HF Sinclair Corp annual report, FY2023

HF Sinclair Corporation — FY2023 Form 10-K Summary

Business context and reporting period

HF Sinclair is an independent energy company operating seven refineries with combined crude-processing capacity of approximately 678,000 barrels per stream day. Its businesses include Refining, Renewables, Marketing, Lubricants & Specialties and Midstream. Operations span the United States, Canada, the Netherlands and more than 80 export markets.

This filing is the Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed February 21, 2024. The filing presents annual results rather than a standalone fourth-quarter report. Year-over-year comparisons are affected by the March 14, 2022 Sinclair acquisition, whose operations were included for a full year in 2023 but only from the acquisition date in 2022.

Key financial metrics

Metric	FY2023	FY2022	Change
Sales and other revenues	$31.96 billion	$38.20 billion	Down 16%
Income from operations	$2.20 billion	$4.05 billion	Down 46%
Net income attributable to HF Sinclair	$1.59 billion	$2.92 billion	Down 46%
Diluted EPS	$8.29	$14.28	Down 42%
EBITDA	$2.90 billion	$4.62 billion	Down 37%
Net cash provided by operating activities	$2.30 billion	$3.78 billion	Down 39%
Capital expenditures	$385.4 million	$524.0 million	Down 26%
Cash dividends declared per share	$1.80	$1.20	Up 50%

Calculated consolidated margins were approximately 6.9% for operating income, 5.0% for net income attributable to HF Sinclair and 9.1% for EBITDA. The filing does not present these consolidated margins as reported metrics.

Refinery gross margin declined to $21.39 per produced barrel from $26.78, a 20% decrease. Consolidated refinery utilization declined to 83.7% from 92.3%, while produced refined-product sales declined to 602,280 barrels per day from 628,340.
Refinery net operating margin declined to $12.53 per produced barrel from $18.86.
Renewables sales volume increased to 215.5 million gallons from 136.2 million gallons. Net operating margin improved to negative $0.01 per gallon from negative $0.52, but the segment remained marginally loss-making before depreciation and amortization.
Marketing revenue increased to $4.15 billion from $3.91 billion, with branded sites increasing to 1,540 from 1,513. Marketing margin increased to approximately $0.07 per gallon from $0.06.
RIN compliance costs were $790.8 million in 2023. Lower-of-cost-or-market inventory adjustments reduced pre-tax earnings by $270.4 million, compared with $52.4 million in 2022.
Cash and cash equivalents were $1.35 billion at year-end, compared with $1.67 billion at December 31, 2022. Total assets were $17.72 billion and total equity was $10.24 billion.

Debt and liquidity

Reported long-term debt was $2.74 billion at December 31, 2023; total debt principal was approximately $2.76 billion.
HF Sinclair had a $1.65 billion senior unsecured revolving facility maturing in April 2026, with no borrowings outstanding and $0.3 million of letters of credit outstanding.
The HEP revolving facility provided $1.2 billion of commitments, with $455.5 million borrowed at year-end and approximately $744.5 million of remaining availability. The facility matures in July 2025 and is guaranteed by HF Sinclair following the HEP merger.
Management reported approximately $3.75 billion of liquidity, consisting of cash, the undrawn HF Sinclair facility and remaining HEP facility availability.
Debt principal maturities are $455.5 million in 2025, $1.0 billion in 2026, $400.0 million in 2027, $500.0 million in 2028 and $400.0 million thereafter. No principal maturity was scheduled for 2024.
Contractual obligations totaled $7.19 billion, including debt principal and interest, supply agreements, transportation and storage commitments, leases and other long-term obligations.

Material changes versus the prior comparable period

Lower refined-product prices, lower sales volumes, reduced refinery margins and planned turnarounds drove the substantial decline in revenue, operating income, net income and cash flow.
Operating expenses increased 4% to $2.44 billion, primarily from increased maintenance and the full-year inclusion of the acquired Sinclair businesses. Depreciation and amortization increased 17% to $770.6 million.
Turnaround expenditures increased to $555.7 million from $144.8 million, reducing operating cash flow.
On December 1, 2023, HF Sinclair completed the merger of HEP into an indirect wholly owned subsidiary. Consideration included $267.6 million of cash and 21.1 million HF Sinclair shares. The transaction reduced noncontrolling interest and consolidated the midstream business under HF Sinclair.
HF Sinclair repurchased 18.8 million shares for $974.5 million during 2023, including $810.6 million of privately negotiated purchases from REH Company. The August 2023 repurchase authorization had $676.4 million remaining at year-end.
HF Sinclair repaid $307.8 million of senior notes at maturity in October 2023 and exchanged HEP senior notes for equivalent HF Sinclair senior notes in December 2023.
The Board increased the quarterly dividend from $0.45 to $0.50 per share in February 2024. The company also repurchased an additional $85.0 million of shares from REH Company in January and February 2024.

