PBF Energy Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. PBF Energy is a holding company that consolidates PBF LLC and PBF Logistics LP (PBFX). At quarter-end, it operated four refineries with approximately 730,000 barrels per day of combined capacity; the Torrance refinery acquisition closed after quarter-end.
Financial performance and key metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $3.86 billion | $3.55 billion | $6.66 billion | $6.55 billion |
| Operating income | $234.8 million | $273.8 million | $229.3 million | $446.2 million |
| Net income attributable to PBF Energy | $103.5 million | $135.8 million | $74.1 million | $223.1 million |
| GAAP diluted EPS | $1.06 | $1.57 | $0.76 | $2.57 |
| Operating cash flow | Not separately provided | Not separately provided | $216.1 million | $317.7 million |
- Q2 gross refining margin excluding the non-cash inventory adjustment was $6.50 per barrel, versus $9.35; for the first half it was $5.77 versus $9.93. Reported gross refining margin included inventory-accounting benefits.
- The lower-of-cost-or-market (LCM) inventory reserve reduction increased operating income by $157.8 million in Q2 and $216.8 million in the first half. Excluding that item, management’s adjusted fully converted EPS was $0.14 for Q2 versus $0.88, and a loss of $0.51 for the first half versus income of $1.74.
- First-half throughput increased to 678,000 barrels per day from 472,500, mainly reflecting the addition of Chalmette. First-half costs to comply with the Renewable Fuel Standard, excluding the Gulf Coast refinery, rose to $115.5 million from $72.9 million.
- Cash and cash equivalents were $1.413 billion at June 30, including $998.5 million held for the Torrance acquisition. Current assets were $3.932 billion and current liabilities $1.902 billion. Total balance-sheet debt was approximately $2.360 billion, including $135.9 million current and $2.224 billion long-term debt.
- Management reported total liquidity of approximately $1.869 billion, defined as cash plus availability under the Revolving Loan; PBFX also had $263.4 million of revolving-credit availability. First-half capital expenditures and turnaround spending were significant; net capital spending was $333.9 million.
Changes, outlook, and material developments
- Revenue rose year over year in Q2, but lower commodity prices reduced revenue per barrel. Profitability declined as benchmark crack spreads weakened, crude differentials became less favorable, RFS compliance costs increased, and interest expense rose. Chalmette’s contribution and higher Mid-Continent throughput partly offset these pressures.
- First-half results also reflected planned Delaware City coker work and approximately two weeks of weather-related power disruption. Interest expense increased to $73.5 million from $49.1 million for the first half, largely due to debt issued in 2015.
- On July 1, 2016, PBF completed the Torrance acquisition for $537.5 million plus preliminary working capital of $460.9 million, subject to final valuation. The deal was financed with cash and Revolving Loan borrowings. Management said the acquisition expands capacity to approximately 900,000 barrels per day and adds a presence in California; integration, acquired liabilities, and expected benefits remain risks.
- Management expected 2016 net capital expenditures of approximately $500–$525 million and said available cash flows and borrowing capacity were expected to cover needs for the next 12 months, subject to market conditions. It stated an intention to continue a $0.30 quarterly Class A dividend, while noting future dividends remain at the board’s discretion. The company was in compliance with debt covenants at quarter-end.
- The tax receivable agreement liability was $661.4 million. The filing estimates annual payments of approximately $37.5–$56.6 million over the next five years, declining thereafter; an assumed immediate acceleration was estimated at $596.4 million under stated assumptions.
Risks, contingencies, and unusual items
- Refining earnings and liquidity are exposed to volatile crude, product, natural gas, and RIN prices; weak margins, outages, and supply or logistics disruptions can materially affect results. The filing also highlights counterparty risk and the potential liquidity effect if the J. Aron inventory intermediation agreements terminate.
- On July 28, 2016, the company entered an EPA settlement requiring a $250,000 penalty related to potentially invalid RINs; it expected reimbursement under a counterparty indemnity. Other environmental matters and proceedings were described, with penalties not expected to be material.
- Environmental rules, including renewable fuel obligations and California emissions programs, may increase costs. The filing identifies integration and performance risks for the Chalmette and Torrance acquisitions and notes that historical information for acquired refineries may be limited.
- The Rail Facility amendment after quarter-end extended maturity to October 31, 2017 and requires repayment of $20 million by January 1, 2017. The company also had approximately $424.5 million of outstanding letters of credit.
Investor verification priorities
- Separate recurring refinery performance from the substantial non-cash LCM inventory benefit; verify how current inventory prices affect future write-downs or reversals.
- Review post-acquisition Torrance funding, final working-capital and purchase-price allocation, integration costs, and operating performance.
- Track crack spreads, crude differentials, RIN costs, throughput, and outage/turnaround schedules, particularly following the addition of Torrance.
- Assess debt service and liquidity after Torrance financing, including restricted or earmarked cash, credit availability, letters of credit, and the Rail Facility repayment requirement.
- Evaluate the cash burden and assumptions underlying the tax receivable agreement, as well as the sustainability of dividends and PBFX distributions.