PBF Energy Inc. — Form 10-Q summary
Business context and reporting period
Quarter ended September 30, 2017; comparisons are with the three and nine months ended September 30, 2016. PBF Energy is a holding company that consolidates PBF LLC and PBF Logistics LP (PBFX). Its two segments are Refining and Logistics. It operated five U.S. refineries with approximately 900,000 barrels per day of combined capacity; PBFX provides terminal, pipeline, and storage services.
Financial and operating results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $5.479 billion | $4.513 billion | $15.251 billion | $11.172 billion |
| Operating income | $587.2 million | $129.7 million | $476.7 million | $359.1 million |
| Net income | $347.2 million | $56.4 million | $223.0 million | $153.8 million |
| Net income attributable to PBF Energy | $314.4 million | $42.1 million | $173.6 million | $116.3 million |
| Diluted earnings per Class A share | $2.85 | $0.43 | $1.57 | $1.19 |
| Cash provided by operating activities | Not presented for the quarter | Not presented for the quarter | $322.2 million | $388.2 million |
Q3 gross margin was $667.0 million, or $8.54 per barrel of throughput, versus $195.2 million, or $2.70 per barrel. Nine-month gross margin was $689.9 million, or $3.22 per barrel, versus $524.0 million, or $2.69 per barrel. Management’s non-GAAP gross refining margin, excluding special items, was $10.22 per barrel in Q3 and $8.46 for the nine months, compared with $6.92 and $6.20, respectively, in 2016. Throughput rose to 849,700 barrels per day in Q3 from 786,300; nine-month throughput rose to 786,100 from 711,800.
Q3 2017 results included a $265.1 million noncash benefit from the lower-of-cost-or-market (LCM) inventory adjustment, adding $160.7 million to net income. The comparable Q3 2016 benefit was $104.0 million pre-tax. For the first nine months, the LCM benefit was $97.9 million in 2017 versus $320.8 million in 2016. Excluding special items, management reported fully exchanged, diluted earnings per share of $1.44 for Q3 2017 versus a loss of $0.16 in Q3 2016, and $1.18 for the 2017 nine-month period versus a loss of $0.67 in 2016. These are non-GAAP measures.
Cash and cash equivalents were $300.9 million at September 30, down from $746.3 million at year-end 2016. Nine-month investing cash outflow was $609.9 million, including $267.2 million in property and equipment spending and $341.6 million for turnarounds; financing cash outflow was $157.7 million. Cash declined by $445.4 million over the period. Working capital was $1.154 billion, down from $1.351 billion at year-end.
Long-term debt, net of financing costs, was $2.158 billion; the debt schedule showed $2.191 billion of debt and related obligations before unamortized financing costs. The company issued $725 million of 7.25% senior notes due 2025 and used proceeds principally to retire its 8.25% senior secured notes due 2020. The refinancing resulted in $25.5 million of debt-extinguishment costs for the nine-month period. The 2023 senior notes became unsecured after the 2020 notes were discharged. PBF reported total liquidity of approximately $1.233 billion, including cash and estimated availability under its revolving loan; PBFX separately had $167.2 million of revolving-credit capacity and $39.4 million of cash. The company said it was in compliance with debt covenants.
Changes, outlook, and risks
- Q3 revenue increased 21.4% year over year; nine-month revenue increased 36.5%. Higher commodity prices, improved throughput and stronger industry refining margins contributed. The Torrance refinery was acquired in July 2016, so the nine-month comparison also reflects a longer period of Torrance operations in 2017.
- Management cited improved performance at Chalmette and Torrance, higher Q3 throughput following planned turnarounds, stronger crack spreads, and lower RFS compliance costs. Q3 RFS costs were $83.4 million versus $94.7 million; nine-month costs were $203.2 million versus $251.9 million.
- Management expected approximately $600 million of 2017 net capital expenditures for PBF excluding PBFX, with most refinery maintenance and turnaround spending substantially completed by September 30. PBFX expected $110–$120 million of 2017 net capital expenditures, primarily for growth projects. Management stated that cash flows and available resources should cover anticipated needs over the next 12 months, but results remain sensitive to petroleum markets and other external factors.
- The company maintained a $0.30 quarterly Class A dividend and declared another $0.30 dividend payable in November 2017. The board’s $300 million share-repurchase authorization ran through September 30, 2018; $149.2 million remained available, and no shares were repurchased in Q3. Dividends and repurchases are discretionary and may be reduced or suspended.
- Key exposures include volatile crude, product, natural gas and refining margins; RIN and California emissions-credit costs; counterparty and supply risks; substantial indebtedness; and dependence on refinery operations and logistics. The company’s inventory-intermediation agreements with J. Aron were extended to 2019, with possible mutual extensions, but termination could increase the company’s inventory funding needs.
- Environmental and legal matters include Torrance remediation liabilities recorded at $138.5 million; a Delaware City barge-shipment penalty under appeal; pending challenges to an ethanol permit; and an EPA matter involving potentially invalid RINs for which the company asserted an affirmative defense. A Chalmette class-action matter was reversed on appeal, but the company said the potential claims were not determinable and could have a material adverse effect depending on their scope. Management described several other identified penalties as not expected to be material.
- The company recorded a $610.8 million tax receivable agreement liability. It estimated payments of roughly $39.6–$60.0 million annually over the next five years, with possible acceleration under specified circumstances; actual payments may differ materially. A post-quarter PBFX offering of $175 million of 6.875% notes due 2023 was used to repay part of its revolver and for general partnership purposes.
Most important facts for investors to verify
- How much of reported earnings and margin improvement reflects the volatile, noncash LCM inventory adjustment versus underlying refining economics.
- Whether stronger throughput and margins persist after turnaround work and hurricane-related market disruptions, and how crude differentials and RIN costs evolve.
- Current borrowing availability, debt maturities and covenants, and the ability to fund capital spending, dividends and tax receivable agreement obligations through market downturns.
- Progress and potential costs or constraints from environmental remediation, RIN-related proceedings, Delaware permit appeals and Torrance-related litigation.
- Whether PBFX growth projects and planned refinery investments deliver expected returns without materially weakening liquidity.