Business context and reporting period
Par Petroleum Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2014. The company operated refining, distribution and marketing; natural gas and oil; and commodity marketing and logistics businesses. Its Hawaii refinery was acquired in September 2013, so 2014 results are not directly comparable with 2013, which had no refinery operations.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $802.1 million; 2013: $29.4 million | $1,545.4 million; 2013: $94.3 million |
| Gross margin | $22.8 million; 2013: $5.6 million | $53.0 million; 2013: $17.1 million |
| Operating loss | $24.4 million; 2013: $4.8 million | $39.2 million; 2013: $2.2 million |
| Net loss | $24.7 million; loss per share $0.81 | $39.2 million; loss per share $1.29 |
| Operating cash flow | Not separately reported in the supplied filing text | Cash used: $73.2 million; 2013: cash provided of $11.8 million |
Refining, distribution and marketing generated gross margin of $18.4 million in the quarter and $45.4 million in the first half, but reported an operating loss of $19.9 million for the quarter and $31.8 million for the first half. Commodity marketing and logistics gross margin fell to $2.6 million for the quarter and $4.2 million for the half-year, chiefly due to lower barge volumes and weaker trading differentials and volumes. Natural gas and oil gross margin was $1.8 million and $3.4 million, respectively.
For the first half, investing cash outflow was $16.5 million and financing cash inflow was $69.5 million; cash declined by $20.2 million to $17.9 million. Operating cash use reflected the net loss and working-capital movements, including a $47.2 million crude-supplier deposit. At June 30, current assets were $583.3 million and current liabilities $520.2 million. Current liabilities included $438.2 million of obligations under supply and exchange agreements. Total debt was $122.1 million, including $2.6 million of current maturities; long-term debt was $119.5 million. Interest expense and financing costs were $6.9 million for the first half.
At June 30, reported liquidity was $51.4 million, including cash and $33.5 million of ABL availability. The company reported total available liquidity of $85.7 million as of August 4, including $38.0 million cash and $47.7 million ABL availability.
Material changes versus prior comparable period
- Revenue and gross margin increased primarily because HIE’s refinery operations were included in 2014 but not in 2013. The company cautions that the periods are not comparable.
- Despite higher gross margin, the first-half operating loss widened to $39.2 million from $2.2 million, reflecting refinery operating costs, higher depreciation, acquisition and integration costs, and other expenses.
- First-half operating cash flow shifted from a $11.8 million inflow to a $73.2 million outflow; cash fell from $38.1 million at year-end 2013 to $17.9 million at June 30, 2014.
- Total debt increased from $97.3 million at December 31, 2013 to $122.1 million at June 30, 2014. Stockholders’ equity declined to $190.3 million from $228.3 million.
Outlook, risks, contingencies and unusual items
- Management said second-quarter results were hurt by adverse crack spreads, particularly late in the quarter when Brent crude prices rose while Hawaii refined-product prices lagged. It described crude and Hawaii product markets as challenging, despite some July recovery.
- Management expected 2014 capital expenditures of approximately $19 million ($16 million for refinery sustaining needs and $3 million for software and IT). It expected to contribute approximately $3.3 million to Piceance Energy in early 2015 and stated that existing cash flows and resources should meet current needs for the next 12 months, while additional capital would be needed for the Mid Pac acquisition or other significant business changes.
- The proposed acquisition of Koko’ōha Investments and Mid Pac Petroleum was valued at $107 million, less estimated long-term liabilities, plus estimated inventory and adjustments. Closing required regulatory approvals; the FTC issued a second request for information on July 30. The company had funded a $10 million deposit and could forfeit deposits in specified termination circumstances.
- Subsequent to quarter-end, the company arranged a Term Loan facility and a separate Bridge Loan facility of up to $75 million for the acquisition. It also launched a rights offering: if fully subscribed, the offering was expected to issue approximately 6.4 million shares and produce approximately $101.5 million net proceeds. The additional $35 million loan advance was required to be repaid from rights-offering proceeds.
- The company reported that disclosure controls were ineffective and a material weakness remained in internal control over financial reporting, related to inventory measurement controls and late financial-statement adjustments. Remediation efforts were ongoing and incomplete.
- Risks include volatile crude and refined-product prices, liquidity and financing needs, refinery operating and environmental requirements, possible reduced crude-pipeline capacity for Texadian, acquisition approval/integration and due-diligence risks, and reliance on tax attributes. A refinery-related federal Clean Air Act consent decree was under negotiation; compliance costs were not yet estimable. Tesoro had agreed to reimburse certain qualifying pre-closing environmental costs under the HIE environmental agreement.
- The company maintained a full valuation allowance against net deferred tax assets. The filing also notes that litigation proceeds from the General Trust, if any, were unknown; management did not consider a loss in the helicopter litigation probable.
Important facts for investors to verify
- Whether the FTC review and other approvals allowed the Mid Pac transaction to close, and the final purchase price, funding, and integration costs.
- Actual rights-offering subscription proceeds and resulting share dilution, and repayment of the additional loan advance.
- Refinery crack spreads, operating performance, and working-capital needs, including obligations and costs under the Barclays supply and exchange agreements.
- Progress in remediating the material weakness and whether inventory controls and financial reporting improve.
- Final consent-decree requirements, environmental expenditures, and any costs not covered by Tesoro’s indemnities.