PBF Energy Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2016. Unless otherwise noted, financial amounts below are in millions of dollars. PBF Energy consolidates its refining operations and PBF Logistics LP (PBFX); results include noncontrolling interests.
Business context
PBF operates five U.S. refineries, with combined crude-processing capacity of approximately 900,000 barrels per day. It acquired the Torrance refinery on July 1, 2016, adding West Coast operations and increasing its scale; the Chalmette refinery, acquired in November 2015, also affects comparisons. PBFX operates logistics assets, including newly acquired Philadelphia-area terminals and a 50% interest in the Torrance Valley Pipeline.
Financial and operating results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $4,513.2 | $3,217.6 | $11,171.9 | $9,763.4 |
| Operating income | $129.7 | $92.3 | $359.1 | $538.5 |
| Net income | $56.4 | $55.5 | $153.8 | $317.1 |
| Net income attributable to PBF Energy | $42.1 | $42.8 | $116.3 | $265.9 |
| Diluted earnings per share | $0.43 | $0.49 | $1.19 | $3.06 |
| Gross refining margin per barrel, excluding special items | $6.92 | $12.97 | $6.20 | $10.95 |
| Adjusted EBITDA | $85.4 | $352.1 | $217.6 | $772.8 |
Revenue increased 40.3% in Q3 and 14.4% year to date, reflecting acquisitions and higher throughput, despite lower revenue per barrel from lower commodity prices. Throughput averaged 786,300 barrels per day in Q3, versus 475,400 a year earlier; the comparison includes Chalmette and, from July, Torrance. Management attributed weaker underlying refining performance primarily to lower crack spreads, less favorable crude differentials, and higher Renewable Fuel Standard compliance costs. Q3 gross refining margin excluding special items fell to $6.92 per barrel from $12.97; the nine-month measure fell to $6.20 from $10.95.
Reported earnings were materially affected by noncash lower-of-cost-or-market (LCM) inventory adjustments. These increased operating income by $104.0 in Q3 and $320.8 year to date in 2016, versus reductions of $208.3 and $81.1 in the corresponding 2015 periods. Thus, reported comparisons do not by themselves show the underlying trend; management’s non-GAAP adjusted measures also exclude specified special items.
Cash flow, debt and liquidity
- Operating cash flow: $388.2 for the first nine months, versus $240.4 in 2015. Working-capital changes were a net source of cash of $99.3.
- Investing cash flow: $1,247.0 used, including $971.9 for Torrance, $194.6 in property and equipment spending, $138.9 in turnaround costs, and $98.4 for PBFX’s Plains terminal purchase.
- Financing cash flow: $539.8 provided, including $550.0 drawn under the Revolving Loan and $138.3 net proceeds from PBFX unit offerings; partly offset by debt repayments and $115.1 in dividends and distributions.
- Cash: $625.4 at September 30, down from $944.3 at year-end 2015. Net cash decreased $318.9 during the nine-month period.
- Debt: Balance-sheet current and long-term debt totaled $2,365.6, compared with $1,836.4 of long-term debt at year-end 2015. The debt fair-value table reports total carrying value of $2,399.7 including catalyst lease obligations.
- Liquidity: Management reported total liquidity of approximately $866.2, down from $1,544.1 at year-end. Working capital was $1,499.3, versus $1,526.5. The company reported compliance with debt covenants at September 30.
Outlook, risks and unusual items
- Management expected 2016 net capital expenditures, facility improvements, and refinery maintenance and turnarounds of approximately $500–$525. It said cash flow and available capital were expected to cover needs over the next 12 months, while noting dependence on volatile petroleum markets. No earnings or margin guidance is provided in the supplied filing text.
- The board declared a $0.30-per-share PBF Energy dividend for November 2016. Management said it currently intended to maintain a quarterly $0.30 dividend, but future payments remain at board discretion. PBFX declared a $0.44-per-unit distribution.
- RFS compliance costs were $55.4 in Q3 and $170.9 for nine months, excluding the Gulf Coast and West Coast refinery amounts specified by the company. Management warned proposed 2017 renewable-fuel standards could raise compliance costs. EPA also notified subsidiaries that records indicated potentially invalid RINs; the company was investigating and expected no material effect, but the matter was unresolved.
- Torrance added substantial assumed environmental obligations: $146.3 recorded at September 30, with expected payments of $31.4 over five years. California AB 32 and SB 32 compliance costs may pose additional risk if recovery from customers changes. The company also assumed responsibility for Torrance air-permit notices; no penalty demands had been received.
- The Chalmette-related Caruso matter includes claims by residents over a 2010 emissions event. A four-plaintiff mini-trial produced limited cleaning-damage awards, now under appeal; a broader claims process was being negotiated, and the ultimate outcome could materially affect financial condition or cash flows.
- The company recognized a $664.4 tax receivable agreement liability, including $50.8 current, and estimated annual payments over the next five years of roughly $37.5–$56.6. Payments and potential acceleration depend on tax benefits, cash availability and other assumptions.
- Management stated disclosure controls were effective, but its internal-control evaluation excluded Chalmette and Torrance while integration was ongoing.
Most important facts for investors to verify
- Underlying refining profitability apart from the large, noncash LCM inventory benefits and the impact of acquired refineries.
- Whether crack spreads, crude differentials and RIN costs improve or continue to pressure margins and cash generation.
- Post-acquisition operating performance, integration progress, final Torrance purchase-price allocation and the acquired environmental and regulatory liabilities.
- Debt, borrowing availability and cash needs after the Torrance purchase, including capacity to fund capital spending, dividends and tax receivable agreement payments.
- Resolution and potential cost of the EPA’s potentially invalid RIN inquiry and the Chalmette and Torrance environmental or legal matters.