HF Sinclair Corporation 10-Q Summary: Second Quarter 2023
Business Context and Reporting Period
HF Sinclair filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2023. The company operates refineries, renewable diesel facilities, branded fuel marketing operations, lubricants and specialty products businesses, and consolidates Holly Energy Partners, L.P. (HEP), in which it held a 47% limited partner interest and a non-economic general partner interest at quarter-end.
Comparisons with 2022 are affected by the March 14, 2022 Sinclair Transactions. Periods after that date include the acquired Sinclair businesses, while earlier 2022 periods include only the predecessor HollyFrontier operations for the pre-acquisition period.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2023 | Change vs. 2022 | Six Months Ended June 30, 2023 | Change vs. 2022 |
|---|---|---|---|---|
| Sales and other revenues | $7.834 billion | Down 30% | $15.399 billion | Down 17% |
| Income from operations | $704.4 million | Down 58% | $1.209 billion | Down 36% |
| Net income attributable to HF Sinclair stockholders | $507.7 million | Down 58% | $860.9 million | Down 38% |
| Diluted earnings per share | $2.62 | Down from $5.43 | $4.40 | Down from $6.86 |
| EBITDA | $872.3 million | Down from $1.806 billion | $1.525 billion | Down from $2.166 billion |
| Net cash provided by operating activities | $490.0 million | Down from $1.528 billion | $667.7 million | Down from $1.989 billion |
Second-quarter operating income margin was approximately 9.0%, compared with approximately 14.9% in the prior-year quarter. Net income attributable to stockholders represented approximately 6.5% of revenue, compared with approximately 10.9% in the prior-year quarter. The filing does not present a single consolidated GAAP gross margin percentage.
- Refinery gross margin was $22.22 per produced barrel in the quarter and $22.90 for the six months, compared with $36.36 and $25.93, respectively, in the comparable 2022 periods.
- Consolidated refinery utilization was 81.7% in the quarter and 77.6% for the six months, compared with 92.5% and 90.5% in 2022.
- Renewables revenue was $175.1 million in the quarter and $377.5 million for the six months. Renewables net operating margin was negative $0.20 per gallon in the quarter and negative $0.06 per gallon for the six months, an improvement from negative $1.07 and negative $1.68, respectively.
- Marketing revenue was $1.041 billion in the quarter and $1.978 billion for the six months. The business had 1,520 branded sites at quarter-end versus 1,329 in the prior-year comparison.
- Renewable identification number costs were $200.8 million in the quarter and $358.3 million for the six months. Open RIN credit obligations were $38.0 million at June 30, 2023.
Cash Flow, Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $1.615 billion at June 30, 2023, compared with $1.665 billion at December 31, 2022. Working capital was $3.805 billion.
- Total debt was $3.196 billion, consisting of $1.393 billion of HF Sinclair long-term debt, $1.495 billion of HEP long-term debt, and $307.6 million of current debt.
- HF Sinclair had no borrowings under its $1.65 billion senior unsecured revolving credit facility, which matures in April 2026. Approximately $0.3 million of letters of credit were outstanding.
- HEP had $606.0 million outstanding under its $1.2 billion senior secured revolving credit facility, which matures in July 2025. HEP was in compliance with its covenants.
- Six-month capital expenditures were $180.3 million, including $16.3 million for HEP. Planned 2023 cash spending, including capital expenditures, turnarounds and catalyst spending, was estimated at $900 million to $1.060 billion.
- Six-month financing cash outflows were $542.8 million, including $248.0 million of share repurchases, $175.3 million of dividends, HEP debt repayments of $62.0 million and $51.3 million of distributions to noncontrolling interests.
- HF Sinclair repurchased 4.8 million shares for $240.3 million during the first six months. The remaining authorization was $419.7 million at June 30, 2023. After quarter-end, the company repurchased 8.2 million shares from REH Company for $410.6 million using cash on hand, leaving approximately $5.0 million of authorization as of August 2, 2023.
Material Changes Versus the Prior Comparable Period
- Revenue and earnings declined primarily because of lower refined product prices, lower refined product volumes and materially lower refinery margins.
- Second-quarter refinery gross margin declined 39% to $22.22 per barrel, while consolidated refinery throughput declined to 598,970 barrels per day from 663,310 barrels per day.
- Operating cash flow declined substantially, principally because of lower operating income, unfavorable working-capital changes and higher turnaround expenditures. Turnaround expenditures were $347.1 million in the first six months versus $70.2 million in 2022.
- Operating expenses increased 9% for the six months, primarily reflecting the acquired Sinclair businesses. Depreciation and amortization increased 18% to $363.3 million.
- Interest expense increased 26% for the six months to $92.8 million, reflecting the HEP senior notes issued in April 2022 and higher variable interest rates. Interest income increased to $37.5 million from $2.8 million due to higher cash balances and interest rates.
- The lower-of-cost-or-market inventory adjustment benefited second-quarter earnings by $7.9 million, compared with a $34.5 million charge in the prior-year quarter. For the six months, inventory valuation adjustments reduced pre-tax earnings by $39.7 million versus $26.0 million in 2022.
- The quarterly dividend increased to $0.45 per share from $0.40 per share in the prior-year quarter.
Guidance, Outlook, Risks and Unusual Items
- For the third quarter of 2023, management expected refinery crude runs of 585,000 to 615,000 barrels per day, reflecting planned maintenance at the Casper and Tulsa refineries. Management expected healthy refined product margins supported by seasonal summer demand.
- Management expected renewable diesel throughput to increase toward normalized run rates by year-end 2023, despite weakening macroeconomic conditions.
- Management expected Marketing site count to grow at least 5% annually and anticipated favorable product mix in Lubricants and Specialty Products, partly offset by softness in certain finished products.
- On May 3, 2023, HF Sinclair submitted a non-binding proposal to acquire the HEP common units it does not already own. No definitive agreement had been executed, and completion was uncertain.
- The company faces commodity price, refining margin, interest rate, foreign currency, operational, environmental, cybersecurity, regulatory and geopolitical risks. Derivatives are used to mitigate, but do not eliminate, these exposures.
- Environmental remediation liabilities were $198.6 million at June 30, 2023. The company is engaged with regulators regarding alleged Clean Air Act and related compliance matters at the Artesia refinery; no penalties had been demanded and the outcome was not predictable.
- HF Sinclair and subsidiaries are pursuing legal challenges involving the EPA’s reversal or denial of small refinery exemptions under the Renewable Fuel Standard. Potential costs could not be estimated.
- Management stated that pending legal and regulatory proceedings were not expected to have a material adverse effect based on currently available information, but outcomes remain uncertain.
- The filing reported effective disclosure controls and procedures as of June 30, 2023 and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the effect of the Sinclair acquisition on period-to-period comparability, refinery throughput and segment earnings.
- Monitor refining margins, utilization, planned turnarounds and the extent to which lower margins continue into subsequent quarters.
- Assess liquidity after the $410.6 million post-quarter-end share repurchase and the October 2023 maturities of approximately $307.6 million of 2.625% senior notes.
- Evaluate HEP’s $606.0 million of revolver borrowings, July 2025 maturity and proposed consolidation or acquisition transaction.
- Track RIN prices, renewable fuel compliance costs, open RIN obligations and the related REH Company escrow arrangements.
- Review environmental remediation exposure and the pending EPA proceedings involving the Artesia, Woods Cross and Cheyenne facilities.
- Reconcile non-GAAP measures such as EBITDA and refinery, renewables and marketing margins with GAAP results before comparing HF Sinclair with peers.