Business context and reporting period
Par Pacific Holdings, Inc. operates refining, retail and logistics businesses, with four refineries in Hawaii, Washington and Wyoming and a 46% interest in natural-gas producer Laramie Energy. This Form 10-Q covers the quarter and six months ended June 30, 2020. Results were heavily affected by COVID-19-related declines in demand and crude-oil market disruption.
Financial performance and position
- Second quarter: Revenue was $515.3 million, down 63% from $1.409 billion a year earlier. Operating loss was $25.4 million versus operating income of $48.6 million; net loss was $40.6 million, or $0.76 per share, compared with net income of $28.2 million, or $0.56 per share. Adjusted EBITDA, a non-GAAP measure, was a loss of $50.3 million versus income of $68.5 million.
- First half: Revenue was $1.719 billion, down 34% year over year. Operating loss was $206.6 million and net loss was $262.9 million, or $4.94 per share, versus prior-year operating income of $70.0 million and net income of $89.3 million, or $1.78 per share. Adjusted EBITDA was a loss of $36.7 million versus income of $119.0 million.
- Margins and operations: Refining posted a second-quarter operating loss of $36.8 million; refining adjusted gross margin was negative $22.3 million. Logistics operating income was $6.3 million and retail operating income was $16.2 million. Refining throughput fell to 115.5 thousand barrels per day from 172.9 thousand; second-quarter refined-product sales volume fell 32%. Retail sales volume declined 29%, while fuel margins increased 61%.
- Cash flow: First-half operating cash flow was $33.8 million versus $24.2 million in 2019; investing cash use was $30.2 million and financing cash provided was $13.2 million. Operating cash flow benefited from working-capital reductions, including lower receivables and inventories, amid falling crude prices. Capital expenditures were $30.2 million.
- Liquidity and debt: June 30 cash and cash equivalents were $142.9 million. Management reported total liquidity of $203.8 million, including cash and available borrowing capacity. Debt principal was $738.6 million; debt net of unamortized discounts and financing costs was $712.4 million, including $58.5 million classified as current maturities. Inventory-financing obligations were an additional $433.3 million. The company issued $105 million of 12.875% secured notes in June, receiving net proceeds of $99 million. It reported compliance with debt instruments.
- Balance sheet: Total assets were $2.225 billion and stockholders’ equity was $392.5 million at June 30, compared with $2.701 billion and $648.2 million, respectively, at year-end 2019. Goodwill was $128.0 million after impairment; the Laramie investment was reduced to zero.
Material changes versus the prior comparable period
- COVID-19 demand destruction, lower crude prices, unfavorable crude differentials and weaker crack spreads drove lower revenue, throughput and refining profitability. Brent averaged $33.39 per barrel in Q2 2020 versus $68.47 a year earlier.
- First-half results included $67.9 million of goodwill impairment, allocated to refining ($38.1 million) and retail ($29.8 million), and a $45.3 million impairment of the Laramie investment. The company discontinued equity-method accounting for Laramie after the investment reached zero.
- First-half RIN expense increased approximately $33.7 million. Conversely, retail fuel margins improved, and lower operating costs and interest expense partially offset adverse trading conditions.
- Second-quarter reported refining results included a favorable $158.4 million lower-of-cost-or-net-realizable-value adjustment, according to management; the first-half balance sheet carried a $24.0 million inventory valuation reserve. Inventory and derivative accounting materially affect reported and adjusted results.
Outlook, management commentary and risks
- Management said the full financial and liquidity impact of COVID-19 remained uncertain and could continue to be material. The company reduced throughput, idled some Hawaii refining units, furloughed 29 employees, cut CEO and independent-director cash salaries by 75%, reduced operating costs and deferred or delayed some capital spending. Hawaii’s planned turnaround was postponed to the third quarter of 2020.
- Management believed cash flows and available resources would cover current capital and turnaround spending, working capital and debt service for the next 12 months; it provided no formal earnings guidance. The 2020 capital-expenditure and deferred-turnaround budget was $95 million to $110 million.
- Inventory financing agreements with J. Aron and MLC were scheduled to expire in May and June 2021, respectively, subject to the disclosed extension or early-termination terms. These facilities finance significant refinery inventory and carry floating-rate costs.
- Environmental exposure includes $16.0 million accrued for certain Wyoming refinery remediation work and estimated costs of approximately $11.6 million for a wastewater treatment system. Costs for some remediation elements were not reasonably estimable. Regulatory requirements, RIN prices, commodity volatility, customer credit and access to capital are additional risks.
- Two related Delta bankruptcy claims totaling approximately $22.4 million remained unresolved; the company accrued approximately $0.5 million for claims considered probable and estimable and said full satisfaction of the claims in stock was remote.
Important facts for investors to verify
- Whether fuel demand, throughput and refining margins recovered after the quarter, and how much reported performance depended on inventory valuation and derivative effects.
- Available liquidity, borrowing-base availability and compliance with debt covenants, alongside the cost and maturity profile of the 12.875% notes and other debt.
- Renewal or replacement terms for the J. Aron and MLC inventory-financing arrangements due in 2021.
- Timing and final costs of the Hawaii turnaround and the $95 million to $110 million 2020 capital and turnaround program.
- Whether the zero carrying value for Laramie and the recorded goodwill impairments remain appropriate as market assumptions change, and the eventual outcomes of environmental and Delta claims.