barrels per stream day at December 31, 2022, from 554,000 at year-end 2021.
Operating expenses increased 54% to $2.335 billion and depreciation and amortization increased 30% to $656.8 million, primarily due to the acquired businesses and renewable diesel projects.
2022 included a $52.4 million lower-of-cost-or-market inventory charge, compared with a $310.1 million benefit in 2021. No goodwill or long-lived asset impairment was recorded in 2022 or 2021.
Interest expense increased to $175.6 million from $125.2 million, primarily due to HEP’s new senior notes and higher rates on its revolving facility.
2022 included a $15.2 million business interruption insurance gain. By contrast, 2021 included a $51.5 million tariff settlement gain and an $86.0 million gain on the sale of Canadian real property.

Guidance, Outlook, Risks and Unusual Items

For the first quarter of 2023, management expected refinery crude runs of 500,000 to 530,000 barrels per day, reflecting winter weather and planned maintenance at Puget Sound, Woods Cross and El Dorado. Refined product margins were expected to remain healthy.
Management expected renewable diesel throughputs to increase through operational optimization, with normalized run rates anticipated in the second half of 2023.
Management expected continued growth in branded marketing sites and strong demand for base oils and finished lubricant products.
HEP targeted leverage of 3.0x to 3.5x and distributable cash flow coverage of at least 1.3x in mid-2023.
Key earnings sensitivities include crude oil and renewable feedstock prices, refined-product crack spreads, RIN and LCFS credit prices, product demand, refinery utilization, weather, supply-chain disruptions, labor costs, interest rates and geopolitical events including the Russia-Ukraine war.
EPA decisions reversed certain small-refinery exemptions and denied exemptions for 2019 and 2020. HF Sinclair subsidiaries are pursuing legal challenges, but the filing states that outcomes and potential costs cannot presently be predicted.
Environmental liabilities accrued were $192.3 million at year-end 2022. The company also disclosed ongoing regulatory discussions involving alleged Clean Air Act compliance issues at its Artesia and Lovington, New Mexico facilities.
An Osage Pipeline crude release in July 2022 resulted in remediation efforts and reduced 2022 equity-method earnings. The pipeline resumed operations in the third quarter.
REH Company owned approximately 20.8% of HF Sinclair’s common stock as of February 15, 2023 and retains board nomination and other governance rights. Future sales of its shares could affect the stock price.
Management and the auditor concluded that internal controls were effective; however, the assessment excluded controls of the acquired Sinclair businesses, which represented approximately 17% of total assets and 26% of 2022 revenue.
The financial statement audit opinion was unqualified. The critical audit matter involved valuation of personal property acquired in the Sinclair Transactions.

Most Important Facts for Investors to Verify

Separate the effects of acquisitions from organic changes when assessing revenue, refinery throughput, margins and earnings growth.
Verify the sustainability of 2022 refining margins and the sensitivity of cash flow to crack spreads, crude differentials and product demand.
Review 2023 turnaround timing and the $530 million to $630 million turnaround and catalyst spending forecast.
Monitor RIN obligations, small-refinery-exemption litigation, LCFS credits and the economic performance of the Renewables segment.
Assess the October 2023 HF Sinclair debt maturity and HEP’s 2025 revolving-credit maturity against projected cash generation and capital allocation.
Review environmental reserves, Artesia regulatory matters, the Osage Pipeline remediation and other contingent liabilities for potential changes in exposure.
Evaluate integration progress and internal-control coverage for the acquired Sinclair businesses.
Track share repurchases, REH Company ownership and potential future share sales, as well as the effect of repurchases and dividends on liquidity.