Par Pacific Holdings, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Par operates refining, retail and logistics businesses, and owns a 42.3% interest in natural-gas producer Laramie Energy. The 2016 comparison includes Wyoming Refining only from its July 14, 2016 acquisition date, so year-over-year comparisons are not fully like-for-like.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $610.5 million | $510.3 million | $1,780.0 million | $1,301.9 million |
| Operating income (loss) | $26.7 million | ($21.8 million) | $72.4 million | ($44.8 million) |
| Net income (loss) | $18.8 million | ($27.8 million) | $53.6 million | ($59.5 million) |
| Diluted earnings (loss) per share | $0.41 | ($0.67) | $1.16 | ($1.44) |
| Adjusted EBITDA | $45.1 million | ($1.6 million) | $107.0 million | ($3.0 million) |
- Drivers and margins: Management attributed the improvement primarily to stronger refining crack spreads and, for the nine-month period, Wyoming Refining’s contribution. Q3 Mid Pacific crack spread was $9.94/barrel versus $4.45; Wyoming’s 3-2-1 Index was $25.29 versus $19.12. Refining operating income was $21.3 million in Q3; logistics $10.4 million; retail $7.5 million. Adjusted Gross Margin per throughput barrel at Hawaii was $6.32 versus $3.32; Wyoming was $18.67 versus $12.20.
- Cash flow: Nine-month operating cash flow was $105.5 million, compared with cash used of $41.2 million in 2016. Investing used $19.4 million, largely capital expenditures; financing used $55.6 million, mainly net debt repayments. Cash and cash equivalents increased to $78.3 million from $47.8 million at year-end 2016. Capital expenditures were $19.9 million for the nine months.
- Liquidity: Reported available liquidity was $137.3 million at September 30, including $78.3 million cash, $5.0 million of Hawaii Retail revolver availability, $20.4 million of Wyoming Refining availability and $33.6 million under the J. Aron deferred payment arrangement. Liquidity was $124.4 million on November 6, primarily reflecting working-capital changes. Current assets were $497.5 million and current liabilities $458.3 million.
- Debt: Principal long-term debt was $353.5 million; its carrying value, net of discounts and financing costs, was $330.2 million. Principal debt declined from $400.4 million at December 31, 2016. The company repaid and terminated its Term Loan in June. The $115 million 5.00% convertible senior notes mature in 2021. Inventory financing obligations, reported separately from long-term debt, were $310.2 million. The company reported compliance with debt covenants.
Material changes and management outlook
- Revenue rose 20% in Q3 and 37% for the nine months. Higher crude prices and the Wyoming acquisition contributed to revenue growth; improved crack spreads were central to the earnings recovery.
- Wyoming Refining contributed approximately $15.1 million of Q3 refining operating income and $20.7 million for the nine months. Its acquisition also increased depreciation and operating costs.
- Interest expense and financing costs fell to $7.4 million in Q3 from $11.2 million, but increased to $25.5 million for the nine months from $22.0 million, reflecting acquisition-related debt and the convertible notes, partly offset by repayment of the Term Loan and earlier Bridge Notes.
- Management stated operating cash flows and available capital resources should be sufficient for current capital expenditures, working capital and debt service over the next 12 months; this is not a guarantee. The 2017 capital expenditure budget, including major maintenance, was $38–$42 million. No formal earnings guidance is provided in the filing.
- Management said it may seek additional debt or equity financing and may repurchase or exchange the convertible notes, subject to market conditions, liquidity needs and contractual restrictions. Dividends are not expected in the foreseeable future, and debt agreements restrict them.
Risks, contingencies and unusual items
- Commodity and operating exposure: Results, cash flow and liquidity are sensitive to crude, feedstock, refined-product and Renewable Identification Number (RIN) prices. Management estimated that a $1/barrel change in average gross refining margins, based on throughput, would change annualized operating income by approximately $32.4 million. Floating-rate debt and financing arrangements also create rate exposure; interest-rate swaps cover $200 million notional.
- Environmental obligations: Hawaii Consent Decree compliance is estimated at approximately $30 million. Tesoro had reimbursed $11.8 million of $12.5 million in related capital expenditures incurred through September 30, 2017. Wyoming remediation estimates include approximately $20.0 million for understood response-cost components, plus estimated wastewater pond and replacement-system costs of $0.5 million and $11.6 million. Some remediation costs remain unestimable; potential regulatory penalties and additional compliance costs could be material.
- Disputes: Tesoro contests the company’s Hawaii acquisition earn-out calculations and claims an additional $4.3 million for 2015 and $8.3 million for 2016; Par disputes that further amounts are owed. A separate Mid Pac earn-out and indemnity dispute was scheduled for arbitration in March 2018. A USW labor dispute was scheduled for arbitration in February 2018.
- Other items: A $1.8 million loss was recorded on termination of the Term Loan. The company maintained a valuation allowance against substantially all net deferred tax assets. The filing also notes approximately $22.4 million in two unresolved General Trust claims related to a predecessor’s plugging and abandonment obligations; management considers full-share settlement remote and had reserved approximately $0.5 million for claims deemed probable and estimable.
- Management cautions that refining profitability depends on volatile market spreads and that environmental requirements, litigation, access to financing, taxes and counterparty performance could affect results. It reported effective disclosure controls as of September 30, 2017.
Investor verification points
- Track whether crack spreads and refinery throughput remain favorable, and separate market-driven gains from Wyoming acquisition contributions.
- Reconcile cash flow and liquidity as inventory and inventory-financing balances fluctuate; confirm availability and transferability of cash held in subsidiaries.
- Review debt maturities, covenant headroom, convertible-note dilution or refinancing plans, and the cost and repayment terms of the J. Aron forward sale.
- Monitor Wyoming remediation and wastewater-system estimates, Hawaii Consent Decree reimbursements, and any regulatory penalties or enforcement actions.
- Check outcomes and any recorded liabilities for the Tesoro earn-out, Mid Pac arbitration, USW dispute and General Trust claims.
- Assess the sensitivity of earnings to RIN prices, crude differentials, interest rates and Laramie Energy’s operating and derivative results.