Summary
- The last three years have been extremely volatile for the refining industry and Par Pacific was obviously not spared.
- After struggling throughout 2020 and 2021, the booming operating condition of 2022 provided a massive cash windfall.
- This could see them fund their upcoming Billings refinery acquisition with cash, whilst also repaying all of their debt within the next twelve months.
- This stands to forever transform their company, as they grow larger and see a sizeable benefit by eliminating their burdensome interest expense.
- It also opens the door for shareholder returns, although I only believe that a hold rating is appropriate for the time being with a possible future upgrade.
Introduction
The refining industry is no stranger to volatility, although the last three years have quite possibly been the most extreme in history, which created a wild ride for Par Pacific ( PARR ). Despite struggling throughout 2020 and 2021, they rapidly saw their fortunes change during 2022, which now excitingly sees their outlook forever transformed with a new age beginning.
Coverage Summary & Ratings
Since many readers are likely short on time, the table below provides a brief summary and ratings for the primary criteria assessed. If interested, this Google Document provides information regarding my rating system and importantly, links to my library of equivalent analyses that share a comparable approach to enhance cross-investment comparability.
Author
Detailed Analysis
After struggling throughout the severe downturn of 2020 and 2021, to the relief of the refining industry, 2022 saw more than just a recovery. In fact, the Russia-Ukraine war exacerbated the existing refining shortage to create booming operating conditions, which in turn, provided a never-before-seen cash windfall that sent their operating cash flow during the first nine months to $369.1m. I suspect that one year ago, no one ever thought such as a result would occur, as this is more than three times their full-year result of $105.6m during 2019, despite also only being three-quarters the length of time.
Even if removing their working capital movements, their cash flow performance was equally as strong during the first nine months of 2022 with their working capital builds and draws across the quarters broadly netting out in aggregate. When viewed through this lens, their results for the third quarter are even more impressive with an underlying operating cash flow of $297.7m, which is truly massive and eliminated most of their net debt, as subsequently discussed.
Whilst the future remains uncertain, the prospects of seeing the entirety of their debt repaid early raises two important outcomes. The first being, the benefit they will see via removing their interest expense, which obviously weighs down their cash flow performance. A suitable example is during 2019 when they paid $65.2m of interest and thus given their operating cash flow was $105.6m, their result without leverage would have been a massive circa 60% higher, literally for the exact same operating conditions. Obviously, the benefit would have been relatively larger during 2020 and 2021 but as these were impacted by the Covid-19 pandemic, it makes for a less useful comparison, similar to how the first nine months of 2022 were too strong to make for a useful comparison.
Meanwhile, the second important outcome sees this potentially opening the door for shareholder returns, possibly in 2023 once they integrate their upcoming Billings refinery acquisition . Unless they pursue further acquisitions, the outlook to see the entirety of their debt repaid leaves few uses for their free cash flow than shareholder returns, which hopefully would include dividends. It remains too early to know for certain because the amount of free cash flow they generate would obviously also depend upon their yet-to-be-known capital expenditure. Although, the accompanying details forecast this acquisition will increase their refining throughput capacity to 218,000bpd from its existing level of 154,000bpd, as per slide two of their June 2022 investor presentation . This represents an increase of circa 40% and thus when combined with prospects of eliminating their burdensome interest expense, it stands to see a new age beginning for shareholders.
Following their massive cash windfall, the first nine months of 2022 saw their cash balance swell and thus as a result, send their net debt plunging to $98.7m, which is a mere fraction of where it ended 2021 at $452.3m. Since their cash balance now stands at a formidable $409.1m, they can easily fund the $310m cost of their upcoming acquisition without tapping debt markets.
When looking ahead into the fourth quarter of 2022 and 2023, the limited global refinery capacity and accompanying energy shortage are likely to keep operating conditions strong, even if they ease back from their recent booming levels due to weakening economic conditions. No one can accurately estimate their future cash flow performance due to their inherent volatility, although they generated circa $300m of operating cash flow during the third quarter of 2022 alone and thus given this general outlook, they are well positioned to absorb this acquisition without any trouble, barring a sudden black-swan event. As a result, it seems reasonable to expect the $310m cost of their upcoming acquisition will be recouped within the next two to three quarters at maximum, if not even sooner if their operating conditions from the third quarter persist, before subsequently seeing the remaining $98.7m of their net debt eliminated during the next quarter.
Given this outlook, it seems pointless to assess their leverage in detail because it clearly does not house any issues right now as it is obviously very low with their net debt less than their operating cash flow during the third quarter of 2022. Meanwhile, the same can also be said for their debt serviceability, which is obviously perfect given the accompanying outlook to repay most, if not the entirety of their debt within the next twelve months. Hypothetically, if operating conditions were to suddenly crash during the coming quarters then a subsequent analysis would discuss these topics in detail but barring such an unexpected outcome, it remains pointless.
Unsurprisingly, their cash windfall during the first nine months of 2022 also helped their liquidity that benefits from their swelling cash balance lifting their cash ratio to 0.24 versus its previous result of 0.08 at the end of 2021. When combined with their current ratio of 1.01, these easily make a strong rating warranted, especially given their prospects to repay the entirety of their debt within the next twelve months. They have already begun repaying their debt early, sensibly starting with their most expensive senior secured notes that were due in January 2026 and carry a very high interest rate of 12.875%, which saw their outstanding balance slightly more than halved during the first nine months of 2022. Apart from boosting their cash flow performance, repaying debt early also provides a shield from rapidly tightening monetary policy that could have otherwise made refinancing difficult or at a minimum, even more expensive.
Par Pacific Q3 2022 10-Q
Conclusion
Thanks to the massive cash windfall during the first nine months of 2022, they are forever transformed with a new age beginning as they not only grow larger but importantly, eliminate their net debt and thus free themselves of burdensome interest expense. Even though their outlook appears brighter than any other time in recent history, their share price already rallied quite significantly back towards its previous level at the end of 2019 before the severe Covid-19 downturn. As a result, I believe that only a hold rating is appropriate for the time being with the possibility of an upgrade once they have integrated their upcoming acquisition and more certainty around shareholder returns emerges.
Notes: Unless specified otherwise, all figures in this article were taken from Par Pacific's SEC Filings , all calculated figures were performed by the author.
For further details see:
Par Pacific: Forever Transformed With A New Age Beginning