PBF Energy Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 3, 2018. PBF operates five U.S. refineries with approximately 900,000 barrels per day of combined capacity and reports Refining and Logistics segments. PBF Energy consolidates PBF Energy Company LLC (PBF LLC) and PBF Logistics LP (PBFX); PBF Energy owned approximately 97.2% of PBF LLC and PBF LLC held a 44.1% limited partner interest in PBFX at quarter-end. Figures below are generally PBF Energy consolidated, unless noted.
Financial results and key metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $5.803 billion | $4.754 billion |
| Income (loss) from operations | $95.7 million | $0.8 million |
| Net income (loss) | $41.8 million | $(20.0) million |
| Net income (loss) attributable to PBF Energy shareholders | $30.4 million; $0.27 per diluted share | $(31.1) million; $(0.29) per diluted share |
| Gross margin | $182.4 million; $2.54 per throughput barrel | $67.0 million; $1.01 per throughput barrel |
| Gross refining margin, excluding special items (non-GAAP) | $522.3 million; $7.26 per throughput barrel | $514.5 million; $7.75 per throughput barrel |
| Operating cash flow | $(85.4) million | $(165.4) million |
| Cash and cash equivalents at quarter-end | $363.0 million | $573.0 million at Dec. 31, 2017 |
| Debt on balance sheet, current and long-term | Approximately $2.177 billion | Approximately $2.186 billion at Dec. 31, 2017 |
Revenue rose 22.0%, principally reflecting higher commodity prices and increased volumes. Refinery throughput averaged 799,600 barrels per day versus 738,000; production averaged 803,000 barrels per day versus 742,700. Refining segment operating income was $125.7 million, compared with $10.6 million; Logistics operating income was $35.2 million versus $36.0 million.
Q1 investing cash outflow was $93.3 million, including $24.9 million in property, plant and equipment spending and $58.8 million in turnaround costs. Financing cash outflow was $31.3 million, including dividends and distributions of $45.6 million. Cash declined by $210.1 million during the quarter.
At March 31, working capital was $1.284 billion and total liabilities were $5.367 billion. Management reported total liquidity of approximately $1.404 billion, including cash and availability under the revolving loan; PBFX separately had approximately $336 million of revolver capacity. The company said it was in compliance with its debt covenants.
Material changes and unusual items
- Q1 results included an $87.7 million non-cash benefit from a lower-of-cost-or-market (LCM) inventory adjustment, versus a $16.0 million non-cash charge in Q1 2017. The 2018 benefit increased net income by $64.5 million after tax. Excluding this item, fully converted net loss was $33.4 million, or $0.29 per share, compared with a $22.7 million loss, or $0.20 per share, in 2017; these are non-GAAP measures.
- Excluding the LCM item, gross refining margin per barrel fell to $7.26 from $7.75. Management cited turnaround-related product mix, which increased lower-value output, partly offset by favorable crude differentials, higher crack spreads, higher throughput and improved Torrance contributions.
- Refinery operating expenses fell $25.1 million, or 5.6%, to $426.1 million; management attributed this to improved reliability and lower maintenance costs at Chalmette and Torrance. General and administrative expense rose $19.0 million to $62.8 million, primarily due to employee-related costs. Depreciation and amortization rose $25.1 million to $86.0 million, reflecting the larger asset base and completed projects and turnarounds.
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate from 35% to 21%. PBF Energy recorded $10.9 million of tax expense, compared with a $19.0 million benefit in the prior-year quarter.
- The company adopted ASC 606 revenue recognition on January 1, 2018 using the modified retrospective method and recorded no material cumulative adjustment. Prior-period figures were not adjusted. The new presentation of depreciation and amortization and adoption of pension-cost presentation guidance did not change total operating income or net income.
Outlook, management commentary and risks
- Management expected 2018 net capital expenditures, excluding PBFX, of approximately $525 million to $550 million, including refinery turnarounds and environmental and regulatory projects. PBFX expected $20 million to $25 million, excluding acquisition spending.
- Management said operating cash flow and available capital resources were expected to cover the next 12 months of capital spending, working capital, dividends, debt service, share repurchases and Tax Receivable Agreement obligations. It cautioned that cash generation depends in part on petroleum markets and other factors outside its control.
- PBF Energy stated its intention to continue a quarterly $0.30-per-share dividend, while emphasizing that future declarations are at the board’s discretion. A $0.30 dividend was declared May 3, 2018. The $300 million share repurchase authorization ran through September 30, 2018; $149.2 million remained available at quarter-end.
- On May 2, 2018, after quarter-end, PBF Holding replaced its asset-based revolving credit agreement, increasing maximum commitments from $2.635 billion to $3.4 billion, extending maturity to May 2023 and adding an accordion up to $3.5 billion. PBFX also acquired two Knoxville terminals on April 16 for approximately $58 million, largely financed by PBFX revolver borrowings.
- Commodity price and refining-margin volatility, crude/feedstock availability, refinery turnarounds, interest rates, counterparty performance, and RIN and California emissions-credit costs are key exposures. RFS compliance costs were $43.9 million in Q1 2018 versus $45.5 million in Q1 2017; management noted that tighter RIN supply could increase prices.
- Inventory intermediation agreements with J. Aron support inventory funding at Paulsboro and Delaware City, but termination could require PBF to finance covered inventories and repurchase certain products. The agreements then extended to December 2019 at Paulsboro and July 2019 at Delaware City, with possible mutual extensions.
- Environmental and legal matters include a Delaware City discharge-permit settlement requiring either a $30,000 penalty plus an $88,000 environmental project or a $118,000 penalty, plus $7,433 cost recovery; a separate $100,000 Delaware City settlement; and ongoing Torrance environmental matters. The filing also describes Chalmette claims with potentially material adverse exposure, though the amount is not determinable, and other proceedings for which outcomes or amounts remain uncertain.
- The $366.5 million Tax Receivable Agreement liability represented estimated undiscounted payments; management estimated annual payments over the next five years could range from approximately $30 million to $65 million. Certain events could accelerate obligations.
Most important facts for investors to verify
- How much of reported profitability and year-over-year improvement reflects the non-cash LCM inventory benefit, and whether underlying refining margins recover.
- Whether planned refinery turnarounds, operating reliability and throughput deliver the expected results, and whether the $525 million to $550 million capital plan is sufficient.
- Cash conversion and working-capital needs, given negative operating cash flow and the quarter’s $210.1 million cash decline.
- Refinancing terms, available borrowing capacity, debt service requirements and the company’s ability to maintain dividends and other capital commitments.
- Exposure to RIN and emissions-credit prices, crude differentials, commodity hedges and inventory intermediation counterparties.
- Developments in environmental matters and litigation, including Delaware City, Torrance and Chalmette, and potential Tax Receivable Agreement payments.