HF Sinclair Corporation — Q1 2022 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2022. HF Sinclair was established on March 14, 2022 as the successor public company to HollyFrontier Corporation following the Sinclair Transactions. Results include the acquired Sinclair businesses only from March 14 through March 31, 2022; therefore, year-over-year comparisons are not fully comparable.
HF Sinclair operates refining, renewables, branded marketing, lubricants and specialty products, and midstream logistics businesses. It consolidates Holly Energy Partners, L.P. (HEP), in which it held a 47% limited partner interest and a non-economic general partner interest at quarter-end.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Sales and other revenues | $7.459 billion | $3.504 billion | +113% |
| Income from operations | $232.8 million | $138.1 million | +69% |
| Net income | $185.3 million | $182.9 million | +1% |
| Net income attributable to HF Sinclair | $160.0 million | $148.2 million | +8% |
| Basic and diluted EPS | $0.90 | $0.90 | Unchanged |
| EBITDA | $359.8 million | $281.3 million | +28% |
| Cash flow from operations | $461.0 million | $62.3 million | +$398.7 million |
| Capital expenditures | $158.3 million | $150.0 million | +$8.3 million |
Reported operating margin was approximately 3.1%, net margin attributable to HF Sinclair stockholders was approximately 2.1%, and EBITDA margin was approximately 4.8%. These calculated margins use reported consolidated figures.
- Refining gross margin increased to $12.69 per produced barrel from $8.00, while consolidated refinery utilization increased to 88.6% from 86.0%.
- Refining segment operating income was $113.0 million; Lubricants and Specialty Products contributed $122.1 million; HEP contributed $51.7 million; Marketing contributed $5.3 million; and Renewables reported a $22.1 million operating loss.
- Renewable identification number (RIN) costs were $196.3 million, with open RIN credit obligations of $144.7 million at March 31, 2022.
- Cash and cash equivalents were $592.3 million, compared with $234.4 million at December 31, 2021. Working capital was $2.628 billion.
- Long-term debt was $3.375 billion, compared with $3.073 billion at December 31, 2021. HEP had $1.142 billion outstanding under its revolving credit agreement at quarter-end.
Material changes versus the prior comparable period
- Revenue growth primarily reflected higher sales prices, stronger refined-product volumes, and the November 2021 Puget Sound refinery acquisition and March 2022 Sinclair acquisition.
- Refining profitability improved materially as product demand and refining margins strengthened. Q1 2021 results were adversely affected by Winter Storm Uri and included a $200.0 million lower-of-cost-or-market inventory benefit; Q1 2022 included an $8.6 million benefit.
- Q1 2021 included a $51.5 million gain from a tariff settlement, which did not recur in 2022.
- Income tax expense was $21.3 million in Q1 2022 versus a $28.3 million tax benefit in Q1 2021. Effective tax rates were 10.3% and negative 18.3%, respectively.
- Operating cash flow increased substantially, supported by higher refining margins and working-capital changes. Investing cash flow included $231.2 million of cash consideration for the Sinclair Transactions.
- Q1 2022 included $25.0 million of incremental acquisition and integration costs, principally legal, advisory and professional fees.
Transactions, liquidity, outlook and risks
HF Sinclair issued 60.2 million common shares to Sinclair HoldCo, representing approximately 27% of pro forma equity, for stated consideration of approximately $2.149 billion. HEP issued 21.0 million common units and paid $321.4 million in cash to acquire Sinclair Transportation Company. The preliminary purchase price allocation recognized $559.7 million of goodwill. The acquired Sinclair operations contributed $523.3 million of revenue and $40.4 million of operating income from March 14 through March 31.
Standalone HF Sinclair liquidity was approximately $1.9 billion at March 31, 2022, consisting of $577.3 million of cash and an undrawn $1.35 billion revolving facility. After quarter-end, on April 27, 2022, HF Sinclair entered into a $1.65 billion senior unsecured revolving facility maturing in April 2026 and completed exchanges of certain HollyFrontier senior notes. HEP subsequently issued $400 million of 6.375% senior notes due 2027 and used the proceeds to partially repay its revolving borrowings.
Management expects 2022 capital and turnaround spending of $805 million to $1.0 billion, including $750 million to $925 million for HF Sinclair and $55 million to $75 million for HEP. Second-quarter refining crude runs are expected to be 615,000 to 645,000 barrels per day. Management expects the Artesia renewable diesel unit to begin start-up in Q2 2022, while construction of the Sinclair pretreatment unit is suspended until 2023 pending an economic review.
Management reinstated a quarterly dividend at $0.40 per share and expects to resume repurchases under the existing $1.0 billion program after completing planned renewables projects. HEP expects to maintain its quarterly distribution at $0.35 per unit and targets distributable cash flow coverage of at least 1.3x and leverage of 3.0x to 3.5x.
- Key exposures include crude and refined-product prices, refining crack spreads, natural-gas costs, RIN prices and renewable-fuel regulations.
- Integration of the Sinclair businesses, realization of expected synergies, and completion and economics of renewable projects remain execution risks.
- Operations are exposed to refinery and pipeline shutdowns, extreme weather, cyberattacks, global hostilities, supply disruptions, environmental regulation and COVID-19-related economic effects.
- Environmental matters remain ongoing. Accrued environmental liabilities were $138.4 million at March 31, 2022. EPA and other agency matters involving the El Dorado, Navajo and Cheyenne facilities remain unresolved, and potential costs for certain matters cannot presently be estimated.
- The EPA denied HollyFrontier’s challenged 2018 small-refinery exemptions in April 2022; HF Sinclair filed a challenge in May 2022. The filing states that potential costs, if any, cannot currently be estimated.
Most important facts for investors to verify
- Confirm the impact of the Sinclair acquisition on full-quarter and full-year revenue, margins, cash flow, leverage and earnings, because acquired operations were included for only 18 days in the reported quarter.
- Review the final purchase price allocation and any closing working-capital adjustments, including the $559.7 million preliminary goodwill amount.
- Monitor RIN costs and the $144.7 million open RIN obligation, including the escrowed HF Sinclair shares and HEP units supporting Sinclair HoldCo’s pre-closing obligations.
- Assess the effect of refining margins, crude and product prices, and geopolitical supply disruptions on earnings and cash flow.
- Track renewable diesel start-up, capital spending, project economics and the delayed Sinclair pretreatment unit.
- Reconcile post-quarter-end debt and liquidity after the new HF Sinclair revolving facility, senior-note exchanges and HEP’s $400 million debt issuance.
- Follow environmental proceedings, EPA actions and potential penalties or remediation costs, which may exceed recorded accruals.