10-Q: Par Pacific Holdings Reports First Quarter 2024 Results, Impacted by Lower Refining Margins

Par Pacific Holdings experienced a net loss in the first quarter of 2024, primarily due to decreased refining margins and increased operating expenses.

Summary

• Par Pacific Holdings reported a net loss of $3.8 million for the first quarter of 2024, a significant decrease from the $237.9 million net income in the same period of 2023.
• The decline was mainly driven by a $240.5 million decrease in refining segment operating income, which included a $94.7 million decrease due to a gain on RINs settlements in the first quarter of 2023.
• General and administrative expenses increased by $22.5 million, and equity earnings from Laramie Energy decreased by $6.1 million.
• These negative impacts were partially offset by a $17.7 million loss on termination of financing agreements in 2023, a $7.8 million improvement in logistics, and a $5.1 million decrease in acquisition and integration expenses.
• Adjusted EBITDA for the quarter was $94.7 million, down from $167.6 million in the first quarter of 2023, and Adjusted Net Income was $41.7 million, compared to $137.5 million in the prior year period.
• The company's refining segment saw a decrease in adjusted gross margin per barrel across all refineries, with the Hawaii refinery at $14.00, Washington at $6.13, and Wyoming at $14.84.
• Total refining throughput was 180.9 thousand barrels per day (Mbpd), with refined product sales volume at 192.9 Mbpd.
• The retail segment experienced a slight decrease in operating income, while the logistics segment saw an increase due to the Billings Acquisition.

Sentiment

Score: 3

Explanation: The document presents a negative outlook due to a significant decrease in profitability, increased expenses, and challenges in the refining segment. While there are some positive aspects, the overall tone is concerning from an investment perspective.

Positives

• The logistics segment experienced a $7.8 million increase in operating income, primarily due to the Billings Acquisition.
• The company repurchased 906 thousand shares for $32.4 million, indicating a return of capital to shareholders.
• There was a $5.1 million decrease in acquisition and integration expenses related to the Billings Acquisition.
• The company saw a $16.0 million favorable change in inventory valuation adjustments.
• The company had a $7.0 million favorable change in crude oil differentials at its refineries in its legacy portfolio.

Negatives

• The company reported a net loss of $3.8 million for the first quarter of 2024, a significant drop from the net income of $237.9 million in the same period of 2023.
• The refining segment's operating income decreased by $240.5 million year-over-year.
• Adjusted EBITDA decreased by $72.9 million year-over-year.
• Adjusted Net Income decreased by $95.8 million year-over-year.
• The company experienced a $125.9 million increase in consolidated environmental costs across all refineries.
• General and administrative expenses increased by $22.5 million year-over-year.
• The retail segment's operating income decreased by $2.5 million year-over-year.
• The company experienced a $17.7 million decrease in refined product sales across its legacy refineries.

Risks

• The company is exposed to commodity price volatility, which significantly affects earnings, cash flows, and liquidity.
• The company faces market risks related to the volatility in the price of RINs and compliance credits required to comply with environmental regulations.
• The company is subject to interest rate risk on its floating-rate debt.
• The company is exposed to credit risk from nonpayment or nonperformance by its counterparties.
• The company's Supply and Offtake Agreement with J. Aron expires on May 31, 2024, and its LC Facility will mature on July 25, 2024, which could impact liquidity.
• The company is subject to various legal proceedings, claims, and regulatory, tax or government audits, inquiries, and investigations that arise in the ordinary course of business.
• The company is subject to extensive and periodically-changing federal, state, and local environmental laws and regulations, which could increase compliance costs.
• The company is subject to the Washington Climate Commitment Act and Clean Fuel Standard, which could have a material impact on its financial condition, results of operations, or cash flows.

Future Outlook

The company believes its cash flows from operations and available capital resources will be sufficient to meet its current capital and turnaround expenditures, working capital, and debt service requirements for the next 12 months. The company may seek to raise additional debt or equity capital to fund acquisitions and any other significant changes to its business or to refinance existing debt.

Management Comments

• Management uses certain financial measures to evaluate our operating performance that are considered non-GAAP financial measures.
• Management uses Adjusted Gross Margin per barrel to evaluate operating performance and compare profitability to other companies in the industry and to industry benchmarks.
• Management believes Adjusted Net Income (Loss) and Adjusted EBITDA are useful supplemental financial measures that allow investors to assess the financial performance of our assets without regard to financing methods, capital structure, or historical cost basis.

Industry Context

The results reflect the impact of volatile commodity prices and crack spreads, as well as increased environmental compliance costs, which are affecting the broader refining industry. The company's performance is also influenced by geopolitical events and regulatory changes, such as the Washington Climate Commitment Act and Clean Fuel Standard.

Comparison to Industry Standards

• The company's refining margins were significantly impacted by decreased crack spreads, which is a common challenge for refiners in the current market.
• The company's adjusted gross margin per barrel at its Hawaii refinery was $14.00, which is below the Singapore 3-1-2 index of $18.67, indicating underperformance compared to the benchmark.
• The Washington refinery's adjusted gross margin per barrel was $6.13, which is significantly below the RVO Adjusted Pacific Northwest 3-1-1-1 index of $20.48, indicating underperformance compared to the benchmark.
• The Wyoming refinery's adjusted gross margin per barrel was $14.84, which is below the RVO Adjusted USGC 3-2-1 index of $21.34, indicating underperformance compared to the benchmark.
• The company's performance is also impacted by the cost of RINs and compliance credits, which are a significant factor for refiners in the current regulatory environment.
• The company's increased operating expenses, particularly in general and administrative costs, are higher than some industry peers, indicating a need for cost management.

Management Changes

Legal Proceedings

• The company is involved in various lawsuits and other contingent matters in the ordinary course of business.
• The company is appealing the City of Honolulu's property tax assessment for tax year 2023.
• The company is appealing a tax assessment from the Washington Department of Revenue related to certain sales of raw vacuum gas oil between 2014 and 2016.
• The company is being audited for prior tax periods related to business transactions conducted in the Hawaii foreign trade zone.
• The company is defending itself against a complaint alleging false claims and statements in connection with various state tax returns related to its business conducted within the Hawaii foreign trade zone.
• The company received a letter from EPA related to the alleged violation of certain air emission limits, controls, monitoring, and repair requirements under the Consent Decree.
• The company's Wyoming refinery is subject to a number of consent decrees, orders, and settlement agreements involving the EPA and/or the Wyoming Department of Environmental Quality.

Stakeholder Impact

• Shareholders are impacted by the decrease in profitability and the net loss reported for the quarter.
• Employees are impacted by the increase in employee costs and the CEO transition.
• Customers may be impacted by changes in fuel prices and availability.
• Suppliers may be impacted by changes in the company's purchasing patterns.
• Creditors are impacted by the company's debt levels and ability to meet debt service requirements.

Next Steps

• The company plans to refinance its existing Hawaii intermediation facility.
• The company will continue to integrate the Billings refinery operations, control processes and information systems into its systems and control environment.
• The company will continue to monitor the creditworthiness of customers to whom it grants credit and establish credit limits in accordance with its credit policy.

Key Dates

Keywords

refining, renewable fuels, crack spreads, EBITDA, RINs, logistics, retail, environmental regulations, debt, commodity prices