Business context and reporting period
This is Par Petroleum Corporation’s unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The filing describes an integrated Hawaii refiner and marketer, with refining and distribution, retail, natural gas and oil production, and commodity marketing and logistics segments. The filing registrant is Par Petroleum Corporation; the request metadata names Par Pacific Holdings, Inc.
Par completed its acquisition of Mid Pac on April 1, 2015, adding Hawaiian retail, terminal, and distribution operations. Mid Pac’s results are included from that date, limiting comparability with 2014. The company also changed its reportable segments in 2015, and recast 2014 segment data.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $583.8 million | $802.1 million | $1,127.4 million | $1,545.4 million |
| Operating income (loss) | $27.5 million | $(24.4) million | $45.3 million | $(39.2) million |
| Net income (loss) | $11.7 million | $(24.7) million | $12.2 million | $(39.2) million |
| Operating cash flow | Not separately stated | Not separately stated | $98.6 million | $(73.2) million |
| Investing cash flow | Not separately stated | Not separately stated | $(100.7) million | $(16.5) million |
| Financing cash flow | Not separately stated | Not separately stated | $(8.9) million | $69.5 million |
Q2 gross margin was $78.7 million, versus $22.8 million a year earlier; six-month gross margin was $144.8 million, versus $53.0 million. Refining and distribution gross margin rose to $58.7 million in Q2 from $10.5 million, while retail gross margin increased to $16.6 million from $8.0 million. Management attributed improved refining results primarily to stronger crack spreads, lower production costs, higher volumes, and a more favorable product mix. Q2 refining throughput was 80.8 thousand barrels per day, up from 70.7 thousand.
Q2 net income included an $18.6 million income-tax benefit from releasing part of the deferred-tax valuation allowance, based on anticipated use of net operating loss carryforwards against Mid Pac income. Before tax, the company recorded a $6.9 million loss. The $19.2 million loss on terminating prior financing arrangements, $9.5 million loss from remeasurement of HIE contingent consideration, and $3.0 million equity loss from Piceance also affected results. Non-GAAP adjusted EBITDA was $30.8 million for Q2 and $53.2 million for the first half; these measures are not substitutes for GAAP results.
At June 30, cash and cash equivalents were $78.2 million, total current assets $436.9 million, and total current liabilities $390.3 million. Total debt was $171.4 million, including $43.4 million current maturities. Obligations under inventory financing agreements were a further $267.7 million. Total stockholders’ equity was $307.1 million. By August 3, the company reported $121.5 million cash and total available liquidity of $173.4 million, including revolver and deferred-payment availability.
Material changes versus the prior comparable period
- Revenue fell year over year in both the quarter and first half, while operating results improved substantially, principally on better refining margins and lower energy costs. Revenue comparisons also reflect lower commodity prices and Mid Pac’s inclusion only from April 2015.
- Operating cash flow swung to $98.6 million for the first half from use of $73.2 million in 2014, aided by working-capital movements, including receivables and inventory financing. Cash declined $11.0 million over the six months after investing and financing activities.
- Mid Pac’s acquisition added assets and debt: Par paid $73.3 million cash consideration, repaid $45.3 million of Mid Pac debt, and recorded preliminary acquisition goodwill of $29.3 million. The purchase-price allocation remained subject to finalization.
- Debt increased from $136.6 million at December 31, 2014 to $171.4 million at June 30, 2015. Par also replaced Barclays supply-and-exchange and HIE asset-based financing arrangements with J. Aron supply-and-offtake agreements.
- General and administrative expense rose to $11.8 million for Q2 from $5.7 million, which management attributed mainly to building back-office capacity after exiting Tesoro transition services and to consulting for systems and process changes.
Outlook, risks, contingencies, and unusual items
Management stated that operating cash flow and available capital resources should be sufficient for capital expenditures, working capital, and debt service for the next 12 months. The 2015 capital expenditure budget was $45 million to $50 million, including approximately $28 million for Piceance investments, which were made in the first half. No numerical earnings guidance was provided.
- The J. Aron supply-and-offtake agreements have a three-year term, with two one-year extension options subject to mutual agreement. They support refinery crude supply and inventory financing, but are secured by substantially all HIE assets, including the refinery. At June 30, $36.0 million was outstanding under the related deferred-payment arrangement.
- A proposed Clean Air Act consent decree may require $20 million to $25 million of refinery improvements. Tesoro is responsible under the environmental agreement for reimbursing reasonable third-party capital expenditures for required projects, subject to the agreement’s terms.
- Mid Pac disputes an asserted earnout claim and has asserted environmental indemnity claims against its former sellers. Tesoro disputes Par’s HIE earnout calculation and claims approximately $1 million is due. Mid Pac also faces a DOJ settlement proposal of approximately $700,000 regarding alleged Clean Air Act violations at its Kawaihae loading rack; Par said ultimate exposure was not quantifiable and could exceed $100,000.
- Commodity prices and refining margins are material sensitivities. The filing estimates a $1-per-barrel change in average gross refining margin, using Q2 throughput, would change annualized operating income by approximately $29.4 million. A $1 crude-oil price change would change derivative fair value and cost of revenues by approximately $0.5 million based on open positions.
- $78 million of debt was subject to floating interest rates at June 30. A 1% increase in variable rates was estimated to increase annual cost of revenues and interest expense by approximately $3.0 million and $1.1 million, respectively.
- Piceance Energy reported a first-half net loss of $15.4 million. Par contributed $27.5 million during the first half; its ownership interest fell from 34.0% to 32.4% after a third-party investment on July 31.
Investor verification priorities
- Confirm the filing entity and corporate name: the source filing is for Par Petroleum Corporation, notwithstanding the request metadata’s Par Pacific Holdings, Inc.
- Assess the sustainability of refining profitability, including crack spreads, crude differentials, throughput, product mix, and energy costs.
- Separate recurring operating performance from the tax-valuation-allowance release, financing termination charge, and fair-value changes; review the company’s non-GAAP reconciliations.
- Review debt maturities, borrowing-base availability, inventory-financing obligations, collateral and covenant terms, and the sources of the post-quarter liquidity increase.
- Track final Mid Pac purchase accounting, contingent consideration, legal and environmental exposures, and any Tesoro reimbursement recoveries.
- Check whether the announced capital budget, Piceance funding needs, and management’s 12-month liquidity assessment remain achievable under changing commodity prices and operating conditions.