E - PBF Energy: Partnership With Eni Is A Gamechanger

Summary

• PBF Energy's sale of a 50% interest in its St. Bernard Renewables biorefinery to Eni for $835-885 million in cash materially derisks both the project and the stock.
• Backing out the $1.7 billion value for biorefinery and $1 billion for recently acquired PBFX leaves PBF's 1.02 MMbpd of refining assets at a low $3 billion valuation.
• Using conservative assumptions, by year end PBF could have enough cash to repurchase 1/3 of the outstanding shares at these levels.
• PBF's discount is often ascribed to its heavy presence in PADD1 and PADD5. But maybe this isn't as big a disadvantage as most belief.
• I think we're another good quarter and the closing of the Eni deal away from this being a $60 stock.

In my last article on PBF Energy ( PBF ), I argued that the current low valuation created an asymmetric risk/reward setup, and with a few more good quarters of cash flow, they would be able to repurchase a significant amount of their float, sending share prices higher.

Well, good news came early with the sale of 50% of the soon-to-be operating renewable diesel facility at their Chalmette refinery to Eni ( E ) for $835-885 million. This development both materially derisks the project, as Eni will be bringing expertise, and provides a cash windfall for PBF, which materially derisks the stock.

PBF Partnership with Eni

In my original article, I discounted the projected cash flow for the Renewable Diesel, or RD project by 50%, because PBF has no track record in running a RD facility. The partnership with Eni is a gamechanger in my opinion, both from a cash influx standpoint, and from a risk reduction standpoint.

The cash payment of $835-885 million for 50% of the project, which should hit PBF's bank account in the next 90 days, represents over 15% of their market value as of today.

Additionally, I believe the expertise Eni brings materially derisks the project, both from an operational and marketing standpoint.

Give credit due to PBF Management. They said they could do this on their own, but CEO Tom Nimbley said they were looking for a partner that:

can increase the value of the partnership where there's an additive aspect where someone is bringing some attributes that we don't currently have."

It looks like they found that partner.

PBF Valuation

The partnership with Eni puts a concrete valuation on the Renewable Diesel ("RD") project, especially since they are being paid half in cash up front. My personal view is that the market wasn't giving this project much credit even with management estimating it would produce $400 million a year in EBITDA at current RIN prices.

With the stock at $44, and 129 million shares outstanding, PBF has a market capitalization of $5.7 billion.

From the $5.7 billion valuation, if we subtract $1.7 billion for the RD project, and subtract another $1 billion for logistics arm PBFX (I'm using the valuation prior to PBF purchasing the remaining units, to be conservative) it puts PBF's refining assets at a $3 billion dollar valuation.

That's a really undemanding valuation for over 1.02 MMbpd of refining capacity, especially with crack spreads still elevated.

For comparison, Marathon ( MPC ) has 3 MMbpd of refining capacity and an enterprise value of $72 billion. Phillips 66 ( PSX ) has 2.2 MMbpd refining capacity an enterprise value of $60 billion. Valero ( VLO ) has 3.2 MMbpd of refining capacity enterprise value of $47 billion.

This is not a apples-to-apples comparison, so don't conclude PBF is 5x underpriced. These companies all have their own RD projects, and I am not backing out the logistics arms from their valuation like I did with PBF. Plus, the larger refiners do have some scale advantages over PBF as well. But with this important caveat, it still shows the dramatic valuation gap between the other major US refiners and PBF.

Looking at PBF's refining assets from a replacement cost standpoint shows a similar massive discount. Cenovus ( CVE ) just spent $1.2 billion to rebuild its Superior, Wisconsin refinery, which only has 49mbpd of capacity. Going back to 2019, PBF got a deal on the Martinez refinery for "just" $1 billion; its replacement cost would be far higher today than it was then.

Share Repurchases

PBF Management really embraced share repurchases quickly.

On the Q3 Conference call in late October, then CFO Erik Young answered an analyst question if "a buyback is in the thought process down the road." He answered:

Ultimately, share buyback is yet another tool that can be employed. We've seen it amongst our peer group and amongst other folks that are out there. And so it absolutely can be something that we could put in place at some point in the future.

Less than 6 weeks later, on December 12th, after a decline into the low $30's caused by both declining crack spreads and former PBFX holders selling shares, PBF announced a $500 million stock buyback program . Shares jumped 7% to $35 on the news. Assuming they started repurchasing the next day, there were only 13 trading days remaining in 2022. In those 13 days, they repurchased $156.4 million in shares. Including 2023, they have repurchased over 5 million shares, roughly 4% of the outstanding, for $189 million.

