PAR Pacific Holdings, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Par operates refining, retail and logistics businesses, including refineries in Hawaii and Wyoming, and holds a 42.3% equity interest in Laramie Energy.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $605.3 million | $377.8 million |
| Operating income (loss) | $29.2 million | $(19.7) million |
| Net income (loss) | $27.8 million | $(18.7) million |
| Diluted EPS | $0.58 | $(0.46) |
| Adjusted EBITDA (non-GAAP) | $32.3 million | $5.4 million |
| Cash from operations | $25.0 million | $12.0 million |
| Capital expenditures | $7.6 million | $4.5 million |
Revenue rose 60%, primarily reflecting higher crude prices and inclusion of Wyoming Refining, acquired in July 2016. Management attributed the earnings turnaround chiefly to improved refining crack spreads. Operating margin was approximately 4.8%, versus a negative margin in Q1 2016. Refining segment operating income was $27.4 million (versus a $18.3 million loss); logistics income was $9.4 million, while retail income declined to $6.1 million from $6.9 million. Laramie equity earnings were $8.7 million, compared with a $1.9 million loss, and included significant derivative-related gains at Laramie.
Adjusted Gross Margin, a company-defined non-GAAP measure, was $61.0 million in refining, $14.7 million in logistics and $17.9 million in retail. Hawaii’s Mid Pacific crack spread increased to $7.69 per barrel from $4.48; Wyoming Refining contributed $12.2 million to refining Adjusted Gross Margin. Retail sales volumes were approximately flat year over year, while retail segment income fell as higher fuel costs partly outpaced higher selling prices.
Balance sheet, debt and liquidity
At March 31, 2017, cash and cash equivalents were $46.2 million, total current assets $461.4 million and current liabilities $422.5 million. Long-term debt was $358.4 million net of discount and financing costs ($386.4 million principal); total liabilities were $804.6 million and stockholders’ equity $399.1 million. Inventory-financing obligations were a further $299.7 million, compared with $225.1 million at year-end. Cash decreased $1.6 million during the quarter. Operating cash generation was partly offset by a $94.7 million inventory increase, largely attributed to crude delivery timing.
Net debt repayments were approximately $16.9 million in Q1. As of March 31, reported available liquidity was $87.3 million, including cash and facility availability; by May 5 it was $78.7 million, primarily reflecting working-capital changes. The company reported compliance with debt covenants. Wyoming Refining’s credit facilities mature April 30, 2018, when remaining balances are due. Management stated that cash flows and available resources should cover capital expenditures, working capital and debt service for the next 12 months.
Outlook, material items and risks
- Management’s 2017 capital expenditure budget, including major maintenance, was $42–46 million, focused mainly on retail improvements, Wyoming refinery expansion projects and information technology. No earnings or revenue guidance was provided.
- On May 8, 2017, after quarter-end, Par amended its J. Aron supply-and-offtake arrangements through May 31, 2021, including a $30 million forward sale of jet fuel. Par said it expected to use the proceeds for general corporate purposes, including retiring higher-cost debt.
- Results remain sensitive to refining margins, crude and product prices, inventory and derivative valuation, RIN compliance costs, and interest rates. The filing estimates that a $1-per-barrel change in average gross refining margins would change annualized operating income by about $32.8 million, all else equal.
- Environmental exposure includes Wyoming refinery investigation and remediation costs estimated at approximately $18.0 million for understood components, wastewater pond work estimated at $0.5 million and a replacement treatment system estimated at $11.6 million. Some remediation costs remain unestimable; potential pipeline penalties and other enforcement costs may arise.
- Hawaii refinery Consent Decree compliance is estimated at approximately $30 million. Tesoro is responsible for qualifying reimbursements and applicable fines and penalties; by March 31, Tesoro had reimbursed $9.7 million of $11.1 million in related capital expenditures incurred to date.
- Contingencies include disputes over Tesoro acquisition earnout calculations, Mid Pac earnout and indemnity claims, and a pending union grievance/arbitration. The company also disclosed environmental and regulatory risks, including fuel standards and greenhouse-gas requirements.
- The company recorded a $0.6 million income tax expense and maintains a valuation allowance against substantially all net deferred tax assets. A change in tax, trade or other government policies was identified as a potential risk.
Key facts for investors to verify
- How much of the earnings improvement reflects sustainable refining performance versus stronger crack spreads, acquisition effects, and derivative or equity-method gains?
- Whether working-capital movements, especially inventory and inventory financing, affect future operating cash flow and liquidity.
- Plans and funding for the April 2018 Wyoming Refining facility maturity, and the use and terms of proceeds from the J. Aron amendment.
- Actual environmental compliance and remediation costs, reimbursement recoveries from Tesoro, and outcomes of disclosed legal and regulatory matters.
- Progress against the $42–46 million 2017 capital budget and management’s stated 12-month liquidity assessment.