Business context and reporting period
Par Pacific Holdings, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The company operates refining, retail and logistics businesses, with refineries in Hawaii and Wyoming, and held a 39.1% equity interest in natural-gas producer Laramie Energy at quarter-end. Northwest Retail, acquired in March 2018, is included in retail results from the acquisition date.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data, unless stated otherwise.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $909.8 | $610.5 | $2,531.6 | $1,780.0 |
| Operating income | $4.9 | $26.7 | $61.5 | $72.4 |
| Net income (loss) | $(5.8) | $18.8 | $25.5 | $53.6 |
| Diluted EPS | $(0.13) | $0.41 | $0.55 | $1.16 |
| Adjusted EBITDA (non-GAAP) | $27.1 | $45.1 | $89.7 | $107.0 |
| Adjusted net income (non-GAAP) | $5.5 | $25.2 | $27.2 | $42.7 |
Revenue increased substantially, mainly from higher crude and refined-product prices and volumes, plus the Northwest Retail acquisition. Profitability weakened: management cited lower Hawaii crack spreads, unfavorable crude differentials and Hurricane Lane’s impact in Q3. Q3 refining operating income fell to $0.4 million from $21.3 million; retail increased to $10.7 million from $7.5 million, while logistics declined to $9.0 million from $10.4 million. For the nine months, refining income declined to $53.6 million, logistics to $26.4 million, and retail improved to $24.2 million.
Refining Adjusted Gross Margin, a company-defined non-GAAP measure, was $52.3 million in Q3 versus $71.2 million; nine-month margin was $171.4 million versus $190.0 million. The nine-month net-income comparison also reflects a $10.5 million Tesoro earn-out settlement charge, lower equity earnings from Laramie Energy and higher depreciation and interest expense. Lower RIN expense partly offset weaker refining conditions.
Operating cash flow for the first nine months was $51.9 million, down from $105.5 million. Investing used $103.7 million, including $74.3 million for Northwest Retail and $30.2 million of capital expenditures. Financing provided $21.2 million, including $30.7 million of net borrowings under the J. Aron deferred-payment arrangement; cash, cash equivalents and restricted cash ended at $88.5 million, down from $119.1 million at year-end 2017.
At September 30, total debt principal was $415.0 million: $115.0 million of 5.00% convertible notes due 2021 and $300.0 million of 7.75% secured notes due 2025. Net carrying debt was $389.6 million. The ABL revolver had no borrowings and a borrowing base of approximately $67.3 million. Inventory-financing obligations were $351.2 million. Management reported compliance with debt covenants and total liquidity of $184.9 million, including cash and available facilities. It believed cash flows and available resources would meet capital, working-capital and debt-service needs for the next 12 months.
Material changes, outlook and risks
- Acquisitions and investment: Northwest Retail was acquired for approximately $75 million in March. In August, Par agreed to buy certain Hawaii refinery units and related assets from IES for $45 million—$30 million cash and shares—plus an inventory adjustment. The transaction was expected to close by year-end, subject to conditions. Subsequent to quarter-end, Laramie repurchased units, increasing Par’s ownership from 39.1% to 46.0%.
- Capital spending: Nine-month capital expenditures were $30.2 million. The 2018 budget was $50–$55 million, principally for maintenance and refinery and retail growth projects, including a Hawaii hydrotreater and Wyoming expansions.
- Market exposure: Management said a $1-per-barrel change in average gross refining margins, based on Q3 throughput, would change annualized operating income by approximately $31.9 million, all else equal. Commodity prices, refining margins, crude differentials, RIN prices and working-capital needs can materially affect earnings and liquidity. A $1 increase in applicable variable interest rates was estimated to raise annual costs by approximately $3.0 million in cost of revenues and $0.5 million in interest expense.
- Environmental and legal matters: Wyoming refinery remediation accruals were $17.5 million; a new wastewater treatment system was estimated to cost approximately $11.6 million. Two related bankruptcy claims totaled approximately $22.4 million, against which about $0.5 million was accrued; the company said it could not predict the outcome. A Hawaii refinery union arbitration concluded in October, with the arbitrator’s decision pending. Consent-decree work continues; Tesoro had reimbursed $12.2 million of $13.1 million in related capital expenditures through quarter-end.
- Other notable items: The company recorded accelerated depreciation after revising useful lives of certain refinery assets. It maintained a valuation allowance against substantially all net deferred tax assets despite approximately $1.6 billion of NOL carryforwards. Adoption of the lease accounting standard was expected to materially increase balance-sheet assets and liabilities. No formal earnings guidance is provided in the supplied filing text.
Important facts for investors to verify
- Whether the Hawaii Refinery Expansion closed on the expected terms and what the final inventory adjustment, share issuance and integration costs were.
- Whether Hawaii refining margins and crude differentials recover, and the ongoing effects of weather, refinery operations and RIN costs.
- How cash conversion and working-capital movements evolve, especially inventory financing and J. Aron deferred-payment usage.
- Progress against the capital-spending budget, environmental obligations and Wyoming wastewater-system estimate.
- Laramie Energy’s operating and financial performance after Par’s ownership increased, including any related liquidity or guarantee exposure.