HF Sinclair Corp quarterly report, Q2 FY2022

HF Sinclair Corporation — Q2 2022 Form 10-Q Summary

Business context and reporting period

HF Sinclair filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2022. The company is an independent energy business with refining, renewables, branded marketing, lubricants and specialty products, and midstream operations through its consolidated 47%-owned interest in Holly Energy Partners, L.P. (HEP).

Comparability with 2021 is limited. HF Sinclair completed the Sinclair Transactions on March 14, 2022, and the 2022 results include the acquired Sinclair businesses only from that date. The company also acquired the Puget Sound refinery on November 1, 2021.

Key financial metrics

Metric	Three months ended June 30, 2022	Three months ended June 30, 2021	Six months ended June 30, 2022	Six months ended June 30, 2021
Sales and other revenues	$11.162 billion	$4.577 billion	$18.621 billion	$8.081 billion
Income from operations	$1.667 billion	$334.2 million	$1.899 billion	$472.3 million
Net income attributable to HF Sinclair stockholders	$1.221 billion	$168.9 million	$1.381 billion	$317.1 million
Basic and diluted EPS	$5.43	$1.03	$6.86	$1.92
Net cash provided by operating activities	$1.528 billion	$427.8 million	$1.989 billion	$490.1 million
EBITDA	$1.806 billion	$444.3 million	$2.166 billion	$725.6 million

Quarterly revenue increased 144%, operating income increased 399%, and net income attributable to stockholders increased 623%. Six-month revenue increased 130%, operating income increased 302%, and stockholder net income increased 336%.

Consolidated refinery gross margin was $36.36 per produced barrel in the quarter and $25.93 for the six-month period, compared with $11.71 and $10.07, respectively, in the prior-year periods. Renewables remained loss-making at a net operating margin of $(1.07) per gallon in the quarter and $(1.68) per gallon for the six months.

Balance sheet, debt and liquidity

Cash and cash equivalents were $1.702 billion at June 30, 2022, compared with $234.4 million at December 31, 2021.
Working capital was $3.637 billion, compared with $1.697 billion at year-end 2021.
Total assets were $19.178 billion and total equity was $9.875 billion at June 30, 2022.
Long-term debt was $3.348 billion, compared with $3.073 billion at December 31, 2021. The balance included $1.740 billion of HF Sinclair debt and $1.608 billion of HEP debt.
HF Sinclair had a $1.65 billion senior unsecured revolving facility maturing in April 2026, with no borrowings and $2.3 million of letters of credit outstanding.
HEP had a $1.2 billion senior secured revolving facility maturing in July 2025, with $721.0 million outstanding and no letters of credit.
Standalone HF Sinclair liquidity, excluding HEP, was approximately $3.34 billion, consisting of $1.69 billion of cash and an undrawn $1.65 billion credit facility.

Material changes versus the prior comparable period

The Sinclair Transactions added refining, renewables, branded marketing and midstream operations, including approximately 1,200 miles of pipelines, eight product terminals and two crude terminals with approximately 4.5 million barrels of storage.
HF Sinclair issued 60.2 million common shares to Sinclair HoldCo, representing approximately 27% of pro forma equity. HEP issued 21.0 million common units and paid $321.4 million in cash for Sinclair Transportation Company.
The acquisition generated preliminary goodwill of $656.4 million and included $2.729 billion of total purchase consideration. The purchase price allocation remained preliminary.
Quarterly refining performance benefited from stronger fuel demand, higher selling prices and wider crack spreads, while crude and feedstock costs also increased.
The 2021 six-month results included a $51.5 million gain from a tariff settlement and a $318.9 million benefit from refining inventory valuation adjustments. The 2022 period included a $26.0 million renewables inventory valuation charge.
2022 included $37.5 million of incremental direct acquisition and integration costs for the Sinclair Transactions, including $12.5 million in the second quarter.
RIN costs were $210.5 million for the quarter and $406.8 million for the six months. A June 2022 EPA rule produced a $72.0 million benefit related to revised 2020 and 2021 volume targets.
HF Sinclair repurchased 2.73 million shares for $132.3 million during the quarter. The remaining authorization was $867.7 million at June 30, 2022.

Guidance, outlook and management commentary

Management expected third-quarter 2022 refinery crude runs of 630,000 to 650,000 barrels per day, supported by demand trends, reduced global refined-product supply and a full quarter of Sinclair and Casper refinery operations.
Lubricants and Specialty Products was expected to benefit from continued strength in Rack Forward and reduced base-oil supply from Russia.
Renewable diesel facilities at Sinclair, Cheyenne and Artesia were online or ramping up, with management expecting full production levels by the end of the third quarter. Construction of the Sinclair pretreatment unit was suspended until 2023 pending an economic review.
HEP expected to maintain its quarterly distribution at $0.35 per unit, or $1.40 annualized, while targeting distributable cash flow coverage of at least 1.3x and leverage of 3.0x to 3.5x.
Expected 2022 capital and turnaround spending totaled $785 million to $950 million, including $735 million to $875 million for HF Sinclair and $50 million to $75 million for HEP.
Management stated that cash, internally generated operating cash flow and available credit facilities should fund planned capital projects and foreseeable liquidity needs.

Risks, contingencies and unusual items

Key exposures include crude oil and refined-product prices, crack spreads, RIN costs, natural gas prices, refinery reliability, environmental regulation, cyberattacks, weather, geopolitical disruption and the Russia-Ukraine war.
The EPA reversed or denied certain small-refinery exemptions for the 2016, 2018, 2019 and 2020 compliance years. HF Sinclair subsidiaries are challenging the EPA actions, while Growth Energy separately challenged the alternative compliance demonstration. The company stated that potential costs could not yet be estimated.
Environmental remediation liabilities were $166.2 million at June 30, 2022, including $143.8 million classified as long-term. Management noted that estimated liabilities could increase as investigations progress.
Pending environmental matters include alleged Clean Air Act compliance issues at the Navajo refinery, stipulated-penalty matters involving the former Cheyenne refinery and a Port of Seattle claim involving historical bunker fuel disposal. Outcomes remain uncertain.
Open RIN credit obligations were $79.5 million at June 30, 2022. Sinclair HoldCo remains responsible for pre-closing obligations, secured by escrowed HF Sinclair shares and HEP units.
The company reported no material changes to previously disclosed risk factors and stated that its disclosure controls were effective as of June 30, 2022.

Facts investors should verify

Whether the strong refining margins and elevated fuel prices are sustainable as commodity prices, crack spreads and demand normalize.
The final purchase price allocation for the Sinclair Transactions and the realized integration costs, synergies and operating performance of the acquired businesses.
The economics and production ramp-up of the renewable diesel assets, including the suspended Sinclair pretreatment project.
Potential financial exposure from EPA RFS decisions, RIN obligations and other environmental proceedings.
HEP’s leverage, distribution coverage, customer concentration and ability to fund capital spending and distributions from operating cash flow.
Future cash deployment among debt reduction, dividends, share repurchases and capital projects.