Business context and reporting period
This is Par Petroleum Corporation’s unaudited Form 10-Q for the three months ended March 31, 2014. The filing identifies the registrant as Par Petroleum Corporation, although the request metadata names PAR Pacific Holdings, Inc. Par operated refining, distribution and marketing; natural gas and oil; and commodity marketing and logistics businesses. Its Hawaii refinery was acquired in September 2013, making comparisons with first-quarter 2013 substantially non-comparable.
Financial performance and position
Amounts are in millions of dollars except per-share data. Gross margin is a company-defined non-GAAP measure.
| Metric | Q1 2014 | Q1 2013 or prior date |
|---|---|---|
| Operating revenue | $743.2 | $64.9 |
| Gross margin | $30.2 | $11.5 |
| Operating income (loss) | $(14.8) | $2.6 |
| Net loss | $(14.6) | $(4.8) |
| Loss per share, basic and diluted | $(0.48) | $(0.30) |
| Cash from operating activities | $(7.9) | $(8.6) |
| Cash and cash equivalents | $20.7 at March 31 | $38.1 at December 31, 2013 |
| Total debt | $91.5 at March 31 | $97.3 at December 31, 2013 |
| Current assets / current liabilities | $543.4 / $473.6 | $544.5 / $453.4 at December 31, 2013 |
First-quarter operating cash use was $7.9 million; investing cash use was $2.6 million, and financing cash use was $6.9 million. Cash declined by $17.4 million during the quarter. Refining, distribution and marketing gross margin was $27.0 million; commodity marketing and logistics gross margin was $1.6 million, and natural gas and oil gross margin was $1.5 million. The company reported total liabilities of $596.2 million and stockholders’ equity of $214.0 million at quarter-end.
Material changes versus the prior comparable period
- Revenue increased sharply largely because the acquired Hawaii refinery contributed a full quarter in 2014; the refinery had no contribution in Q1 2013. The filing cautions that results are not directly comparable.
- Commodity marketing and logistics gross margin fell $8.3 million to $1.6 million, reflecting lower trading differentials on heavy Canadian crude and delivery timing that shifted some profits to Q2 2014.
- Operating expenses excluding depreciation rose by $32.9 million, primarily because of the refinery acquisition. Acquisition and integration costs increased to $2.9 million, including costs associated with leaving Tesoro transition services.
- General and administrative expense decreased $1.7 million, primarily due to lower trust-related professional fees. Interest and financing costs increased to $3.5 million.
- Gains from revaluing warrants and contingent consideration totaled $4.0 million and partly offset operating losses. The contingent-consideration gain reflected a decrease in estimated HIE-related cash flows.
Outlook, risks and unusual items
- Management said refinery profitability depends substantially on crack spreads, which are outside the company’s control. It reported improved refinery gross margin versus Q4 2013, attributing the improvement to better crude procurement.
- Management expected approximately $19 million of 2014 capital expenditures, including about $16 million for refinery sustaining needs and $3 million for HIE integration. It also expected to contribute approximately $3.3 million to Piceance Energy’s drilling program in Q2 or Q3.
- Management believed cash flows and available resources would meet current capital, working-capital and debt-service needs for the next 12 months, but stated that additional capital would be required for the announced Koko’oha acquisition and that funding availability and cost were not assured.
- On June 2, 2014, after quarter-end, the company agreed to acquire Koko’oha Investments for $107 million, less estimated long-term liabilities, plus inventory and subject to adjustments. Koko’oha owns Mid Pac Petroleum, which operates Hawaii retail sites and terminals. Closing remained subject to regulatory and customary conditions.
- For the acquisition, the company increased its Tranche B loan by $13.2 million and reported commitments to expand term loans to $50 million and add a senior bridge facility of up to $75 million. Certain financing parties are related parties.
- Disclosure controls and internal control over financial reporting were ineffective at March 31. Management identified material weaknesses, including inventory measurement controls and prior late financial-statement adjustments; remediation efforts were ongoing and incomplete. The filing also refers to a restatement of certain previously issued 2013 financial statements.
- Environmental compliance is a risk, including a pending federal Clean Air Act consent decree that may require refinery capital improvements. Final costs were not estimable; Tesoro agreed to reimburse certain qualifying capital expenditures and penalties under the acquisition environmental agreement, subject to stated terms and limitations.
- Other risks include volatile crude and refined-product prices, liquidity and debt levels, execution of the acquisition and integration, and regulatory, operational and environmental exposures. The company reported a pending helicopter-fuel lawsuit and said it did not believe a loss was probable. Recovery Trust litigation proceeds, if any, were unknown.
Important facts for investors to verify
- Confirm the correct issuer and ticker: the supplied filing is for Par Petroleum Corporation, not a filing expressly headed PAR Pacific Holdings, Inc.
- Assess refinery margins, crude procurement and working-capital needs, including the large supply-and-exchange-agreement obligations reported at $394.5 million.
- Review the Koko’oha transaction’s closing status, final consideration, financing commitments, related-party terms and resulting leverage.
- Track remediation of internal-control material weaknesses, particularly inventory measurement, and the reliability of subsequent reported results.
- Monitor 2014 capital spending, liquidity, the Piceance contribution and environmental compliance costs, including the consent decree and Tesoro reimbursement obligations.