Business context and reporting period
Par Petroleum Corporation’s Form 10-K covers the fiscal year ended December 31, 2014; it is an annual report, not a standalone fourth-quarter filing. The company operated in refining, distribution and marketing; natural gas and oil; and commodity marketing and logistics. Its Hawaii refinery became part of the business through the September 2013 acquisition of Hawaii Independent Energy (HIE), making 2014 and 2013 results not directly comparable. The filing identifies the registrant as Par Petroleum Corporation, notwithstanding the request metadata naming Par Pacific Holdings, Inc.
The refinery’s results are the principal driver of the business. Management identified the spread between crude/feedstock costs and refined-product prices (“crack spread”) as the main determinant of refinery profitability.
Financial and operating performance
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $3.108 billion | $886.0 million |
| Gross margin (company-defined, non-GAAP) | $170.6 million | $28.9 million |
| Operating loss | $37.5 million | $47.4 million |
| Net loss | $47.0 million | $79.2 million |
| Basic and diluted loss per share | $1.44 | $4.01 |
| Cash used in operating activities | $54.6 million | $35.7 million |
| Cash used in investing activities | $24.3 million | $564.5 million |
| Cash provided by financing activities | $130.1 million | $632.1 million |
Revenue growth principally reflects the full-year contribution from HIE, acquired in September 2013. Segment gross margin was $158.9 million for refining, distribution and marketing, $5.6 million for commodity marketing and logistics, and $6.0 million for natural gas and oil. Commodity marketing margin fell from $16.7 million, mainly on lower trading differentials for heavy Canadian crude and lower volumes; natural gas and oil margin declined from $7.7 million, primarily due to lower realized prices. The filing does not provide a clear consolidated operating-margin percentage.
Annual refinery throughput averaged 69,000 barrels per day, or 73% utilization of rated capacity. The Singapore 4-1-2-1 crack spread averaged $6.22 per barrel in 2014, reaching $7.39 in Q4 after a second-quarter low of $4.79. Management said declining crude prices and customer contracts priced on prior-week or prior-month averages benefited fourth-quarter results; Q4 financial statements are not separately presented in the supplied filing text.
Liquidity, debt and balance sheet
At December 31, 2014, cash and cash equivalents were $89.2 million, total assets $741.0 million, total liabilities $448.8 million, and stockholders’ equity $292.2 million. Current assets were $460.8 million and current liabilities $310.8 million. Current liabilities included $197.4 million of obligations under supply and exchange agreements, which support refinery inventory and working capital.
Total debt, net of unamortized discount, was $136.6 million: $87.4 million under the Term Loan, $22.8 million under the retail credit agreement and $26.5 million under Texadian’s uncommitted facility. The Term Loan carried a 10% cash-pay or 12% payment-in-kind rate, at the company’s election, and was stated to mature in 2018. The filing lists $29.1 million of debt maturities in 2015, $39.4 million in 2016 and $53.2 million in 2018. The company reported compliance with its credit agreements at year-end.
Available liquidity was $190.5 million at December 31, 2014, comprising $89.2 million cash and $101.3 million of revolver/ABL availability. By March 9, 2015, reported liquidity was $172.3 million. Management attributed the decline mainly to lower refining-segment borrowing-base availability as refined-product prices fell, and a $13.5 million payment toward Piceance Energy’s drilling program. Operating cash use increased year over year despite the smaller net loss, in part reflecting working-capital movements and supply-and-exchange obligations.
Material changes, outlook, risks and unusual items
- Mid Pac transaction: The company expected to acquire Mid Pac for approximately $107 million, less estimated long-term liabilities and plus inventory, subject to adjustments. The filing anticipated an April 2015 closing, with funding expected from cash, subsidiary debt and possible equity contributions. Mid Pac had sold 74 million gallons in 2014; a supply agreement began January 1, 2015. The acquisition and its completion are subsequent-event expectations, not 2014 operating results.
- Fourth-quarter conditions: Management reported improved crack spreads, lower feedstock costs amid falling crude prices, and the year’s highest on-island sales, including a military jet contract. It expected additional on-island sales from Mid Pac and other commercial opportunities but provided no quantified earnings guidance.
- Capital needs: The 2015 capital budget was $10–15 million, primarily for refinery reliability and efficiency, plus approximately $28 million for Piceance Energy investments. Piceance’s credit facility generally restricts distributions to owners, limiting access to its cash flows.
- Environmental obligations: A proposed Consent Decree was expected to require $20–25 million of refinery capital improvements. Tesoro agreed to reimburse qualifying third-party project costs under the HIE Environmental Agreement. The filing also describes indemnity limits for certain other pre-existing environmental matters. A groundwater sheen found near the Sand Island terminal in 2014 was investigated; the company said it believed the material did not originate from its facility, and no further response was anticipated.
- Other material risks: Refining margins and crude/product price volatility; refinery outages and transportation disruptions; environmental and fuel-standard compliance costs; exposure to Hawaii’s regional market; debt, variable-rate interest and working-capital needs; and union negotiations after the refinery labor agreement expired in January 2015. Mid Pac integration, regulatory approval and financing also posed risks.
- Taxes and unusual accounting items: The company reported approximately $1.4 billion of federal net operating loss carryforwards but maintained a full valuation allowance against deferred tax assets; an ownership change could restrict their use. The 2014 net loss included noncash gains from changes in warrant value ($4.4 million) and contingent consideration ($2.8 million). The company raised approximately $101.5 million net through a 2014 rights offering. No dividends were paid, and debt agreements restrict dividends.
Deloitte issued an unqualified opinion on the financial statements and on internal control over financial reporting as of year-end. Management also concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether the Mid Pac acquisition closed as anticipated, its final purchase consideration and funding mix, and the resulting debt and share dilution.
- Subsequent refinery crack spreads, throughput, operating reliability and on-island sales, including the economics of the supply agreement with Mid Pac.
- Actual 2015 liquidity and borrowing-base availability, debt maturities and compliance with credit-facility covenants.
- The final Consent Decree requirements, project costs, timing and Tesoro reimbursement; also any developments in the Sand Island matter.
- Piceance Energy’s drilling pace, development spending, reserve revisions and ability to service its credit facility, given that distributions to Par are restricted.
- Progress in labor negotiations and any effect on refinery operations; and the conditions under which the company can use its NOL carryforwards.