Business context and reporting period
Par Pacific Holdings, Inc. filed this Form 10-Q for the quarter and nine months ended September 30, 2020. The company operates refining, retail and logistics businesses, with four refineries in Hawaii, Wyoming and Washington and a 46% investment in natural-gas producer Laramie Energy.
Financial results and liquidity
Amounts are in millions of dollars unless stated otherwise.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $690.0 | $1,401.6 | $2,409.4 | $4,002.4 |
| Operating income (loss) | $2.8 | $18.4 | $(203.9) | $88.4 |
| Net income (loss) | $(14.3) | $(83.9) | $(277.2) | $5.4 |
| Adjusted EBITDA (non-GAAP) | $(16.1) | $47.0 | $(52.7) | $166.0 |
| Operating cash flow | Not separately stated | Not separately stated | $26.0 | $98.6 |
Q3 2020 refining, logistics and retail operating results were respectively $(5.1) million, $6.4 million and $12.1 million. Refining Adjusted Gross Margin was $16.3 million, down from $86.1 million a year earlier; retail Adjusted Gross Margin was $31.0 million versus $34.6 million. Adjusted EBITDA and Adjusted Gross Margin are non-GAAP measures.
At September 30, cash and cash equivalents were $127.3 million and reported liquidity was $190.6 million. Total debt principal was $735.1 million ($710.5 million net carrying value); current debt maturities were $59.3 million. Inventory-financing obligations were an additional $470.9 million. Stockholders’ equity was $379.9 million, down from $648.2 million at year-end 2019. Nine-month capital expenditures were $42.5 million; operating cash flow less capital expenditures was negative $16.5 million.
Material changes versus comparable periods
- Q3 revenue fell 51%, primarily reflecting lower crude and refined-product prices and a 32% decline in refining sales volumes. Nine-month revenue declined 40%; refining sales volume was down 19%.
- Q3 net loss narrowed year over year largely because Q3 2019 included an $81.5 million impairment of the Laramie investment. In Q3 2020, weaker refining margins and volumes and lower retail volumes weighed on results.
- Nine-month results shifted from $5.4 million net income to a $277.2 million net loss. Drivers included weak refining conditions, $67.9 million of goodwill impairment, a $45.3 million Laramie investment impairment, and higher RIN costs and inventory valuation adjustments.
- Operating cash flow declined to $26.0 million from $98.6 million. Working-capital movements, including lower receivables and inventory, supported 2020 cash flow, while repayments under inventory-financing arrangements were a use of cash.
Outlook, management commentary and risks
- Management attributed significant disruption to COVID-19 and related demand declines. The company reduced refinery throughput, idled some Hawaii units, cut discretionary spending and headcount, and deferred or delayed some capital and turnaround spending. Management said the full effect on results, cash flow and liquidity remained uncertain and could continue to be material.
- Management stated that cash flows and available resources should cover current capital and turnaround spending, working capital and debt service for the next 12 months. The 2020 capital-expenditure and deferred-turnaround budget was $95–$115 million; management gave no earnings guidance.
- In June 2020, the company issued $105 million of 12.875% senior secured notes due 2026, with $98.8 million net proceeds for general corporate purposes. The high coupon increases financing costs. The company reported compliance with its debt instruments at September 30.
- Key financing arrangements require attention: the Hawaii J. Aron supply-and-offtake agreements mature May 2021, and the Washington refinery intermediation agreement runs through June 2021. The company was evaluating extension or replacement options. Its $48.7 million of 5.00% convertible notes mature in 2021.
- Commodity prices, refining crack spreads, RIN prices, customer demand, working-capital needs, interest rates and access to capital markets are material risks. A $1-per-barrel change in average gross refining margins, using Q3 throughput, was estimated to change annualized operating income by about $37.8 million, all else equal.
- Environmental exposures include $15.8 million accrued for specified Wyoming refinery remediation, estimated at $11.6 million to design and construct a replacement wastewater treatment system, and potential additional compliance costs. A September 2020 EPA consent agreement required a $123,461 penalty. The company also disclosed unresolved claims totaling approximately $22.4 million related to a predecessor’s plugging-and-abandonment obligation; it had accrued approximately $0.5 million for claims considered probable and estimable.
Important facts for investors to verify
- Whether product demand, crack spreads and refinery throughput recover, and whether management’s cost reductions and liquidity measures prove sufficient.
- The status and terms of extensions or replacements for the J. Aron and Washington inventory-financing arrangements before their 2021 maturities.
- Debt-service capacity, including the 12.875% notes, 2021 convertible-note maturity, inventory-financing obligations and covenant requirements.
- Further impairment or cash-flow effects from Laramie Energy, whose carrying value was reduced to zero; Par’s credit-facility guarantee is limited to a pledge of its subsidiary equity interest.
- Actual turnaround and capital spending against the $95–$115 million 2020 budget, and the scale and timing of environmental remediation and other contingent obligations.