Business context and reporting period
Par Pacific Holdings, Inc. filed this Form 10-Q for the three months ended March 31, 2018. The company operates refining, retail and logistics businesses and holds a 39.1% equity interest in natural-gas producer Laramie Energy. It completed the acquisition of Northwest Retail, comprising 21 owned and 12 leased gasoline and convenience-store locations in Washington and Idaho, on March 23, 2018.
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Revenue | $765.4 million | $605.3 million |
| Operating income | $27.7 million | $29.2 million |
| Net income | $15.2 million; $0.33 per diluted share | $27.8 million; $0.58 per diluted share |
| Adjusted EBITDA (non-GAAP) | $26.1 million | $32.3 million |
| Operating cash flow | $12.6 million | $25.0 million |
| Cash, cash equivalents and restricted cash | $65.7 million | $119.1 million at Dec. 31, 2017 |
| Long-term debt, net carrying value | $386.5 million | $384.8 million at Dec. 31, 2017 |
Revenue increased 26%, mainly from higher refining prices and sales volumes; refined-product sales volume rose 7.9%. Operating income margin was approximately 3.6%, versus 4.8% a year earlier, while net income margin was approximately 2.0%, versus 4.6%. Refining operating income was $26.1 million (down from $27.4 million); logistics was $8.8 million (down from $9.4 million); retail was $5.7 million (down from $6.1 million). Retail results include only nine days of Northwest Retail operations.
Crack spreads and crude-oil differentials weakened: refining Adjusted Gross Margin was $56.4 million, down from $61.0 million. The company reported that a $13.2 million RIN benefit, primarily from small-refinery exemptions, partly offset weaker refining economics. Net income also reflected a $10.5 million charge relating to settlement of the Tesoro earn-out dispute and lower Laramie Energy equity earnings ($5.6 million versus $8.7 million).
Cash used in investing was $84.3 million, including $74.7 million for Northwest Retail and $9.6 million of capital expenditures. Financing activities provided $18.3 million, primarily from a $21.5 million increase in the J. Aron deferred-payment arrangement. Current assets were $588.2 million and current liabilities $509.2 million at quarter-end; current liabilities included $383.8 million of inventory-financing obligations. Separately, the company had $415.0 million principal outstanding on its 5.00% convertible notes due 2021 and 7.75% secured notes due 2025, with no ABL borrowings. It reported compliance with debt covenants.
Outlook, commentary and risks
- Management said cash flows and available capital resources should cover current capital expenditures, working capital and debt service for the next 12 months. Reported liquidity was $122.6 million at March 31 and $156.6 million at May 4, 2018; the increase was primarily attributed to working-capital changes.
- 2018 capital expenditure budget: $50 million to $55 million, including maintenance, Hawaii hydrotreater work and Wyoming refinery projects. The filing provides no earnings or revenue guidance.
- Commodity prices and refining margins are key sensitivities. Management estimated that a $1-per-barrel change in average gross refining margins, all else equal, would change annualized operating income by approximately $33.4 million. RIN prices, crude/feedstock costs and counterparty performance also pose risks.
- Environmental exposures include $17.8 million accrued for identified Wyoming refinery remediation work and an estimated $11.6 million for a replacement wastewater treatment system. The company notes that costs for some remediation elements are not reasonably estimable. Consent-decree work at the Hawaii refinery continues; estimated remaining capital expenditures were approximately $1 million, with reimbursement by Tesoro subject to the environmental agreement.
- Other contingencies include a Mid Pac earn-out and indemnity arbitration scheduled for November 2018, with the sellers asserting up to $4.5 million; and two related Delta bankruptcy claims totaling approximately $22.4 million, against which the company accrued approximately $0.5 million. The company stated that issuing stock for the full claims was remote, but settlement remained subject to litigation.
Important facts for investors to verify
- How much of Q1 refining performance depended on the $13.2 million RIN benefit and whether comparable exemptions or benefits will recur.
- Post-acquisition Northwest Retail performance and the final purchase-price allocation; the preliminary allocation included $45.7 million of goodwill.
- Working-capital and liquidity trends, including use and availability of the J. Aron deferred-payment arrangement and ABL facility.
- Refining-margin exposure, capital spending progress, and the timing and cost of environmental remediation and compliance obligations.
- Resolution and potential financial effects of the Mid Pac and Delta claims and other disclosed contingencies.