Par Pacific Holdings, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods unless noted. Par operates refining, retail and logistics businesses, and holds a 39.1% equity interest in natural-gas producer Laramie Energy. Results include Northwest Retail from its March 23, 2018 acquisition.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $856.4 million | $564.2 million | $1,621.8 million | $1,169.5 million |
| Operating income | $29.0 million | $16.5 million | $56.6 million | $45.6 million |
| Net income | $16.2 million | $7.0 million | $31.4 million | $34.8 million |
| Diluted EPS | $0.35 | $0.15 | $0.68 | $0.75 |
| Adjusted EBITDA (non-GAAP) | $36.6 million | $29.6 million | $62.6 million | $62.0 million |
Revenue rose 52% in Q2 and 39% in the first half, driven mainly by higher crude prices and refined-product volumes, rather than equivalent margin expansion. Q2 operating margin was approximately 3.4% versus 2.9%; first-half operating margin was approximately 3.5% versus 3.9%. Net margin was approximately 1.9% in Q2 versus 1.2%, and 1.9% in the first half versus 3.0%.
- Q2 segment operating income: Refining $27.1 million (up from $13.6 million); logistics $8.7 million (up from $7.4 million); retail $7.9 million (up from $7.0 million). Corporate, eliminations and other reduced results by $14.6 million.
- Drivers: Management cited stronger Wyoming refinery crack spreads and throughput, improved Hawaii gross margin, and lower Q2 RIN expense. These gains were partly offset by weaker Hawaii crack spreads, higher corporate payroll costs, and lower Laramie equity results. The Northwest Retail acquisition boosted retail volume and revenue.
- First-half net income declined despite higher operating income, chiefly reflecting a $10.5 million Tesoro earn-out settlement charge and lower Laramie equity earnings ($3.2 million versus $11.1 million). The charge arose after settlement and is reported as a change in contingent consideration.
- Q2 Adjusted Gross Margin was $62.7 million in refining, $12.7 million in logistics and $26.5 million in retail. First-half amounts were $119.1 million, $25.0 million and $45.9 million, respectively. These are non-GAAP measures and should be considered alongside GAAP results.
Cash flow, balance sheet and liquidity
- First-half operating cash flow: $31.3 million, down from $62.2 million. Working-capital changes used approximately $33.6 million, primarily due to supplier advances for crude purchases; higher inventory financing partly offset the cash use.
- Investing cash flow: $91.2 million used, including $74.3 million for Northwest Retail and $17.7 million in capital expenditures. Financing provided $24.2 million, including $30.2 million of net borrowings under the J. Aron deferred-payment arrangement. Cash, cash equivalents and restricted cash fell from $119.1 million at year-end to $83.4 million.
- At June 30, cash was $82.7 million; total assets were $1.45 billion, current assets $637.6 million and current liabilities $531.9 million. Inventory-financing obligations were $416.3 million, compared with $363.8 million at December 31.
- Debt principal was $415 million: $300 million of 7.75% senior secured notes due 2025 and $115 million of 5.00% convertible notes due 2021. GAAP carrying value, net of discount and financing costs, was $388.0 million. The $75 million ABL facility had no borrowings and a $57 million borrowing base at quarter-end. Par reported compliance with debt covenants.
- Reported liquidity was $163.4 million at June 30, including cash and available borrowing/payment capacity; it was $193.9 million as of August 2, primarily reflecting working-capital changes. On July 24, ABL commitments increased from $75 million to $85 million. Management expected cash flows and available resources to cover capital, working-capital and debt-service needs for the next 12 months.
Outlook, risks and unusual items
- 2018 capital expenditure budget: $50–$55 million, including maintenance, the first phase of a Hawaii hydrotreater project and Wyoming refinery expansion projects. The filing provides no earnings or revenue guidance.
- Refining profitability is sensitive to crude/product prices and crack spreads. Par estimated that a $1-per-barrel change in average gross refining margin, at Q2 throughput, would change annualized operating income by about $32.8 million, assuming other factors unchanged. RIN prices and regulatory requirements are additional risks.
- Environmental exposures include $17.6 million accrued for identified Wyoming refinery remediation components, plus estimated $11.6 million costs for a replacement wastewater-treatment system. Some investigation and remediation costs remain unestimable; potential future penalties are also disclosed. Tesoro had reimbursed $12.2 million of $13.0 million of Hawaii consent-decree capital expenditures through June 30.
- Other contingencies include a USW labor dispute scheduled for arbitration in October 2018 and two unresolved Delta-related claims totaling approximately $22.4 million; Par accrued about $0.5 million for claims considered probable and estimable. The filing says the likelihood of issuing stock for the full Delta claim amount is remote.
- Par settled the Tesoro earn-out dispute for $10.5 million and a Mid Pac earn-out/indemnity dispute for $350,000 plus up to $300,000 of environmental obligations. Laramie’s credit facility was about $190 million drawn; Par’s guarantee is limited to its pledged ownership interest, and distributions to owners are generally restricted.
- Adoption of the new lease standard was expected to materially increase balance-sheet assets and liabilities through recognition of right-of-use assets and lease liabilities. Management said it was still evaluating the impact.
Most important facts for investors to verify
- Whether operating improvement persists when crude prices, crack spreads and RIN costs change, particularly at the Hawaii refinery.
- Cash conversion and working-capital demands, including supplier advances, inventory financing and the capacity and cost of the J. Aron arrangements.
- Integration, final purchase-price allocation and performance of the Northwest Retail acquisition.
- Actual capital spending and project costs, plus the timing and scope of environmental remediation and consent-decree work.
- Settlement and potential dilution exposure from remaining claims, and Laramie’s operating results, debt and distribution restrictions.