Par Pacific Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Par operates refining, retail and logistics businesses, with a 46% investment in Laramie Energy. On June 1, it acquired the Billings, Montana refinery and related logistics assets and equity interests. Financial figures below are in U.S. dollars; “M” means million and “B” means billion.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $1.784B | $2.106B | $3.469B | $3.457B |
| Operating income | $46.4M | $174.0M | $307.8M | $52.9M |
| Net income | $30.0M | $149.1M | $267.9M | $12.1M |
| Diluted EPS | $0.49 | $2.50 | $4.39 | $0.20 |
| Adjusted EBITDA (non-GAAP) | $150.8M | $242.1M | $318.5M | $254.5M |
| Adjusted net income (non-GAAP) | $105.6M | $197.2M | $243.1M | $169.9M |
Q2 adjusted gross margin, a non-GAAP measure, was $205.6M in Refining (versus $287.3M), $29.6M in Logistics (versus $24.9M) and $39.2M in Retail (versus $27.6M). The acquired Montana refinery contributed $58.2M of refining adjusted gross margin for its June operating month. Segment margins are not consolidated profit measures.
- Cash flows, six months: Operating cash flow was $312.2M, investing cash flow was negative $626.0M, and financing cash flow was positive $13.8M. Investing outflow included $608.2M paid at the Billings closing and $30.7M of capital expenditures.
- Cash: Cash and cash equivalents were $191.0M at June 30, versus $490.9M at year-end 2022; total cash including restricted cash was $195.0M.
- Debt: Principal debt was $594.7M and carrying value, net of discounts and financing costs, was $579.1M. This excludes $783.6M of current obligations under inventory financing agreements. The company reported $215M of letters of credit outstanding under its ABL facility.
- Liquidity: Management reported liquidity of $464.4M, including cash and access to credit and inventory-financing arrangements. It said available resources and operating cash flows should cover capital expenditures, working capital and debt service for the next 12 months.
- Balance sheet: Total assets were $3.610B, total liabilities $2.691B and stockholders’ equity $919.3M. Inventory was $1.241B.
Material changes and key drivers
- Q2 revenue fell 15% year over year, while net income declined to $30.0M from $149.1M. Management attributed the earnings drop chiefly to a $124.7M decline in Refining segment operating income, reflecting weaker crack spreads and less favorable Hawaii crude differentials; higher G&A and acquisition costs also weighed on results. Retail segment operating income improved by $9.7M.
- For the first half, revenue was broadly flat, while operating income and net income rose substantially. Refining segment operating income increased $256.8M year over year, with management citing lower environmental costs, including a $94.7M gain from settling 2020 and 2021 renewable fuel obligations (RINs). The first-half comparison also includes the $10.7M Laramie distribution recorded as equity earnings.
- Crack spreads declined sharply versus Q2 2022: the reported Singapore 3-1-2, Pacific Northwest RVO-adjusted 3-1-1-1 and USGC RVO-adjusted 3-2-1 indices fell 63%, 47% and 49%, respectively. The quarter’s results also included substantial derivative and inventory-related adjustments; reported non-GAAP measures exclude specified items and may not be comparable with other companies’ measures.
- Billings was acquired for approximately $638.2M before a preliminary $12.7M working-capital adjustment, funded with cash and ABL borrowings. The preliminary purchase-price allocation remains subject to finalization, primarily for inventory, property and equipment, and environmental liabilities; adjustments could be material. The acquired assets contributed $217.2M of revenue and a $15.6M net loss in the reported period.
- In February, Par refinanced prior debt with a $550M term loan due 2030, priced at 98.5% of face value, and retired its 7.75% and 12.875% senior secured notes and Term Loan B. The refinancing extended maturities but management estimated undiscounted future interest payments of $295M using rates in effect at March 31, 2023. A $300M interest-rate collar runs through May 2026.
Outlook, risks and contingencies
- No company earnings or operating guidance is provided in the supplied filing text. Management’s stated 12-month liquidity assessment is not a forecast of results. Its market discussion cited uncertainty in crude prices and refining margins: the EIA forecast Brent averaging $73 per barrel in 2023 in its May outlook, while OPEC production cuts were described as potential upward price pressure.
- Commodity prices and refining margins materially affect earnings and liquidity. Par estimated that a $1-per-barrel change in average gross refining margins, at Q2 throughput, would change annualized operating income by about $58.4M, all else equal. It also disclosed floating-rate debt exposure and estimates that a 1% rate increase would raise annual costs by about $0.9M under inventory financing and $8.1M in interest expense, after specified rate protections.
- Environmental-credit exposure remains significant: gross RIN and other environmental credit obligations were $433.0M, with related credits carried in inventory at $293.3M. The company estimated net obligations of $100.9M if both were marked to market. Washington’s Climate Commitment Act and Clean Fuel Standard may require further credit purchases; renewable fuel rules also create compliance and market-price risk.
- The Billings acquisition brought environmental liabilities estimated at $18.9M, with certain costs expected over 20–30 years. At the Wyoming refinery, Par accrued $14.5M for known remediation components and estimated $11.6M for a replacement wastewater treatment system; further remediation costs are not fully estimable.
- Other matters include disputed Hawaii tax-related proceedings and two unresolved Delta-related claims totaling approximately $22.4M, against which Par accrued about $0.5M for claims deemed probable and estimable. The filing states that outcomes and potential impacts of some proceedings cannot be predicted with certainty.
- After quarter-end, Par entered an uncommitted Hawaii letter-of-credit facility with a stated maximum of $120M and a possible increase to $350M, subject to conditions. A related supply-and-offtake amendment requires minimum liquidity of $15M for PHR over any three consecutive business days, including at least $15M in cash and cash equivalents. On August 2, the board expanded the share-repurchase authorization from $50M to $250M.
Important facts for investors to verify
- Whether the Billings acquisition achieves expected integration benefits, and how the final purchase-price allocation affects reported assets, depreciation and environmental liabilities.
- How refining margins, crude differentials, throughput and environmental-credit prices evolve, particularly given the sharp Q2 margin decline and the first-half RIN settlement gain.
- Cash generation and liquidity after acquisition funding, inventory-financing needs, letters of credit and the new PHR minimum-liquidity covenant.
- Floating-rate borrowing costs, the effect of the interest-rate collar, and whether the refinancing’s longer maturity offsets its stated future interest burden.
- Environmental compliance costs, unresolved legal and tax matters, and any changes to the company’s estimates or accruals.
- That Adjusted EBITDA, adjusted net income and adjusted gross margin are non-GAAP measures; review their reconciliations and the exclusions before relying on them.