PBF Energy Inc. quarterly report, Q2 FY2018

PBF Energy Inc. and PBF Energy Company LLC — Q2 2018 Form 10-Q

Reporting period: Three and six months ended June 30, 2018. Figures are unaudited. Unless stated otherwise, amounts are for consolidated PBF Energy and in U.S. dollars; PBF Energy consolidates PBF LLC and PBF Logistics LP (PBFX). PBF operates five U.S. refineries with approximately 900,000 barrels per day of combined capacity, plus a logistics segment.

Financial results and key metrics

Metric	Q2 2018	Q2 2017	Six months 2018	Six months 2017
Revenue	$7.444 billion	$5.017 billion	$13.247 billion	$9.772 billion
Operating income (loss)	$422.3 million	$(111.0) million	$517.9 million	$(110.3) million
Net income (loss)	$287.7 million	$(104.2) million	$329.5 million	$(124.2) million
Net income (loss) attributable to PBF Energy stockholders	$272.2 million	$(109.7) million	$302.5 million	$(140.7) million
Diluted EPS	$2.37	$(1.01)	$2.66	$(1.30)
Operating cash flow	Not presented by quarter	$307.9 million	$(34.7) million

Q2 revenue rose 48.4%; first-half revenue rose 35.6%. Management attributed growth to higher commodity prices and greater throughput and sales volumes.
Q2 consolidated gross margin was $484.1 million, versus a loss of $63.9 million. Gross refining margin, a non-GAAP measure, was $928.3 million ($11.77 per throughput barrel); excluding special items it was $770.3 million ($9.77 per barrel), versus $501.5 million ($7.17 per barrel) a year earlier.
First-half consolidated gross margin was $645.4 million, versus a loss of $16.7 million. Gross refining margin excluding special items was $1.293 billion ($8.57 per barrel), versus $1.016 billion ($7.45 per barrel).
Results included a non-cash lower-of-cost-or-market inventory adjustment benefit of $158.0 million pre-tax in Q2 and $245.7 million pre-tax for the first half. The comparable 2017 periods included inventory write-downs of $151.1 million and $167.1 million, respectively, and $25.5 million of debt-extinguishment costs. These items materially affect year-over-year comparisons.
Management reported Q2 adjusted EBITDA of $364.8 million versus $116.5 million; the first-half comparison was $464.1 million versus $200.2 million. These are non-GAAP measures and include adjustments described in the filing.
Refinery operating expense was $5.11 per throughput barrel in Q2 and $5.40 for the first half, down from $5.69 and $6.12, respectively. General and administrative expense increased 42.9% in Q2 and 43.1% in the first half, mainly due to employee-related costs, incentive compensation and retirement benefits. Depreciation and amortization also increased.
Q2 throughput averaged 866,600 barrels per day, versus 769,200; first-half throughput averaged 833,300, versus 753,700. Management cited stronger margins, favorable crude differentials, higher volumes and improved Torrance performance, while noting regional market differences.

Cash, debt and liquidity

At June 30, cash and cash equivalents were $478.3 million; current assets were $4.108 billion and current liabilities $2.477 billion, for working capital of $1.631 billion. Inventory was $2.540 billion.
Reported long-term debt was $2.214 billion, with $1.3 million of current debt. Debt included $350 million outstanding under PBF Holding’s revolving credit agreement and $84 million under PBFX’s revolver. PBF Energy reported $43.4 million of net interest expense in Q2 and $86.6 million for the first half.
Six-month operating cash flow of $307.9 million compared with investing outflows of $365.2 million, including $115.7 million in property and equipment, $179.2 million in turnaround costs, and PBFX’s $58 million Knoxville terminal acquisition. Cash declined by $94.7 million from year-end.
Management reported total liquidity of approximately $1.786 billion at June 30, including cash and availability under PBF Holding’s facility; PBFX separately had approximately $272 million of revolver availability. The filing says the company was in compliance with debt covenants and expected cash flow and available resources to cover needs for the next 12 months, while noting dependence on operating results and market conditions.
On May 2, PBF Holding replaced its asset-based revolver with a $3.4 billion facility maturing in May 2023, with an accordion to $3.5 billion. On July 30, after quarter-end, PBFX increased its revolver commitment from $360 million to $500 million and extended maturity to July 2023.

Outlook, capital allocation and material developments

No earnings or margin guidance is provided. For 2018, management expected $525–$550 million in net capital expenditures for PBF excluding PBFX, and $60–$65 million for PBFX excluding acquisitions. Planned work included refinery turnarounds, facility improvements and environmental and regulatory projects.
Management said it currently intended to continue PBF Energy’s quarterly $0.30 per-share dividend, subject to board discretion. A $0.30 dividend was declared for payment August 30, 2018. PBFX declared a $0.495-per-unit distribution for the same payment date.
The $300 million share repurchase authorization expired September 30, 2018; $150.8 million had been used by June 30, leaving $149.2 million available. No shares were repurchased in Q2.
PBFX completed its $58 million Knoxville terminal acquisition in April. After quarter-end it agreed to acquire East Coast storage assets for $107 million, subject to approvals and expected to close in Q4 2018; it also raised approximately $35 million in a registered unit offering.

Risks, contingencies and unusual items

Refining results and liquidity are exposed to volatile crude, feedstock, product and natural-gas prices; crack spreads and crude differentials; refinery downtime; and commodity-hedge movements. A $1 per MMBTU change in natural-gas prices was estimated to change annual costs by about $68 million.
Renewable fuel compliance costs were $39.2 million in Q2 and $83.1 million for the first half, down from $74.2 million and $119.7 million in 2017. RIN prices, emissions requirements and California AB32 obligations remain risks. Accrued renewable-credit and emissions obligations were $52.4 million at quarter-end.
Inventory intermediation arrangements with J. Aron support inventory financing at Paulsboro and Delaware City but expose the company to counterparty and termination risk, including potential need to finance inventory or repurchase stored products. Current terms run to July 2019 for Delaware City and December 2019 for Paulsboro, with possible extensions by mutual consent.
The Tax Receivable Agreement liability was $391.2 million. Management estimated payments of approximately $30–$65 million annually over the next five years, declining thereafter; acceleration provisions could apply in certain circumstances.
Environmental matters include Torrance remediation liabilities of approximately $133.9 million and ongoing regulatory and legal matters. Management stated that certain unresolved matters were not expected to be material, but identified Chalmette class and mass-action litigation as potentially capable of materially affecting financial position, results or cash flows. Other proceedings include Delaware City permit and compliance matters and Torrance alleged violations.
Management identified commodity-market volatility, regulation, environmental compliance, debt, counterparty performance, refinery operations and potential inability to maintain dividends among principal risks. Disclosure controls were reported effective as of June 30, 2018.

Important facts for investors to verify

How much reported earnings and gross-margin improvement was attributable to the non-cash inventory valuation benefit, versus underlying refining performance.
Whether refining margins, crude differentials, throughput and Torrance operating improvements persist, and how planned turnarounds affect production and spending.
Cash conversion and working-capital needs, including inventory levels, receivables, and the effect of commodity prices on liquidity.
Debt and borrowing availability, covenant headroom, and the consequences if market conditions weaken or inventory intermediation agreements end.
Actual RIN and emissions costs, environmental remediation spending, litigation outcomes and potential Tax Receivable Agreement payments.
Execution and funding of the 2018 capital program, PBFX acquisitions, and the sustainability of dividends and distributions.