Business context and reporting period
Par Pacific Holdings, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The company operates refining, retail and logistics businesses in Hawaii and the western United States, and holds a 42.3% equity interest in natural-gas producer Laramie Energy. The Wyoming refinery, acquired in July 2016, contributed to 2017 results but was not included in the comparable 2016 periods.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $564.2 million | $413.8 million | $1,169.5 million | $791.6 million |
| Operating income (loss) | $16.5 million | $(3.3) million | $45.6 million | $(23.0) million |
| Net income (loss) | $7.0 million | $(13.1) million | $34.8 million | $(31.8) million |
| Diluted EPS | $0.15 | $(0.32) | $0.75 | $(0.77) |
| Adjusted EBITDA (non-GAAP) | $29.6 million | $(6.8) million | $62.0 million | $(1.4) million |
Revenue increased 36% in Q2 and 48% for the first half. Management attributed the improvement principally to stronger refining crack spreads and the Wyoming acquisition. Q2 operating margin was approximately 2.9% and net margin approximately 1.2%; first-half operating and net margins were approximately 3.9% and 3.0%, respectively. These margins are calculated from reported GAAP results.
For Q2, refining operating income was $13.6 million, logistics $7.4 million and retail $7.0 million; corporate and other costs were $11.6 million. Hawaii’s Mid Pacific crack spread averaged $8.35 per barrel, versus $3.96 a year earlier. Wyoming Refining contributed approximately $5.8 million of Q2 refining operating income. Management noted that less favorable crude-oil differentials partly offset higher crack spreads.
First-half operating cash flow was $62.2 million, compared with cash used of $28.8 million in 2016. Investing used $11.8 million, mainly for capital expenditures; financing used $44.0 million, including net debt repayments of approximately $41.3 million. Cash was $54.2 million at June 30, versus $47.8 million at year-end 2016.
At June 30, total debt carrying value was $340.6 million, including $27.0 million current; principal debt was $365.1 million before discounts and financing costs. Inventory financing obligations were another $291.7 million. Total liabilities were $787.2 million and stockholders’ equity $407.5 million. Current assets of $456.7 million compared with current liabilities of $428.0 million. Reported available liquidity was $92.1 million at June 30 and $118.3 million on August 3, 2017, including cash and available facilities.
Material changes versus prior comparable periods
- The company moved from losses to GAAP profitability in both Q2 and the first half, with substantially improved adjusted EBITDA. Higher crack spreads and Laramie Energy’s swing to equity earnings supported the improvement.
- Wyoming Refining added revenue, operating income and expenses to 2017 results; its acquisition closed July 14, 2016, limiting direct year-over-year comparability.
- Interest expense and financing costs rose to $9.1 million in Q2 and $18.1 million for the half, reflecting acquisition-related borrowing and the convertible notes. The company repaid and terminated its Term Loan on June 30 and recorded a $1.8 million loss on termination.
- On May 8, the J. Aron supply-and-offtake arrangements were extended through May 31, 2021, and a $30 million jet-fuel forward sale was entered into. The outstanding forward-sale debt was $29.5 million at quarter-end.
- Inventory increased to $307.2 million from $198.3 million at year-end, while inventory financing obligations rose to $291.7 million from $225.1 million. The inventory valuation reserve was $8.6 million, versus $0.2 million at year-end.
Outlook, commentary, risks and unusual items
- Management said cash flows and available capital resources should cover current capital expenditures, working capital and debt service for the next 12 months, while cautioning that additional capital may be needed and may not be available on acceptable terms.
- The 2017 capital expenditure budget, including major maintenance, was $38 million to $42 million. First-half capital expenditures were $11.8 million.
- On August 7, 2017, the Wyoming Refining credit-facility maturity was extended from April 30, 2018 to June 30, 2019. The filing reports compliance with debt covenants at June 30.
- Commodity prices are a significant earnings and liquidity risk. Management estimated that a $1-per-barrel change in average gross refining margins, based on first-half throughput, would change annualized operating income by approximately $32.4 million. A 1% increase in variable interest rates was estimated to increase annual costs by approximately $2.1 million in cost of revenues and $2.5 million in interest expense, after considering hedges and minimum rates.
- The Hawaii refinery Consent Decree compliance program is estimated to cost approximately $30 million; Tesoro is responsible for reimbursing qualifying pre-acquisition costs and paying applicable fines and penalties. Through June 30, Tesoro had reimbursed $11.0 million of $12.0 million in incurred capital expenditures.
- Wyoming refinery environmental response costs for better-understood contamination work were preliminarily estimated at approximately $20.0 million; wastewater pond work and a replacement treatment system were estimated at approximately $12.1 million combined. Some remediation costs remain unestimable. The company also anticipated a PHMSA civil penalty exceeding $100,000 and disclosed potential further environmental and regulatory enforcement.
- Other contingencies include disputed Tesoro earn-out calculations, Mid Pac earn-out and indemnity claims with arbitration scheduled for April 2018, and a United Steelworkers dispute scheduled for arbitration in February 2018. The filing does not establish a clear final outcome or ultimate exposure for these matters.
- Substantially all net deferred tax assets remained subject to a valuation allowance. The company recorded first-half income tax expense of $1.1 million despite reporting pretax income.
Important facts for investors to verify
- Whether improved refining margins persist, and how crude differentials, refinery operations and commodity hedges affect realized profitability and cash flow.
- The contribution and comparability of the Wyoming refinery, including capital needs, environmental obligations and the extended credit-facility maturity.
- Debt service and liquidity exposure, particularly inventory financing, the J. Aron forward-sale obligation, floating-rate debt and restrictions on moving subsidiary cash.
- Actual spending, reimbursements and remaining obligations under the Hawaii Consent Decree and Wyoming environmental programs.
- Developments and potential financial effects from the earn-out, labor and other legal disputes, as well as realizability of deferred tax assets.