Business context and reporting period
Par Pacific Holdings, Inc. filed this Form 10-Q for the quarter ended September 30, 2019. It operates refining, retail and logistics businesses, with three refineries in Hawaii, Wyoming and Washington; the Washington refinery and logistics assets were acquired in January 2019. The company also held a 46% equity investment in natural-gas producer Laramie Energy.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1,401.6 million | $909.8 million | $4,002.4 million | $2,531.6 million |
| Operating income | $18.4 million | $4.9 million | $88.4 million | $61.5 million |
| Net income (loss) | $(83.9) million | $(5.8) million | $5.4 million | $25.5 million |
| Diluted EPS | $(1.65) | $(0.13) | $0.11 | $0.55 |
| Adjusted EBITDA (non-GAAP) | $49.7 million | $27.6 million | $166.3 million | $91.1 million |
| Adjusted net income (non-GAAP) | $6.7 million | $6.0 million | $36.0 million | $28.6 million |
For the nine months, operating cash flow was $98.6 million, investing cash outflow was $334.3 million and financing cash inflow was $273.0 million. Capital expenditures were $64.1 million. Cash, cash equivalents and restricted cash totaled $113.1 million at quarter-end; management reported liquidity of $175.3 million, including available financing sources.
At September 30, 2019, debt principal was $669.5 million ($642.4 million net of unamortized discounts and financing costs), while inventory-financing obligations were $731.4 million. Cash was $110.7 million excluding restricted cash. The company reported compliance with its debt agreements and no borrowings under its ABL revolver. Current liabilities were $1,051.6 million, including inventory financing and $54.5 million of current operating lease liabilities.
Material changes versus the prior comparable period
- Revenue increased 54% in Q3 and 58% year to date, principally reflecting the Washington acquisition and higher refining volumes; acquired Washington operations contributed $300.0 million of Q3 revenue and $855.6 million for the nine-month period.
- Q3 GAAP net loss widened substantially because of an $81.5 million non-cash impairment of the Laramie investment. Its estimated fair value fell to $51.8 million from a pre-impairment carrying value of $133.3 million, following continued declines in natural-gas prices.
- Nine-month net income declined despite higher operating income, reflecting the Laramie impairment, higher interest and financing costs, and acquisition-related costs. A $69.0 million income-tax benefit, mainly from a partial release of the tax valuation allowance following the Washington acquisition, supported reported net income.
- Q3 Adjusted EBITDA improved year over year, driven by Washington operations, stronger Wyoming refining conditions and retail margins; unplanned Hawaii maintenance and higher purchased-product volumes were offsets. Hawaii maintenance caused approximately 11 lost throughput days and $2.6 million of additional operating expense.
- Interest expense and financing costs rose to $57.3 million for the first nine months from $29.3 million, principally due to new acquisition financing and inventory-intermediation arrangements.
Outlook, commentary, risks and unusual items
- Management expected operating cash flows and available capital resources to cover capital expenditures, working capital and debt service for the next 12 months, while noting that additional capital may be needed for other significant business changes or refinancing and may not be available on acceptable terms.
- 2019 capital expenditure guidance was $100–$110 million, focused on refinery projects, renewable-fuels processing and storage, turnaround preparation and maintenance.
- Management cited commodity-price volatility as a major exposure. At Q3 throughput levels, a $1-per-barrel change in average gross refining margins would change annualized operating income by approximately $54.3 million, all else equal. A 1% increase in applicable variable interest rates was estimated to increase annual costs by about $3.3 million in cost of revenues and $4.5 million in interest expense.
- Key operating and regulatory risks include refinery maintenance and reliability, changes in crack spreads and crude differentials, RIN prices and fuel standards, environmental compliance costs, and potentially more stringent greenhouse-gas requirements. Wyoming remediation accruals were $16.8 million; a wastewater-treatment replacement was estimated at approximately $11.6 million. Some remediation costs were not reasonably estimable.
- Small-refinery exemptions generated a $5.7 million net RIN benefit in Q3. The company also recorded a $6.2 million lower-of-cost-or-net-realizable-value inventory charge during the quarter.
- Operating lease assets and liabilities increased materially following adoption of ASC 842 and the Washington acquisition; the standard had no material impact on reported operations or cash flows. The Washington purchase-price allocation remained preliminary at quarter-end.
- After quarter-end, on November 1, 2019, the Washington refinery intermediation agreement was extended through June 30, 2021, with an early-termination option beginning March 31, 2021.
Most important facts for investors to verify
- Whether Washington refinery and logistics contributions persist after integration, and how results compare with the preliminary acquisition assumptions.
- Whether Hawaii refinery maintenance and purchased-product costs normalize, and whether planned capital projects and turnarounds remain on budget.
- How natural-gas prices affect Laramie Energy, the investment’s recoverability and any guarantee exposure; Par’s disclosed recourse is limited to its pledged subsidiary equity interest.
- Debt service, floating-rate exposure, inventory-financing availability and covenants, including the terms and capacity of the J. Aron and MLC arrangements.
- The sustainability of earnings excluding the one-time tax valuation-allowance benefit, impairment and RIN-related benefits, as well as potential environmental and regulatory costs.