PARR - Par Pacific Holdings

[Gordon Gecko]

Curious to see if anyone else has looked at this. PARR is a small, diversified refinery/retail/midstream that Zell and Whitebox brought out of BK w/ ~$1.2Bn NOLs. They own a HI complex (Refinery, midstream, retail) and just purchased a Wyoming refinery and affiliated midstream asset.

 

The story in brief is that the Business has about $50mm cash, nat gas assets held cheaply on the B/S and NOLs that don't appear to be captured in current EV. The nat gas asset value was established last Dec. and has actually come down due to hedging costs. I'm no E&P pro, but I saw Mizuho put a $260mm valuation on the gas assets (vs. ~$110mm on the B/S). Backing that out and the cash, the assets are trading at about 3.25x management's estimate of 2017 cash flow (assuming 'mid-cycle' EBITDA) despite 40% of that coming from retail and midstream (comps tend to range from 8-12x)

 

Obviously those situations can persist for years, but what makes this story interesting is that management has gone on record saying that the Gas asset doesn't fit into the PARR structure - the DDA creates a tax shield that really does you no good in a business where your best asset is the NOLs. They have stated that they might look to divest when CIG got to $3.50. Well... CIG is at $3.50. If they're able to get $260mm realization w/ a <$700mm market cap, you have to think shares would appreciate markedly. If they can parlay that, the $50mm in cash and next year's FCF (they just completed large maintenance projects on the 2 refineries, so should have decent cash) into organic or accretive acquisition, you'd think that would be even better.

 

I was hoping someone could shed some more light on comp valuations for nat gas assets (Laramie Energy in Piceance) and how realistic mid-cycle cash estimates are. 

[RedDaruma]

I haven't looked at closely but one of the blogs I have been reading mentioned about the first time in Aug 2015 and second in Oct last year.

 

http://wertartcapital.com/

 

Also, this name was pitched by Miguel Fidalgo, who used to work at Baupost, in Grant's conference last year.

 

Hope this helps.

RD

[KJP]

There are two VIC writeups on this, including one that is quite recent.

 

It's also been discussed a few times here:

 

http://clarkstreetvalue.blogspot.com/2016/04/par-pacific-holdings-update-distressed.html

 

http://clarkstreetvalue.blogspot.com/2016/06/par-pacific-holdings-wyoming-refining.html

 

 

 

 

[Gordon Gecko]

Thanks, I read the bit by wertartcapital - It just didn't really resonate.

 

I don't believe that you can take bridge financing as representation for current borrowing cost. I ask myself if I really believe that it would cost 8% to provide the current debt capitalization on the company - and the answer is no. Debt issuance costs are a 'one off' in the sense that while they will recur during the building/acquisition process, in 5-10 years they'll have gone to 0. To lump that into cost of long term financing seems unduly onerous.

 

It also seems draconian to penalize them for the move in their share price following the announcement of the WYCO acquisition. Management has been pretty clear in saying that they will not be raising equity at these levels, it would be too "painful". Plus, part of the bull story is that they have identified organic projects to improve utilization in WYCO, so there is room for organic growth without incremental equity issuance. 

 

But even assuming Wertart's numbers are correct, $150mm EBITDA vs. $850mm net EV (ex-Laramie @ book), given 40% midstream & retail contribution... It just doesn't add up unless there are real doubts about the reality of "mid-cycle" profitability or there is suspected abuse to minority holders. At least, that's my current take. I was hoping someone with some refinery and/or Gas E&P experience might opine! 

[mateo999]

I agree and own / adding here.  I think it's worth noting that if One Rock shuts down the refinery operations of the old Chevron refinery, HIE should be able to boost on-island sales which would be a needle-mover.

[Gordon Gecko]

I agree and own / adding here.  I think it's worth noting that if One Rock shuts down the refinery operations of the old Chevron refinery, HIE should be able to boost on-island sales which would be a needle-mover.

 

While I agree, I'm not sure why they would do that. Most people don't tend to buy a business, retain 99% of the employees, and then shut down operations soon thereafter...

 

With that said, I also don't understand their angle in buying it at all. It's smaller, less efficient, and seems to cater to a less attractive market due to lower emphasis on distillate. They also lose the benefits of being in the global footprint of CVX. One Rock make some vague references to Mitsubishi, perhaps they have some sort of takeoff agreement with them? All mysterious still, but I don't think it makes or breaks the story one way or the other. 

[mateo999]

I agree and own / adding here.  I think it's worth noting that if One Rock shuts down the refinery operations of the old Chevron refinery, HIE should be able to boost on-island sales which would be a needle-mover.

 

While I agree, I'm not sure why they would do that. Most people don't tend to buy a business, retain 99% of the employees, and then shut down operations soon thereafter...

