PBF Energy Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Dollar amounts are USD; financial amounts are generally in millions unless stated otherwise. PBF Energy consolidates PBF Energy Company LLC and PBF Logistics LP (PBFX).
Business context and reporting period
PBF operates five U.S. refineries with combined capacity of approximately 900,000 barrels per day, alongside its logistics segment, PBFX. Refining results depend significantly on the difference between refined-product prices and crude/feedstock costs; PBFX revenue is substantially derived from fee-based agreements with PBF affiliates.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $7,646 | $5,479 | $20,893 | $15,251 |
| Income from operations | $286 | $587 | $804 | $477 |
| Net income | $192 | $347 | $522 | $223 |
| Net income attributable to PBF Energy shareholders | $180 | $314 | $482 | $174 |
| Diluted EPS | $1.50 | $2.85 | $4.16 | $1.57 |
| Operating cash flow | — | — | $720 | $322 |
Q3 consolidated gross margin was $315 million, down from $648 million. Gross refining margin was $9.37 per throughput barrel, versus $13.61; excluding identified special items, it was $9.25 versus $10.22. For the nine-month period, gross refining margin was $9.90 per barrel versus $8.91, or $8.80 versus $8.46 excluding special items. These gross-refining-margin measures are non-GAAP.
Q3 revenue increased 39.6%, mainly reflecting higher commodity prices and higher volumes. Refinery throughput averaged 888,400 barrels per day in Q3 versus 849,700. For the nine months, throughput averaged 851,800 versus 786,100 barrels per day. The filing attributes weaker Q3 results primarily to lower crack spreads compared with the prior-year quarter, partly offset by favorable crude differentials and higher throughput.
Nine-month investing cash outflow was $420 million, including $192 million of property, plant and equipment spending, $201 million of turnaround costs and the $58 million Knoxville terminal acquisition; $48 million of asset-sale proceeds partly offset these uses. Cash and cash equivalents were $1,059 million at September 30, up from $573 million at year-end 2017. Working capital was $2,101 million. Management reported total liquidity of approximately $2,237 million, including cash and availability under PBF Holding’s asset-based revolver; PBFX separately had $446 million of revolver capacity.
Total debt carrying value was approximately $2,220 million, including $350 million outstanding under PBF Holding’s revolver and $50 million under PBFX’s revolver. Cash exceeded current debt, but debt less cash was approximately $1,161 million on this carrying-value basis. PBF Energy reported compliance with its debt covenants at quarter-end.
Material changes and unusual items
- Q3 included a $43.8 million gain on the sale of non-refinery Torrance land and a $44.6 million charge for early return of leased railcars. Management said a further $7.7 million railcar-related charge was expected as remaining railcars were taken out of service and returned.
- A noncash lower-of-cost-or-market inventory adjustment increased Q3 operating income by $54.8 million and nine-month operating income by $300.5 million. The comparable adjustments were $265.1 million in Q3 2017 and $97.9 million for the first nine months of 2017. These volatile inventory adjustments materially affect reported comparisons.
- Q3 adjusted EBITDA was $331 million versus $405 million; nine-month adjusted EBITDA was $795 million versus $605 million. These are non-GAAP measures, and the filing cautions that they are not substitutes for GAAP results or operating cash flow.
- Renewable Fuel Standard compliance costs declined to $33.9 million in Q3 from $83.4 million, and to $117.0 million for the nine months from $203.2 million.
- General and administrative expense rose 20% in Q3 and 33.7% for the nine months, primarily due to employee-related costs, including incentive compensation and retirement benefits. Nine-month depreciation and amortization increased by approximately $63.5 million, reflecting the larger asset base and completed projects and turnarounds.
- The August 2018 share offering raised $287.3 million net. The board authorized a $0.30 per-share dividend for payment in November; management stated it intended to continue quarterly dividends at that level, subject to board discretion.
Outlook, risks and contingencies
Management expected 2018 net capital expenditures, excluding PBFX, of approximately $525–$550 million, primarily for refinery maintenance, turnarounds, facility improvements and regulatory requirements. PBFX expected approximately $50–$55 million of net capital expenditures, excluding acquisitions. PBFX completed the $107 million East Coast Storage Assets acquisition on October 1, 2018; $75 million was payable at closing and the balance one year later.
Management stated available operating cash flow and capital resources should cover capital spending, working capital, dividends, debt service and Tax Receivable Agreement obligations for the next 12 months, while noting that cash generation depends on volatile petroleum markets and other factors outside the company’s control. Key risks include crack-spread and crude-differential volatility, RIN and emissions-credit costs, interest rates, counterparty and supply risks, refinery disruptions, and the possible termination of J. Aron inventory intermediation agreements. Those agreements expire in 2019 unless extended by mutual consent; termination could require the company to finance covered inventory and repurchase products.
The Tax Receivable Agreement liability was $381.3 million. The company estimated payments of roughly $30–$65 million annually over the next five years, with potential acceleration under specified circumstances; actual payments may differ. Environmental and legal matters include refinery compliance proceedings and remediation obligations. The filing notes that the potential amount of the Thomas v. Exxon Mobil/Chalmette mass action is not determinable and an adverse outcome could be material. Other disclosed proceedings were generally described as not expected to have a material effect, though outcomes and timing remain uncertain. The company also asserted an affirmative defense concerning potentially invalid RINs; EPA acceptance was unresolved.
Subsequent to quarter-end, PBF declared the $0.30 dividend, PBFX declared a $0.50-per-unit distribution, and PBFX completed the East Coast Storage Assets acquisition. No specific earnings or margin guidance is provided in the supplied filing text.
Important facts for investors to verify
- How much of reported earnings and cash flow reflects reversible inventory valuation adjustments, and how the company’s results perform excluding all identified special items.
- Refining economics by region, including realized crack spreads, crude differentials, throughput, and RIN/compliance costs.
- Actual revolver availability, borrowing-base movements, covenant headroom, and cash needs following the October 1 acquisition and planned 2018 capital program.
- Progress and final costs for refinery environmental matters and litigation, especially the Chalmette mass action and unresolved Torrance proceedings.
- Renewal or replacement of the J. Aron agreements before their stated 2019 expirations, and the resulting inventory-funding implications.
- Whether operating cash flow supports the stated dividend intention, debt obligations, capital spending, and Tax Receivable Agreement payments under weaker market conditions.