Business Context and Reporting Period
Par Pacific Holdings, Inc. (formerly Par Petroleum Corporation) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. Its businesses include a Hawaii refinery and distribution network, Hawaii retail operations, a 32.4% investment in Laramie Energy, and commodity marketing and logistics. The April 1, 2015 acquisition of Mid Pac expanded the retail and refining businesses; its results are included from that date, limiting comparability with 2014.
Key Financial Metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $495.5 million | $854.3 million | $1,622.9 million | $2,399.7 million |
| Operating income (loss) | $26.3 million | $(36.6) million | $71.6 million | $(75.8) million |
| Net income (loss) | $14.7 million | $(39.5) million | $26.9 million | $(78.7) million |
| Diluted EPS | $0.39 | $(1.19) | $0.72 | $(2.51) |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $144.3 million | $(76.7) million |
Revenue fell about 42% year over year in Q3 and 32% for the nine-month period, while profitability improved materially. Management attributed stronger refining performance to favorable crack spreads, lower crude-related production costs, increased throughput and a better product mix. Q3 gross margin was $90.4 million versus $23.8 million; nine-month gross margin was $235.2 million versus $76.9 million. Refining gross margin per throughput barrel was $10.72 in Q3 and $8.80 year to date, compared with $1.65 and $2.13, respectively, in 2014. Retail gross margin gains primarily reflect the Mid Pac acquisition.
For the nine months, net cash used in investing was $107.7 million, mainly for Mid Pac ($64.4 million), Laramie contributions ($27.5 million) and capital expenditures ($15.9 million). Financing activities used $24.0 million. Cash and equivalents were $101.8 million at September 30, versus $89.2 million at year-end 2014.
At September 30, total debt, net of discount, was $169.6 million, including $43.4 million of current maturities. Separately, obligations under inventory financing agreements were $215.1 million. Current assets were $431.6 million and current liabilities $358.0 million. Reported total liquidity was $152.7 million at September 30 and $163.2 million at October 29, 2015, including cash and available facilities.
Material Changes and Unusual Items
- The June 2015 J. Aron supply-and-offtake arrangement replaced the Barclays supply-and-exchange arrangement and HIE asset-based credit facility. The transition produced a $19.2 million nine-month loss on termination of financing agreements. J. Aron’s arrangement also provides inventory financing and a deferred payment facility.
- Mid Pac was acquired for $74.4 million cash consideration; its results contributed $49.9 million of Q3 revenue and $6.6 million of Q3 net income.
- The company recorded $9.6 million of impairment charges in commodity marketing and logistics: $7.0 million for goodwill and $2.6 million for a supplier-relationships intangible asset. Management cited weaker forecasts, negative cash flows and cancellation of barge capacity.
- Nine-month results included an $18.3 million tax benefit from releasing part of the deferred-tax valuation allowance, based on expected use of net operating losses at Mid Pac. The company continued to maintain a full valuation allowance for remaining net deferred tax assets.
- Nine-month results also included $18.7 million of losses from remeasurement of HIE contingent consideration, $2.7 million of warrant remeasurement losses, and $6.1 million of equity losses from Laramie.
Outlook, Risks and Contingencies
The filing provides no formal earnings guidance. Management said it expected operating cash flows and available resources to cover current capital expenditure, working capital and debt-service needs for the next 12 months, while noting that access to additional capital is not assured. The 2015 capital expenditure budget was $45 million to $50 million; approximately $28 million of planned Laramie investments had been made during the first half. Additional Point Arguello capital needs were uncertain, and production there was uneconomic in the low-price environment.
Key exposures include volatile crude, refined-product and natural-gas prices, refinery performance, and interest rates. The company estimated that a $1-per-barrel change in gross refining margins could change annualized operating income by approximately $26.5 million, all else equal. It also depends on J. Aron for refinery crude supply and inventory intermediation; termination could require repurchasing inventory at market prices and materially affect liquidity. At September 30, $76 million of debt was floating-rate; the filing estimated a 1% rate increase would raise annual costs by approximately $2.6 million on debt and $0.9 million on the J. Aron arrangement.
A potential Clean Air Act consent decree could require $20 million to $25 million of refinery improvements; Tesoro is responsible under the environmental agreement for reimbursing qualifying third-party capital costs. Other disclosed matters include disputed Mid Pac and Tesoro earnouts, environmental compliance risks and a tentative $200,000 resolution of an EPA/DOJ claim concerning the Kawaihae loading rack, subject to final documentation. Subsequent to quarter-end, management announced plans to terminate the defined-contribution pension and post-retirement medical plans on December 31, 2015; approximately $6 million was accrued for the medical plan at quarter-end.
Important Facts for Investors to Verify
- Whether the improved refining margins and operating results persist as crude prices, crack spreads, throughput and product mix change.
- The sustainability and quality of operating cash flow, including working-capital movements and noncash items; the nine-month cash-flow improvement included substantial receivable and inventory-related movements.
- Debt maturities, covenant compliance and liquidity availability, especially the distinction between funded debt and the $215.1 million inventory-financing obligation. The company reported compliance with debt covenants at September 30.
- J. Aron agreement costs, availability, performance and potential inventory-repurchase exposure; management’s liquidity assessment and facility availability after October 29.
- Final costs, timing and Tesoro reimbursement for consent-decree work, along with outcomes of earnout, indemnity and other legal matters.
- Whether the $18.3 million tax benefit and Mid Pac-related tax assumptions are realized, and the eventual effect of benefit-plan terminations and any employee or union process.