PAR Petroleum Corporation — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing identifies the registrant as Par Petroleum Corporation (OTCQB: PARR). Its results are not directly comparable with 2012: the company adopted fresh-start accounting after emerging from bankruptcy in August 2012, acquired Texadian in December 2012, and acquired Hawaii Independent Energy (HIE) in September 2013.
Business context and material developments
Par operated three segments: refining, distribution and marketing in Hawaii; non-operated oil and gas interests, principally a 33.34% interest in Piceance Energy; and crude-oil marketing and logistics. The HIE acquisition added a 94,000-barrel-per-day refinery, related logistics assets and 31 retail outlets. The purchase included $75 million cash plus working capital and inventory, approximately $24.3 million of pre-closing start-up and turbine-overhaul funding, and contingent earn-outs of up to approximately $40 million. Par also acquired Texadian in December 2012.
To fund the HIE transaction, Par completed a private placement that generated approximately $199.2 million net proceeds and used Barclays supply-and-exchange arrangements that provided approximately $378.2 million. In January 2014, the company implemented a 1-for-10 reverse stock split; share and per-share figures in the filing are generally retroactively adjusted.
Financial performance and position
| Metric | FY 2013 | December 31, 2013, unless noted |
|---|---|---|
| Total operating revenue | $886.0 million | — |
| Refining, distribution and marketing revenue | $778.1 million | Segment operating loss: $19.3 million |
| Commodity marketing and logistics revenue | $100.1 million | Segment operating income: $9.1 million |
| Oil and gas sales | $7.7 million | Segment operating income: $0.2 million |
| Operating loss | $39.3 million | — |
| Net loss | $70.6 million; $3.57 per basic and diluted share | — |
| Cash from (used in) operations | $(35.7) million | Cash and cash equivalents: $38.1 million |
| Cash from (used in) investing | $(564.5) million | Total assets: $827.1 million |
| Cash from financing | $632.1 million | Stockholders’ equity: $236.8 million |
| Debt, net of discount | — | $97.3 million; $3.25 million current |
| Available liquidity | — | $79.9 million, including cash and borrowing availability |
Cost of revenues was $848.9 million. Interest and financing costs were $19.5 million, including a $6.1 million loss on extinguishment of debt; a $10.1 million warrant fair-value loss also contributed to the net loss. The company reported no income-tax expense for 2013. Its approximately $1.3 billion federal NOL carryforwards were subject to a full valuation allowance on net deferred tax assets.
Year-end debt included $19.5 million of Tranche B loans, $51.8 million under HIE’s asset-based facility, and $26.0 million under HIE Retail’s term loan. Separately, the balance sheet included $390.8 million of obligations under supply-and-exchange agreements. Par reported $41.6 million of letters of credit outstanding under Texadian’s uncommitted credit agreement.
Changes versus prior periods
2013 revenue and expenses reflect the newly acquired refining and logistics businesses; neither contributed comparable full-year results in the prior periods shown. The 2013 net loss of $70.6 million compares with a $8.8 million loss for the four-month 2012 successor period, but those periods are not comparable. The predecessor’s eight-month 2012 period reported a $45.4 million net loss, including a $151.3 million oil-and-gas impairment and bankruptcy-related reorganization items.
Management said refinery margins were pressured by out-of-cycle feedstock purchases made during start-up, compounded by geopolitical tensions, and by weaker fourth-quarter crack spreads. Management also cited elevated general and administrative costs while building internal support functions and relying on contractors and Tesoro transition services.
Outlook, risks and unusual items
- Management believed operating cash flows and available capital resources would cover capital expenditure, working-capital and debt-service needs for the next 12 months, while noting dependence on oil and refined-product markets and other factors outside its control. No quantified earnings or margin guidance was provided.
- Management expected improved crude sourcing to support refinery margins and reduced reliance on outside service providers and transition services to lower relative G&A costs.
- Refinery profitability is exposed to volatile crack spreads, crude/feedstock costs, product prices, seasonality and operational interruptions. Fourth-quarter crack spreads are generally seasonally weaker.
- Piceance Energy’s credit facility restricted cash distributions to owners. Par could be called for up to $20 million of capital contributions; failure to fund could dilute its interest. Piceance had $90.2 million outstanding on its revolving facility at year-end, and Par’s guarantee recourse was limited to its pledged equity interests.
- Tesoro agreed to reimburse certain refinery capital costs and penalties relating to a pending Clean Air Act consent decree and to cover specified pre-acquisition environmental matters, subject to contractual terms and limitations. Compliance costs for the final decree were not yet estimable.
- A Hawaii-related jet-fuel litigation matter involved a $3.25 million demand; management did not believe a loss was probable. Bankruptcy-related claims of approximately $40.2 million remained unresolved, with $3.8 million accrued for claims deemed probable and estimable. The largest listed claim was a $22.4 million U.S. Government claim concerning offshore plugging and abandonment obligations.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end because of a material weakness: insufficient qualified accounting personnel to prevent material misstatements. Remediation was ongoing; additional finance staff and a new CFO and controller were hired by early 2014.
Key facts for investors to verify
- Refinery operating performance, feedstock sourcing, crack spreads and cash generation after the September 2013 acquisition.
- Debt and liquidity availability under the facilities, related covenants, Barclays supply-and-exchange obligations, and the substantial letters of credit supporting Texadian.
- Progress in remediating the material weakness and any subsequent changes to financial reporting controls.
- Final HIE purchase-price allocation, earn-out exposure, and whether Tesoro’s environmental reimbursement and indemnity cover the eventual consent-decree requirements.
- Resolution and potential dilution or cash cost of remaining bankruptcy claims, including the offshore abandonment claim, and any Piceance capital call or changes in distributions.