Future Share Repurchases

In a few months, PBF should be in a position to repurchase a substantial amount of the outstanding shares. There were a few interesting exchanges on the Q4 Conference Call that hinted at PBF's future plans. The first was CFO Karen Davis announcing:

we anticipate that over time, our cash should return to more normalized levels in the $750 million to $1 billion range. Our gross debt is now below pre-pandemic levels and at a level that we believe is currently appropriate and sustainable for our business.

At the high end of that range, it implies a cash return of $1.2 billion from the current cash balance of $2.2 billion. This again is before the Eni payment.

Then there was the following entertaining exchange with BofA's Doug Leggate:

Doug Leggate

Karen, congrats on the permanent seat. Now you have to deal with all of us. Forgive me for beating on Neil's question but let me maybe just ask it differently. Why should we not think about the proceeds from the joint venture translating directly to share buybacks? Because your operating cash flow takes care of all the other things you talked about. So are we looking at a 15% buyback with the cash inflow from the JV?

Karen Davis

Well, first of all, I'd say we are just delighted to be partnering with Eni and at the moment, just focused on closing the deal.

Doug Leggate

You're not discouraging me from thinking that way?

Matt Lucey

We would never discourage you to think any way you want. It's a futile -- any attempt would be futile. But look, we've been very, very focused on getting the transaction to the point where we are today. The transaction hasn't closed yet and I learned a long, long time ago not to figure out ways to spend money that you don't have in your pocket yet. Clearly, the company will put forward policies that are appropriate at the appropriate time but we have nothing else to add at the moment.

They are wisely not spending the money before they have it, but once they do, my napkin math shows the following possible outlook for PBF repurchases.

Even with the additional debt payoff of PBFX notes, this leaves around $2 billion available for share repurchases and special dividends - enough to purchase almost 1/3rd of the outstanding shares at these levels.

Last Man Standing in PADD1 and PADD5 - maybe this isn't a negative?

The following is mostly my free thinking - I don't have a lot of numbers to back this up, so take it with a grain of salt.

The most frequent reason I read for PBF's discount versus the other major refiners, beyond scale, is that 2/3rds of PBF's refineries are in PADD1 (Delaware City, DE and Paulsboro, NJ) or PADD5, specifically California (Torrance and Martinez.)

PADD1 is disadvantaged from primarily being served by water and rail, not pipeline, and because PADD1 is the usual destination for overseas refined product.

PADD5 is disadvantaged primarily because of the political climate in California that is openly hostile to energy companies. Recently, the elevated price of CA natural gas has also been a negative.

As I've tried to illustrate, I believe the discount for this is certainly in the stock price. But what if the "conventional wisdom" is wrong?

With PADD1, maybe the Russian refined product embargo combined with less Chinese exports, will cause lower refined product imports on the East Coast. This combined with jet demand returning to pre-COVID levels, along with more driving, and 2023 could be the year we see "normal" East Coast demand, but without the 335mbpd Philadelphia Energy Solutions refinery (closed due to fire in 2019) and the 130mbpd Come By Chance refinery (closed in 2020.)

With PADD5, California has also lost refining capacity since 2020 with the 161 Mbpd Marathon Martinez refinery converting to RD this year and the 120Mbpd Phillips 66 Rodeo California converting to RD (opening in 2024.) Perhaps the return to office driving and increased jet fuel demand will keep crack prices high in 2023 and beyond. With jet fuel, PBF Martinez in particular has a high jet fuel output (roughly 23% of their output.) On the political front, California governor Newsom's efforts for a windfall profit tax also seem to be stalling as well.

We know the conventional reasoning that favors gulf coast refiners and refiners with access to shale oil. But perhaps the benefit is overstated, and the economics of operating in PADD1 and PADD5 are better than most think.

Conclusion

In my recent interview with Seeking Alpha , I talked about looking for catalysts that drive a rerating in deep value names, and that generating lots of cash to either repurchase shares or debt is often a great way to do that.

PBF spent most of last year repurchasing debt, and it certainly re-rated as a result. Considering they are net debt free as of last quarter, even before the Eni payment, I believe they'll spend this year repurchasing shares, and we could see a further re-rating higher.

So what's holding PBF back? Honestly, I just think it's a scary chart for new investors. Looking at just the stock price, it looks like we've "missed the move" as it ran from $18 to $45. But looking instead at Enterprise Value, it's actually down from this time last year, as PBF has paid off $3 billion in debt while buying out PBFX and repurchasing shares. If we factor in the incoming payment from Eni, EV will be down significantly.

I think we're another good quarter and the closing of the Eni deal away from this being a $60 stock.

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