Par Petroleum Corporation (identified in request as PAR Pacific Holdings, Inc.) — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; filed November 12, 2014. The filing is under Par Petroleum Corporation. Amounts below are in U.S. dollars.
Business context and reporting period
The company operated a Hawaii refinery and related distribution and retail assets, natural gas and oil interests, and a commodity marketing and logistics business. Its 94,000-barrel-per-day refinery was acquired with Hawaii Independent Energy (HIE) in September 2013. Results are therefore not directly comparable with 2013, when HIE contributed only a few days of activity in the third quarter and none to the first nine months before its acquisition.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $854.3 million | $35.4 million | $2,399.7 million | $129.6 million |
| Gross margin (company-defined, non-GAAP) | $23.8 million | $4.7 million | $76.9 million | $21.8 million |
| Operating loss | $36.6 million | $8.4 million | $75.8 million | $10.5 million |
| Net loss | $39.5 million | $14.6 million | $78.7 million | $28.7 million |
| Loss per share | $1.19 | $0.87 | $2.51 | $1.77 |
| Cash used in operating activities | Not provided for the quarter | Not provided for the quarter | $76.7 million | Cash provided: $9.0 million |
Gross margin was about 2.8% of revenue in Q3 and 3.2% for the nine-month period. Refining generated $21.4 million of Q3 gross margin and $66.8 million year to date; commodity marketing and logistics generated $0.8 million and $5.0 million, respectively. The filing attributes weaker logistics results to lower rail-car revenues and higher repair costs in Q3, and lower crude differentials and volumes year to date.
At September 30, cash and cash equivalents were $97.4 million; current assets were $637.1 million and current liabilities $512.7 million. Current liabilities included $388.4 million of obligations under supply and exchange agreements. Total debt was $158.7 million, including $38.0 million of current maturities. The company reported $130.1 million of available liquidity at September 30 and $169.1 million at November 6, including cash and stated facility availability. The rights offering raised $101.8 million gross in August.
For the nine months, investing cash outflow was $16.7 million and financing cash inflow was $152.8 million. Capital expenditures were approximately $10.0 million; management expected full-year 2014 capital expenditures of approximately $19 million.
Material changes versus the prior comparable period
- Revenue and gross margin rose substantially as the acquired HIE refinery contributed for most of 2014; the prior-year comparison is not like-for-like.
- Net loss increased to $39.5 million in Q3 and $78.7 million for the first nine months. Refining margins did not cover operating and corporate costs.
- Management cited elevated feedstock differentials, planned maintenance and a five-day crude-unit outage in July, plus two weeks of planned maintenance in August, as pressures on Q3 operations.
- Nine-month operating cash flow shifted from a $9.0 million inflow to a $76.7 million outflow, reflecting losses and working-capital uses, among other factors.
- Debt increased to $158.7 million from $97.3 million at year-end 2013. The company also issued approximately 6.4 million shares through its rights offering.
Outlook, risks, contingencies and unusual items
- Management expected increased contracted on-island sales to begin in Q4 2014 and expand in 2015, potentially reducing exports and helping balance refinery production. It believed available cash and capital resources would meet the next 12 months’ current capital, working-capital and debt-service needs, but said additional debt would be required to fund the planned Mid Pac acquisition and further capital might be needed for other significant changes.
- The proposed acquisition of Koko’oha/Mid Pac was valued at approximately $107 million, less estimated long-term liabilities, plus inventory and adjustments. It remained subject to regulatory approvals; the FTC had issued a second information request. The termination date was extended to January 1, 2015. A $10 million deposit had been paid, with a further $5 million deposit due after the HSR waiting period expires.
- Management identified crack spreads, crude and refined-product prices, feedstock differentials, operating reliability, working capital and access to financing as important business drivers and risks. Refinery environmental requirements, fuel standards, potential supply or transportation disruptions, and acquisition integration also pose risks.
- The company disclosed a material weakness in internal control over financial reporting and ineffective disclosure controls, citing late adjustments and corrections and unreliable inventory measurement processes. Remediation had begun but was not yet demonstrated to be effective.
- In October, a release believed to involve water and crude oil occurred during single-point-mooring hose work. Cleanup costs were expected to be about $0.5 million; an insurance claim was intended. Separately, Hawaii’s health department identified HIE as a potential responsible party concerning an oily sheen near its Sand Island terminal; the company disputed that the material originated from its facility and was cooperating.
- A consent decree concerning alleged pre-acquisition Clean Air Act violations at the Hawaii refinery was expected to be finalized in the first half of 2015 and could require capital improvements. Tesoro agreed under the environmental agreement to reimburse specified pre-closing-related capital expenditures and certain fines, subject to agreement terms.
- Q3 included $1.7 million of compensation expense related to modified vesting for the former COO, $1.8 million of financing costs associated with terminating Bridge Loan commitments, and $0.6 million of loss on sale of oilfield equipment. Fair-value gains on warrants and HIE contingent consideration partly offset other expenses; these gains are non-cash and valuation-sensitive.
Important facts for investors to verify
- Whether refinery throughput, crack spreads, feedstock differentials and maintenance performance improved after the reported outages, and whether higher contracted local sales were realized.
- Mid Pac acquisition status, final purchase funding and terms, FTC/HSR outcome, deposit exposure, and whether anticipated operating benefits materialized.
- Operating cash flow, working-capital needs, supply-and-exchange obligations, debt maturities, covenant headroom and actual availability of stated credit facilities.
- Progress in remediating the material weakness, especially inventory controls, and the outcome of the required year-end internal-control assessment.
- Final costs and responsibility for the single-point-mooring incident, Sand Island matter, and refinery consent-decree work, including recoveries under insurance or the Tesoro environmental agreement.