 

With that said, I also don't understand their angle in buying it at all. It's smaller, less efficient, and seems to cater to a less attractive market due to lower emphasis on distillate. They also lose the benefits of being in the global footprint of CVX. One Rock make some vague references to Mitsubishi, perhaps they have some sort of takeoff agreement with them? All mysterious still, but I don't think it makes or breaks the story one way or the other.

 

They'd do that because tier 3 gasoline standards went into effect last Sunday.  From my understanding, via conversations with Par's mgmt team, Chevron did not seek, nor did it get, a small refinery exemption (which would have pushed the T3 compliance date to 1/1/20).  So you have a refinery that can't produce ULSD, and will have trouble taking enough sulfur out of its transportation fuel stream to comply.  I believe the last major turnaround was in 2013, so probably by middle of this year, One Rock will need to make some tough capital allocation decisions.  The economics of adding a desulfurization unit to comply are just not there.  My guess/hope is that the refinery will be converted primarily to storage assets.

 

[Gordon Gecko]

 

They'd do that because tier 3 gasoline standards went into effect last Sunday.  From my understanding, via conversations with Par's mgmt team, Chevron did not seek, nor did it get, a small refinery exemption (which would have pushed the T3 compliance date to 1/1/20).  So you have a refinery that can't produce ULSD, and will have trouble taking enough sulfur out of its transportation fuel stream to comply.  I believe the last major turnaround was in 2013, so probably by middle of this year, One Rock will need to make some tough capital allocation decisions.  The economics of adding a desulfurization unit to comply are just not there.  My guess/hope is that the refinery will be converted primarily to storage assets.

 

Interesting, thanks for that. Did they have to keep on the entire workforce due to union rules?

[mateo999]

Interesting, thanks for that. Did they have to keep on the entire workforce due to union rules?

Unfortunately I don't know

[KJP]

My guess/hope is that the refinery will be converted primarily to storage assets.

 

If the old Chevron refinery were closed and Par could increase average throughput to 90k barrels/day (from ~78k currently against 94k nameplate capacity) that would be a huge boost to EBITDA/FCF given the operating leverage of a refinery.  I think that's a big potential upside at current prices.

 

As things stand and based on the breakdown they gave in response to Cooperman's question on the last call, I understand management is claiming $150 million "mid-cycle" EBITDA after accounting for $40 million in corporate G&A.  I don't think that includes any EBITDA hit from the periodic turnarounds they have to do at the refineries,  which appear to happen every 3-4 years.  Management estimated the recent Hawaii turnaround cost $20-25 million in EBITDA.  I assume a turnaround at the Wyoming refinery would cost less because that refinery is more seasonal, and thus a turnaround should be less disruptive.  So, if you estimate $10 million EBITDA decline for the Wyoming turnaround, you get a $30-35 million EBITDA decline every 3-4 years.  So, ballpark amortization would be $10 million per year, reducing "normalized" "mid-cycle" EBITDA to $140 million or so.

 

On the CapEx side of things, management guided to $10-15 million in 2017, which shouldn't include any major turnarounds or pipeline work like they had in 2016.  CapEx for the Hawaii turnaround was around $35 million.  A turnaround at the smaller Wyoming refinery should be cheaper, so I ballpark it at $20 million.  That's $55 million in additional CapEx every 3-4 years, so ballpark the amortization at $15 million year, producing "normalized" CapEx of $25-30 million/year.

 

So, "normalized" "mid-cycle" EBITDA - "normalized Cap Ex" = ~$110- $115 million/year.  Because they won't pay any material amounts of taxes, that should be pretty close to "normalized" "mid-cycle" FCF to the enterprise, ignoring any contribution to or from Laramie.

 

For a peak at the potential upside of the current assets if the old Chevron refinery were closed, you then estimate the gross margin on an additional ~12k barrels/day throughput at the Hawaii refinery, a very high percentage of which should become FCF given the operating leverage of a refinery.

 

These are obviously all ballpark estimates based on management's view of "mid-cycle" crack spreads, but do they sound roughly right?

[Gordon Gecko]

My guess/hope is that the refinery will be converted primarily to storage assets.

 

If the old Chevron refinery were closed and Par could increase average throughput to 90k barrels/day (from ~78k currently against 94k nameplate capacity) that would be a huge boost to EBITDA/FCF given the operating leverage of a refinery.  I think that's a big potential upside at current prices.

