HF Sinclair Corporation — Q1 2023 Form 10-Q Summary
Business context and reporting period
HF Sinclair is an independent energy company operating refining, renewables, branded marketing, lubricants and specialty products, and logistics businesses through Holly Energy Partners, L.P. (HEP). It operates refineries in Kansas, Oklahoma, New Mexico, Washington, Utah and Wyoming, supplies more than 1,500 branded stations, licenses the Sinclair brand at more than 300 additional locations, and exports specialty products to more than 80 countries.
The filing covers the three months ended March 31, 2023. Comparisons with Q1 2022 are not fully like-for-like because the Sinclair businesses were acquired on March 14, 2022; Q1 2022 includes those businesses only from the acquisition date, while Q1 2023 includes the full quarter.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Sales and other revenues | $7.565 billion | $7.459 billion | +1% |
| Income from operations | $504.2 million | $232.8 million | +117% |
| Net income | $385.0 million | $185.3 million | +108% |
| Net income attributable to HF Sinclair | $353.3 million | $160.0 million | +121% |
| Basic and diluted EPS | $1.79 | $0.90 | +99% |
| EBITDA | $652.8 million | $359.8 million | +81% |
| Net cash from operating activities | $177.7 million | $461.0 million | -61% |
| Capital expenditures | $100.1 million | $158.3 million | -37% |
Operating margin was approximately 6.7% of revenue, compared with approximately 3.1% in Q1 2022. Net income attributable to HF Sinclair stockholders represented approximately 4.7% of revenue, compared with approximately 2.1% in the prior-year quarter.
- Refining gross margin increased to $23.70 per produced barrel from $12.69. Consolidated net operating margin increased to $12.55 per barrel from $5.14.
- Refining segment operating income was $440.7 million; Renewables reported a $64.6 million operating loss; Lubricants and Specialty Products contributed $78.7 million; HEP contributed $62.1 million.
- Renewables revenue increased to $202.4 million from $28.3 million, but the segment recorded a $47.6 million lower-of-cost-or-market inventory charge and a $64.6 million operating loss.
- Marketing revenue increased to $937.4 million from $277.0 million, while marketing margin declined to approximately $0.04 per gallon from $0.07.
- Income tax expense was $99.7 million, with an effective tax rate of 20.6%, versus $21.3 million and 10.3% in Q1 2022.
Liquidity, cash flow and debt
- Cash and cash equivalents were $1.365 billion at March 31, 2023, down from $1.665 billion at December 31, 2022.
- Standalone HF Sinclair liquidity, excluding HEP, was approximately $3.01 billion, consisting of cash and an undrawn $1.65 billion senior unsecured revolving facility maturing in April 2026.
- Total debt was $3.240 billion, including $307.3 million of current debt and $2.933 billion of long-term debt. Total debt declined from $3.255 billion at year-end 2022.
- HEP had $651.5 million outstanding under its $1.2 billion senior secured revolving facility, which matures in July 2025. HEP's weighted-average borrowing rate was 6.88% at March 31, 2023.
- Both HF Sinclair and HEP were in compliance with applicable debt covenants. HF Sinclair had no revolving borrowings and $2.3 million of letters of credit outstanding.
- Operating cash flow was reduced by $163.7 million of turnaround expenditures and unfavorable working-capital changes. Financing cash outflows included $245.6 million of share repurchases and $88.0 million of dividends.
- HF Sinclair repurchased 4.8 million shares for $240.3 million during the quarter. Approximately $419.8 million remained available under the $1.0 billion repurchase authorization at March 31, 2023.
Material changes versus the prior comparable period
- Profitability improved materially because of stronger refining margins, healthy transportation-fuel demand, constrained refined-product supply and favorable crude spreads.
- Revenue growth was limited by lower refined-product volumes and was partially offset by higher sales prices. Transportation-fuel revenue declined, while marketing and renewable diesel revenue increased substantially.
- Total cost of products sold declined 5%, primarily because of lower crude costs and lower refined-product volumes. However, the renewables inventory reserve increased cost of products sold by $47.6 million, compared with an $8.6 million benefit in Q1 2022.
- Operating expenses increased 34%, principally due to the full-quarter contribution from the acquired Sinclair businesses and higher purchased-fuel costs.
- SG&A declined 13% as acquisition-related professional and legal costs decreased. Acquisition and integration costs were $3.9 million versus $25.0 million in Q1 2022.
- Interest expense increased to $45.8 million from $34.9 million, primarily due to HEP's April 2022 issuance of $400 million of senior notes and higher revolving-credit rates.
- Capital spending declined year over year because Q1 2022 included significant renewable-diesel expenditures and cash paid for the Sinclair acquisition.
Guidance, outlook, risks and unusual items
- For Q2 2023, management expects refinery crude runs of approximately 550,000 to 580,000 barrels per day, reflecting planned maintenance at the Navajo and Parco refineries.
- Management expects refined-product margins to remain healthy, supported by constrained supply and seasonal driving demand. Renewables throughput is expected to increase, with normalized run rates expected in the second half of 2023.
- Marketing site count is expected to grow at least 5% annually. Lubricants are expected to benefit from favorable product mix and seasonal transportation-lubricant demand, partly offset by softness in certain finished products.
- Expected 2023 cash spending is $940 million to $1.150 billion, including $910 million to $1.105 billion for HF Sinclair capital expenditures, turnarounds and catalyst spending, and $30 million to $45 million for HEP.
- RIN compliance costs were $157.5 million in Q1 2023, and open RIN credit obligations were $75.7 million. The company is litigating EPA decisions concerning small-refinery exemptions for the Woods Cross and Cheyenne refineries; potential costs cannot currently be estimated.
- Environmental remediation expense was $13.3 million, and accrued environmental liabilities were $202.0 million at March 31, 2023. The filing states that additional liabilities could arise as investigations develop.
- Principal operating risks include volatility in crude and refined-product prices and margins, refinery or pipeline disruptions, environmental and renewable-fuel regulations, cyberattacks, weather, geopolitical events, financing costs and economic conditions.
- On May 3, 2023, HF Sinclair submitted a non-binding proposal to acquire the HEP common units it does not already own in exchange for HF Sinclair stock at a fixed exchange ratio of 0.3714 shares per HEP unit. The proposal requires a definitive agreement and may not be completed.
Most important facts for investors to verify
- Confirm the comparability of Q1 2022 results because the Sinclair businesses contributed only from March 14, 2022.
- Assess the sustainability of the unusually strong refining margins and the effect of planned Q2 refinery turnarounds on throughput and cash flow.
- Track renewables profitability, the $108.7 million inventory valuation reserve and progress toward normalized run rates.
- Review cash conversion, including turnaround spending, working-capital requirements and the planned $940 million to $1.150 billion of 2023 cash spending.
- Monitor October 2023 maturities of the $307.3 million aggregate 2.625% senior notes classified as current debt.
- Evaluate RIN costs, EPA litigation and the $202.0 million environmental liability for potential future cash requirements.
- Verify the terms, approvals, financing and potential dilution associated with the proposed HEP transaction; the filing provides no assurance that it will be consummated.