Par Pacific Holdings, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise noted. Par operates refining, retail, logistics and Texadian businesses, and holds an equity investment in Laramie Energy. Amounts below are U.S. dollars.
Financial and operating performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $377.8 million | $543.6 million |
| Operating income (loss) | ($19.7 million) | $17.9 million |
| Net income (loss) | ($18.7 million), or ($0.46) per share | $0.5 million, or $0.01 per share |
| Cash from operations | $12.0 million | $86.8 million |
| Adjusted EBITDA (non-GAAP) | $5.4 million | $22.4 million |
- Margins: Gross margin fell to $35.4 million from $66.1 million. Refining gross margin declined to $9.7 million from $43.1 million. Adjusted refining margin was $32.2 million versus $44.4 million; adjusted refining margin per throughput barrel was $4.51 versus $6.60, while net operating margin per barrel was $0.77 versus $2.72.
- Refining operations: Mid-Pacific crack spread fell to $4.48 per barrel from $9.09. Throughput was 74.2 thousand barrels per day, nearly unchanged, while on-island sales declined to 60.8 thousand barrels per day from 64.4 thousand. Exports increased to 20.6 thousand barrels per day from 17.7 thousand.
- Other segments: Retail gross margin rose to $18.6 million from $13.3 million, reflecting the Mid Pac acquisition and higher volumes. Logistics gross margin was $8.0 million versus $9.2 million; Texadian gross margin was a $0.9 million loss versus a small profit.
- Cash flow and investment: Operating cash flow was substantially below the prior-year period. Investing used $57.2 million, including $55.0 million invested in Laramie; financing used $0.8 million. Cash declined to $121.8 million from $167.8 million at year-end.
- Liquidity and debt: At March 31, cash was $121.8 million and reported available liquidity was $153.2 million, including $26.5 million available under the J. Aron deferred payment arrangement and $5.0 million under the KeyBank revolver. At April 29, available liquidity was $121.0 million, including $75.7 million cash; the filing attributes the decline primarily to product-purchase advances, turnaround spending and operating results. Debt, net of discounts and financing costs, was $163.0 million, including $11.0 million current maturities. Inventory-financing obligations were $144.0 million. The company reported compliance with debt covenants.
Material changes and unusual items
- The principal operating deterioration was lower refining spreads and reduced on-island sales. Management also cited weaker Texadian activity and associated costs. Mid Pac, acquired April 1, 2015, contributed retail sales and increased operating and depreciation expenses.
- Reported results included a $21.4 million negative refining inventory valuation adjustment, including the effect of the embedded J. Aron repurchase derivative. Management’s adjusted measures exclude specified valuation and other items; they are non-GAAP and should not be treated as substitutes for GAAP results.
- Non-operating results included gains of $6.2 million from remeasurement of contingent consideration and $1.6 million from common-stock warrants. These fair-value gains partly offset the operating loss and are not equivalent to operating cash generation.
- On March 1, Par invested $55.0 million in Laramie, increasing its ownership from 32.4% to 42.3%, alongside Laramie’s Piceance Basin acquisition. Laramie had approximately $131 million outstanding on its revolving facility; Par’s guarantee is limited to a pledge of its subsidiary’s equity interest. The facility generally restricts cash distributions to owners.
Outlook, risks and contingencies
- Management expected operating cash flows and available resources to cover capital expenditures, working capital and debt service for the next 12 months. The 2016 capital expenditure budget, including major maintenance, was $50–55 million; refinery turnaround costs were estimated at $30–35 million and expected to be funded from operating cash flow. No specific earnings or margin guidance was provided.
- A Clean Air Act consent decree covering the refinery was under negotiation and expected to be finalized in Q2 2016. Estimated compliance capital costs were $20–30 million; Tesoro was responsible under an environmental agreement for reimbursing qualifying third-party capital expenditures. Final terms, timing and recovery remain relevant uncertainties.
- Key exposures include volatile crude and refined-product prices and crack spreads, interest rates, renewable fuel credit costs, environmental regulation, counterparty credit, and litigation. A $1 per barrel change in average gross refining margin was estimated to change annualized operating income by approximately $26.7 million, all else equal.
- Other disclosed matters include a USW labor dispute referred to grievance/arbitration, a Mid Pac earnout and indemnity dispute, and remaining General Trust claims. The filing states that no material changes had occurred in the risk factors reported in the 2015 Form 10-K.
Important facts for investors to verify
- Whether refining spreads, on-island volumes and refining margins recover, and how the 2016 turnaround affects throughput, costs and liquidity.
- Cash conversion and working-capital movements: operating cash flow fell sharply year over year, and cash and available liquidity declined after quarter-end.
- Terms and reimbursement mechanics of the final consent decree, including whether projected capital costs are fully recoverable from Tesoro and on what schedule.
- Laramie’s performance, debt and distribution restrictions, as well as Par’s exposure under its limited equity pledge guarantee.
- The amount and timing of derivative, inventory-financing and contingent-consideration effects; reported adjusted metrics exclude some material items.