Guidance, outlook, commentary and unusual items

For the first quarter of 2024, management expected refinery crude runs of 585,000 to 615,000 barrels per day, reflecting planned Puget Sound maintenance. Seasonal gasoline weakness was expected to pressure refined-product margins.
Management expected continued weakening in RIN and LCFS credit prices to pressure Renewables margins and stated that it would focus on economic optimization.
Marketing management continued to target annual branded-site growth of at least 5%.
Expected 2024 cash spending totaled $875 million, consisting of $800 million of sustaining capital and turnaround spending and $75 million of growth capital. Turnarounds and catalyst spending was expected to be $415 million.
Management stated that cash, internally generated cash flow and available credit facilities should fund planned projects and liquidity needs for the foreseeable future, while noting that dividends and repurchases remain subject to Board discretion and market, tax, regulatory and debt considerations.
HF Sinclair accrued $195.4 million for environmental liabilities at December 31, 2023 and incurred $26.5 million of environmental remediation expense during the year.
EPA, DOJ and New Mexico regulators continued discussions regarding alleged Clean Air Act and related compliance issues at the Artesia and Lovington refineries. No penalties had been demanded as of the filing date, and the outcome was described as too early to predict.
The Osage Pipeline crude release matter was resolved through a consent decree lodged in January 2024, subject to court review, involving a $7.4 million civil penalty and injunctive relief.
Legal challenges continue regarding EPA decisions on small-refinery Renewable Fuel Standard exemptions. The company stated that potential costs could not presently be estimated.
Oregon’s Climate Protection Program rules were invalidated by an appellate court on procedural grounds, while the state indicated it intended to pursue new rulemaking. The potential financial and operational impact remains uncertain.

Principal risks

Exposure to volatile crude oil, renewable feedstock, refined-product, lubricant, natural gas, RIN and LCFS credit prices.
Refinery turnarounds, unplanned outages, fires, spills, weather events, transportation disruptions, supply-chain constraints and limited insurance coverage.
Increasing environmental, fuel-quality, renewable-fuel, pipeline-safety, greenhouse-gas and climate-related regulation, including potentially higher compliance and capital costs.
Potential reductions in petroleum-fuel demand from vehicle efficiency improvements, electric vehicles, alternative fuels and changing consumer preferences.
Cybersecurity threats affecting refinery, pipeline, financial and operational technology systems.
Debt covenant, refinancing, interest-rate, supplier-credit and customer-credit risks.
Goodwill and long-lived-asset impairment risk. Goodwill was approximately $3.0 billion; no impairment was recorded in 2023, but valuation was sensitive to future margins, production, operating costs, capital spending and discount rates.
Concentration and governance risk related to REH Company, which owned approximately 13.3% of HF Sinclair’s common stock as of February 15, 2024.

Most important facts for an investor to verify

Reconcile the decline in 2023 earnings and cash flow to refinery margins, utilization, turnaround spending, inventory valuation adjustments and RIN costs.
Review the HEP merger accounting, debt restructuring, remaining noncontrolling interest and the effect on consolidated leverage and cash flows.
Assess whether the $875 million 2024 capital and turnaround budget is consistent with expected operating cash flow and shareholder-return commitments.
Monitor 2024 refinery utilization, crack spreads, regional differentials, planned turnarounds and the Puget Sound maintenance schedule.
Track RIN, LCFS and other low-carbon credit prices, regulatory changes and the status of small-refinery exemption litigation.
Evaluate environmental accruals, the Artesia and Lovington regulatory matters, the Osage consent decree and potential future remediation costs.
Confirm debt maturities, HEP facility refinancing requirements and compliance with credit-facility covenants.
Consider the sustainability of dividends and share repurchases in a lower-margin refining environment.