HF Sinclair Corporation — Q3 2022 Form 10-Q Summary
Business context and reporting period
HF Sinclair filed its unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. The company is an independent energy company operating refining, renewables, branded marketing, lubricants and specialty products, and midstream logistics businesses through Holly Energy Partners, L.P. (HEP).
On March 14, 2022, HF Sinclair completed the acquisition of Sinclair Oil and HEP completed the acquisition of Sinclair Transportation Company. Results include the acquired Sinclair businesses from March 14, 2022 onward; therefore, reported 2022 results are not directly comparable with 2021 results. The company also acquired the Puget Sound refinery on November 1, 2021.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Sales and other revenues | $10.599 billion, versus $4.685 billion | $29.220 billion, versus $12.766 billion |
| Income from operations | $1.328 billion, versus $297.4 million | $3.227 billion, versus $769.7 million |
| Net income attributable to HF Sinclair | $954.4 million, versus $280.8 million | $2.336 billion, versus $597.9 million |
| Basic and diluted EPS | $4.45, versus $1.71 | $11.35, versus $3.63 |
| EBITDA | $1.463 billion, versus $482.6 million | $3.629 billion, versus $1.208 billion |
| Operating cash flow | $872.8 million, versus $249.4 million | $2.862 billion, versus $739.5 million |
Revenue increased 126% in the quarter and 129% for the nine months. Net income attributable to HF Sinclair increased 240% in the quarter and 291% for the nine months. The increases primarily reflected stronger refined-product demand and pricing, wider refining margins, higher volumes, and the Puget Sound and Sinclair acquisitions.
Consolidated refinery gross margin was $31.47 per produced barrel in the quarter and $27.97 for the nine months, compared with $14.87 and $11.75, respectively, in the prior-year periods. Consolidated refinery net operating margin was $23.83 per barrel in the quarter and $20.27 for the nine months, compared with $8.47 and $4.80, respectively.
Renewables generated a gross margin of $0.19 per gallon in the quarter and $0.18 for the nine months, but net operating margin was negative $0.26 and negative $0.79 per gallon, respectively. Marketing margin was $0.03 per gallon in the quarter and $0.05 for the nine months.
Capital expenditures were $417.4 million for the nine months, compared with $548.3 million in 2021. Expected 2022 cash spending for HF Sinclair and HEP was $740 million to $885 million, including turnarounds and catalyst spending.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $1.447 billion at September 30, 2022, compared with $234.4 million at December 31, 2021.
- Working capital was $3.585 billion, compared with $1.697 billion at year-end 2021.
- Total long-term debt was $3.334 billion, compared with $3.073 billion at year-end 2021.
- HF Sinclair had a $1.65 billion unsecured revolving credit facility maturing in April 2026, with no borrowings and $2.3 million of letters of credit outstanding at September 30, 2022.
- HEP had $706.0 million outstanding under its $1.2 billion secured revolving facility and was in compliance with its covenants.
- HEP issued $400 million of 6.375% senior notes due 2027 and used the proceeds primarily to repay revolving-credit borrowings.
- HF Sinclair’s standalone liquidity, excluding HEP, was approximately $3.08 billion, consisting of $1.43 billion of cash and an undrawn $1.65 billion revolving facility.
- The company repurchased $977.0 million of common stock and paid $175.4 million of dividends during the first nine months. A new $1.0 billion repurchase program was authorized in September 2022; $900.0 million remained authorized at September 30, 2022.
- The quarterly common dividend was $0.40 per share. HEP expected to maintain its quarterly distribution at $0.35 per unit.
Material changes and unusual items
- The Sinclair transactions added refining, renewable diesel, branded marketing and midstream assets, including approximately 1,200 miles of pipelines, eight product terminals and two crude terminals with approximately 4.5 million barrels of operated storage.
- The acquisition was recorded with approximately $2.749 billion of total purchase consideration and $677.2 million of preliminary goodwill. Acquisition and integration costs were $10.7 million in the quarter and $48.1 million for the nine months.
- Renewables inventory valuation charges reduced pre-tax earnings by $16.8 million in the quarter and $42.8 million for the nine months. This contrasts with a $318.9 million inventory valuation benefit in the first nine months of 2021.
- Lubricants and Specialty Products recorded a $44.4 million FIFO charge in the quarter, compared with a $9.6 million benefit in the prior-year quarter; the nine-month FIFO effect was a $84.9 million benefit.
- The company recorded a $16.3 million equity-method investment loss in the quarter and a $7.3 million loss for the nine months, primarily related to HEP’s share of environmental remediation and recovery costs following a July 2022 crude-oil release on the Osage Pipeline.
- 2021 results included a $51.5 million tariff-settlement gain and an approximately $86.0 million gain on the sale of Mississauga real property, neither of which recurred in 2022.
- RIN costs were $261.6 million in the quarter and $668.4 million for the nine months. A June 2022 EPA rule produced a $72.0 million benefit related to revised 2020 and 2021 renewable-volume targets.
- Environmental liabilities were $165.4 million at September 30, 2022, including $143.1 million classified as long term.
Outlook, risks and contingencies
For the fourth quarter of 2022, management expected refinery crude runs of 620,000 to 650,000 barrels per day, supported by strong refined-product margins and constrained supply. Management expected continued higher-priced feedstock effects in Lubricants and Specialty Products, strong renewable diesel demand and margins, and full operating rates across renewable facilities in the second half of the quarter following planned October maintenance at the Sinclair renewable diesel unit.
Key risks include volatility in crude and refined-product prices and crack spreads, demand and supply changes, refinery or pipeline disruptions, weather, cyberattacks, environmental and renewable-fuel regulations, inflation and labor costs, interest rates, financing availability, the Russia-Ukraine war, and integration of the Sinclair businesses. Management stated that liquidity should be sufficient for planned projects and foreseeable needs.
HF Sinclair is challenging EPA decisions involving the reversal or denial of small-refinery exemptions under the Renewable Fuel Standard. The potential financial impact was not estimable at the filing date. The company also disclosed ongoing environmental matters at the Navajo refinery and a Port of Seattle remediation claim. A separate Cheyenne refinery matter was resolved after the company accepted and paid an $849,850 EPA penalty in October 2022.
Important facts for investors to verify
- Separate the effects of acquisitions, commodity prices and refining margins when assessing underlying year-over-year performance.
- Monitor refinery crack spreads, crude costs, utilization, turnaround activity and the sustainability of the unusually strong 2022 margins.
- Evaluate renewables profitability, including RIN prices, feedstock costs, inventory valuation charges and production ramp-up.
- Review RIN obligations, EPA proceedings and the 2.57 million HF Sinclair shares and 5.29 million HEP units held in escrow as security for pre-closing obligations.
- Assess HEP leverage, debt maturities, interest-rate exposure and the separation of recourse between HEP creditors and HF Sinclair.
- Consider the cash impact of share repurchases, dividends, planned capital spending and environmental or regulatory contingencies.
- Verify the preliminary purchase-price allocation and goodwill, which may change as acquisition valuations are finalized.