 

As things stand and based on the breakdown they gave in response to Cooperman's question on the last call, I understand management is claiming $150 million "mid-cycle" EBITDA after accounting for $40 million in corporate G&A.  I don't think that includes any EBITDA hit from the periodic turnarounds they have to do at the refineries,  which appear to happen every 3-4 years.  Management estimated the recent Hawaii turnaround cost $20-25 million in EBITDA.  I assume a turnaround at the Wyoming refinery would cost less because that refinery is more seasonal, and thus a turnaround should be less disruptive.  So, if you estimate $10 million EBITDA decline for the Wyoming turnaround, you get a $30-35 million EBITDA decline every 3-4 years.  So, ballpark amortization would be $10 million per year, reducing "normalized" "mid-cycle" EBITDA to $140 million or so.

 

On the CapEx side of things, management guided to $10-15 million in 2017, which shouldn't include any major turnarounds or pipeline work like they had in 2016.  CapEx for the Hawaii turnaround was around $35 million.  A turnaround at the smaller Wyoming refinery should be cheaper, so I ballpark it at $20 million.  That's $55 million in additional CapEx every 3-4 years, so ballpark the amortization at $15 million year, producing "normalized" CapEx of $25-30 million/year.

 

So, "normalized" "mid-cycle" EBITDA - "normalized Cap Ex" = ~$110- $115 million/year.  Because they won't pay any material amounts of taxes, that should be pretty close to "normalized" "mid-cycle" FCF to the enterprise, ignoring any contribution to or from Laramie.

 

For a peak at the potential upside of the current assets if the old Chevron refinery were closed, you then estimate the gross margin on an additional ~12k barrels/day throughput at the Hawaii refinery, a very high percentage of which should become FCF given the operating leverage of a refinery.

 

These are obviously all ballpark estimates based on management's view of "mid-cycle" crack spreads, but do they sound roughly right?

 

You're right that you need to normalize the costs - still trying to work out exactly what maintenance is vs. growth and the EBITDA impact of turnarounds - but what you have seems like a reasonable, ballpark estimate.

 

Tough to look at FCF on an enterprise basis due to the difficulty in assessing NOL value, IMO. Netting cash interest of about $25mm should get you a decent free cash to equity proxy (Assume your $115mm estimate -> FCFE ~$90mm). If the gas assets are worth BV (which seems punitive) imputed valuation of the rest is ~5x FCFE without really giving credit for the NOLs.

 

But it is all predicated on those management estimates

[KJP]

 

Tough to look at FCF on an enterprise basis due to the difficulty in assessing NOL value, IMO. Netting cash interest of about $25mm should get you a decent free cash to equity proxy (Assume your $115mm estimate -> FCFE ~$90mm). If the gas assets are worth BV (which seems punitive) imputed valuation of the rest is ~5x FCFE without really giving credit for the NOLs.

 

But it is all predicated on those management estimates

 

Yes, at the end of the day it all hangs on management estimates.

 

For an EV and to look at future FCF to the enterprise and to equity, I've been thinking about it as (i) zero additional value to NOLs beyond essentially paying no taxes on income; and (ii) sell Laramie for $150 million, use a portion of the proceeds to pay off the highest cost debt.

[constala]

Gordon, greed is good  ;)but would you mind detailing your calc- I can not reconcile your x3.25?  in  "Backing that out and the cash, the assets are trading at about 3.25x management's estimate of 2017 cash flow"

 

At $13.2 share price, Mcap is 600m, cash 51m, debt 409m: EV is 958m. Then you deduct Natgas potential sale value: 110m (BV) or closer to FV (150m-260m). Say a conservative 110m: Future EV is 848m. If FCFe: is 100m  then EV/FCFe=x8.5 right? Does not seem so crazy cheap to me in a cyclical industry, with recent crack spreads below mean, very low past gross earnings, obvious headwinds notably in Hawai. And it woud seem safe not to assign any value to NOL imho (high PBT a rarity in this industry).

 

 

[mateo999]

Gordon, greed is good  ;)but would you mind detailing your calc- I can not reconcile your x3.25?  in  "Backing that out and the cash, the assets are trading at about 3.25x management's estimate of 2017 cash flow"

 

At $13.2 share price, Mcap is 600m, cash 51m, debt 409m: EV is 958m. Then you deduct Natgas potential sale value: 110m (BV) or closer to FV (150m-260m). Say a conservative 110m: Future EV is 848m. If FCFe: is 100m  then EV/FCFe=x8.5 right? Does not seem so crazy cheap to me in a cyclical industry, with recent crack spreads below mean, very low past gross earnings, obvious headwinds notably in Hawai. And it woud seem safe not to assign any value to NOL imho (high PBT a rarity in this industry).

 

Why would you compare FCFe to EV?  You're double penalizing for debt.  Also, 110 BV of Laramie I believe to be punitive.

[Gordon Gecko]

Why would you compare FCFe to EV?  You're double penalizing for debt.  Also, 110 BV of Laramie I believe to be punitive.

 

Agree. CIG gas pricing is up >50% since then and I think you'd be hard pressed to find a Gas business without marked appreciation since turn of the year.