Oil Refiner Par Pacific Has Some Issues (NYSE:PARR)

Refiner and gasoline station operator Par Pacific Holdings (NYSE:PARR) has had a wild run over the past eight years. With the inventory worth dropping sharply this yr due to poor working outcomes, some take into account the inventory now to be a purchase. I’m not so positive as a result of I see too many issues with their operations and administration. I charge PARR a maintain. That is an replace to my prior articles.

Irrational Inventory Repurchases

I need to begin with a significant motive why I can’t purchase PARR. Previously, I really helpful shopping for PARR in a June 2016 article, and I purchased/bought the inventory a number of occasions through the years. Since my final article in February 2023, it appears administration has develop into irrational managing their funds, in my view. In 2023, they used $67.821 million to repurchase 1.946 million shares at a median worth per share of $34.85 in comparison with the present PARR worth of $25.31. As much as Could 6 of this yr, they spent $73 million to repurchase inventory, they usually simply approved a brand new $250 million inventory repurchase program. I’m completely in opposition to this repurchase. Par Pacific has junk debt rankings of Ba3 by Moody’s and $635 million long-term debt. Plus, the corporate misplaced $3.7 million in 1Q’24. As an alternative of inventory repurchases they need to pay down debt to enhance their debt rankings as a result of below the March 2024 amended ABL mortgage settlement if S&P upgrades their debt the rate of interest on the ABL mortgage would lower 0.25%.

They’re in a really high-risk commodity enterprise the place monetary leverage is usually a pal or your worst enemy. These inventory repurchases are very troubling, in my view, particularly when their CEO was promoting PARR inventory. William Pate, who was CEO till a number of weeks in the past when he retired in Could, sold 150,000 shares final November at a median worth of $34.88.

Whereas I doubt, Par Pacific is headed into severe monetary hassle. I too usually see massive inventory repurchases ultimately put corporations into very severe hassle. Massive Heaps (BIG) is presently in severe monetary hassle after making huge inventory repurchases a number of years in the past, for instance. I usually cowl distressed/bankrupt corporations, and I consistently see that prior irrational inventory repurchases had been a significant factor for the corporate’s demise.

Billings Refinery – Bought in 2023

My preliminary response to their buy final yr of Exxon’s Billings refinery was constructive. Now, nevertheless, I’ve a blended opinion. The headline buy worth of $310 million is deceptive. That worth included a 65% curiosity in Yellowstone Power Restricted Partnership and a 40% curiosity in Yellowstone Pipeline Firm, which collectively had been carried on their June 30, 2023, steadiness sheet after the acquisition for about $84 million. This suggests that Par Pacific paid about $226 million only for the refinery. This appears very low cost for a 63,000-bpd refinery. There are two issues with this assertion. First, additionally they needed to pay over $299 million for the refinery’s stock. Second, it is a very outdated inefficient refinery that had manufacturing prices of $12.44 per throughput barrel in 1Q’24 (In comparison with $4.89 in Hawaii, $7.86 in Wyoming, and $6.07 in Washington.) The whole buy worth was over $638 million – not $310 million. Whenever you analyze the return on their refinery funding, you really want so as to add $226 million plus the $299 million stock and use $525 million.

First Quarter 2024 Outcomes Have been Disappointing

The present PARR inventory worth displays their very disappointing 1Q’24 outcomes. Whereas the winter season normally has a unfavorable affect, the revenue margins in any respect their refineries had been weak, particularly in comparison with 1Q’23. Par Pacific reported a GAAP lack of $(0.06) per share, in comparison with a revenue of $3.96 in 1Q’23.

First Quarter Revenue Assertion 2024 and 2023

Hawaii’s adjusted gross revenue margin was $14.00 per barrel in comparison with $19.11 in 1Q’23; Washington $6.13 in comparison with $11.07; Wyoming $14.84 in comparison with $27.54; and Montana was $13.82. (Be aware: The outcomes for 2Q’24 can be negatively impacted by main upkeep/turnaround on the Billings refinery.) These decrease margins had been the results of weaker crack spreads of their numerous markets. The retail phase had an working revenue of $11 million in 1Q’24 in comparison with $13.5 million in 1Q’23. The one vivid spot was logistics’ working revenue elevated in 1Q’24 to $20.4 million from $12.6 million.

Par Pacific Is Additionally within the Tourism Business

Many traders simply take into account PARR to be an power commerce, however you really want to take a look at it from different angles. For instance, additionally it is successfully within the tourism trade. A lot of the Hawaiian economic system is predicated on tourism, plus many vacationers hire automobiles that use gasoline from their Hele gasoline stations. Vacationer travel to Hawaii is down 4.1% thus far this yr in comparison with final yr. Seasonal vacationers touring to nationwide parks in Wyoming, Montana, and South Dakota use quite a lot of gasoline from their Billings and Newcastle refineries. To date, this yr, vacationer journey on this space has improved over final yr. Yellowstone customer numbers are up 11%, for instance.

EV Gross sales Impacting PARR

Throughout the power trade, EV utilization has a major long-term affect on Par Pacific. Their refineries in Montana and Wyoming are anticipated to be impacted a lot lower than their Hawaii and Washington refineries/gasoline stations as a result of it’s usually not sensible to drive an EV in rural areas. That is mirrored in 2023 EV gross sales. In Montana, 3.40% of vehicle sales had been EVs final yr, 2.11% in Wyoming, and a pair of.12% in South Dakota. Hawaii and a few of their Washington markets are city, so EVs are extra sensible. EV gross sales in Washington had been 18.79% of car gross sales in 2023 and 11.01% in Hawaii. If these percentages enhance, it could have a really unfavorable long-term affect on the corporate’s operations.

Laramie Power – Pure Gasoline Publicity

Their 46% possession of Laramie Power, which has pure gasoline manufacturing within the Piceance Basin in Colorado, had some developments since my February 2023 article. As I discussed in that article, it was carried on Par Pacific’s steadiness sheet at zero, however it’s now carried at $18.8 million and really had a one-time $10.7 million distribution in March 2023. Whereas the $18.8 million is barely about $0.32 per PARR share, it’s a good enchancment.

Could Convention Name

There have been some attention-grabbing discussions in the course of the Could convention name. Matthew Blair from Tudor, Pickering, Holt requested as a part of a query: “…is Par open to being acquired?” CEO Will Monteleone answered:

And finally, I believe any future M&A exercise, whether or not we’re buying or we are the goal, I believe we’re finally centered on maximizing shareholder worth….it would not be applicable to particularly touch upon whether or not we might be a goal, however I believe on the finish of the day, we’re centered on shareholder worth.

Attention-grabbing. Typically, administration strongly assert that they need to stay impartial and have no real interest in being acquired.

A distinct a part of that very same line of questions was concerning NOLs. In accordance with administration, the corporate has about $900 million NOLs. Utilizing the 21% present company tax charge, that means a price of about $189 million with out factoring the current worth of the revenue tax financial savings, or about $3.25 per share.

Renewable Gas Mission in Hawaii

I’m taking a wait and see method concerning their new $90 million liquid renewable fuels manufacturing facility below development in Hawaii. In accordance with management it’s “anticipated to supply roughly 61 million gallons per yr of renewable diesel, sustainable aviation gasoline, renewable naphtha and liquified petroleum gases”. In principle, this might be very worthwhile and in addition assist cut back greenhouse gasoline emissions. I fear, nevertheless, it might additionally cut back Par Pacific’s income if there are working points, however we must wait till 2025 or 2026 to see precise manufacturing/revenue outcomes.

PARR Inventory Valuation

Some might assert that PARR inventory is reasonable due to their low P/E. I’m not so positive. The 2024 EPS consensus estimate is $2.84 with a excessive of $3.52 and a low of $2.50. Utilizing $2.84 and the newest PARR worth of $25.31, their P/E based mostly on estimated EPS is 8.9x. That’s not low cost, in my view, as a result of they do not pay a dividend, their debt has a junk ranking, they’re in a dangerous commodity enterprise, and their long-term outlook is questionable as a result of a lot of the world desires to finish the usage of fossil fuels. The one constructive “kicker” could be the potential for some future buyout.

Conclusion

I purchased/bought PARR inventory plenty of occasions over the past 8 years. One of many causes I initially took an interest within the firm in 2016 was as a result of Sam Zell was a significant holder, however he died in 2023. I can’t take into account shopping for the inventory now due to the irrational monetary method that the present administration is taking by making massive inventory repurchases as an alternative of paying down debt.

As a result of I do not see refinery margins bettering considerably and since I fear about EV gross sales in Hawaii/Washington on a long-term foundation, their 8.9x P/E isn’t any cut price. I proceed to charge PARR a maintain.