2024-01-12 00:32:40 ET
Summary
- Par Pacific Holdings Inc has seen a 12-month gain of 57% and remains an appealing investment with a low valuation.
- The company operates in three segments - Refining, Retail, and Logistics - and has a strong presence in the energy market.
- Despite risks such as share dilution and volatile oil prices, Par Pacific Holdings offers a strong opportunity for long-term investment.
Investment Rundown
Par Pacific Holdings Inc ( PARR ) has been on a massive run the last few months, with the share price now posting a 12-month gain of 57%. The company is quite well diversified, and I think despite some of the markets it's working in, like oil and gas, it remains a very appealing company to be investing in right now. On an FWD p/e it's far below its historical average at just 4.13 right now. Without a dividend, it might at first seem like there isn't a lot of shareholder value here, but I think the value and opportunity lie in the potential rise in the share price in the medium term. Last quarter the revenues rose quite well, around 25% YoY, to $2.5 billion. This means that on a p/s metric, PARR is incredibly cheap, just 0.25 .
I like the diversified business model that NVEC has managed to achieve so far, and I think given the low valuation it still trades at, it offers a good entry point with an adequate amount of margin of safety as well. I am initiating my coverage on the stock, and I will be doing so by rating it a buy here.
Company Segments
PARR has a very well-diversified business model and is operating in some varied markets across the US. The broad footprint I think has been a big help for the business to keep growing the way it has over the years. The top line for instance has expanded by just a little over 50% annually in the last 10 years. The company's operations unfold across three integral segments: Refining, Retail, and Logistics, each contributing to its comprehensive market presence.
In the Refining segment, PARR owns and operates three refineries, specializing in the production of ultra-low sulfur diesel, gasoline, and jet fuel. This strategic focus on refining positions the company to meet the demands of the dynamic energy market, ensuring a versatile product range that aligns with evolving industry standards. This is by far the largest segment in the business, as in the last quarter it generated an operating income of $194 million in total, compared to $34 million for the other two segments combined. The refining segment is the start of the show here really and with the well-diversified nature, I have talked about before, PARR has a presence equally divided among its 4 areas of operations. The operations in Hawaii are the latest at 94 Mbpd in refining crude capacity, the second being Montana at 63 Mbpd.
I think that the company profile and its focus on distillate-oriented yields make for even more positives here. They have compared to peers as shown above here the strongest advantaged distillate yield % at 49%. Prices for distillate cracks have been volatile, following the breakout of the war in Ukraine, which shook a lot of markets globally. Across the 4 main sites where PARR operates the distillate yield has risen, but the biggest improvement was seen in the Hawaii refinery, where it went from 39.3% last year to 42.1% last quarter. Improvements like this are why I think the stock price has so quickly run up in FY2023.
Earnings Highlights
I have already talked a little bit about the strong performance that PARR has had in the last few quarters or even 12 months. On the income statement released on November 6, we can see a strong 25% increase in the top line despite the softer oil prices. This has been caused by higher production levels as the Montana refinery was taken over by the company on June 1 last year. Looking at the bottom line, though, PARR has not been able to increase it the same as the top line. The primary reason is higher depreciation and general and administrative expenses, meaning staff and employees. On top of this, the interest rates have risen since last year too, and are at over $20 million now. PARR hasn't made any unnecessary additions to its debt profile in the last few years, and it's around the same level as in 2021, $532 million.
In the next couple of quarters, I would like to see the production levels continue to increase, but along that the depreciation will likely accelerate too.
On the valuation side of things, I think PARR looks very strong, too. It has a significant discount to the rest of the sector, that being the energy sector. I think this discount comes from the dilution the company is doing, and how a large portion of their operations are in Hawaii too, an area that might be more affected to cause increased depreciation on assets, potentially limiting the earnings potential. With that being said, in the last 10 years PARR has traded at a p/e of 10.5, over 100% higher than the current multiple. Now, I don't think that the rise to that multiple will happen in a few quarters, but rather over the long term. The increased asset base of the company and the low levels of debt put them in a good position to benefit from what I think is rising oil prices. In 10 years, I think oil will be higher than today, even if a lot of investments are going into renewables. The need for oil will remain in high demand as countries like India and Bangladesh increase their factory and production capabilities, much fueled by oil. The FY2023 EPS estimate sits at $8.4 right now, and I do think a 7 - 8% annual CAGR for the next 10 years is reasonable, even if the dilution continues. If there is a dividend announced I might just rate the company a strong buy even, but for now a buy will be my initial rating as I begin covering PARR.
Risks
One of the risks that are facing the company is the volatility of oil prices . It has a broad presence in different markets but that doesn't necessarily protect it entirely against lower oil prices. It could ramp up operations to help offset some of that, but that would likely also result in higher depreciation for the business, accelerating the need to upgrade or investments in essential infrastructure. That might not be the best in a higher interest rate environment like now when capital is expensive to get a hold of.
One of the risks I do see with PARR for investors is the steady stream of dilution they have been practicing, going back to 2013 and beyond. This unhallowed the position that investors have in the business and unless PARR can make up for this in terms of bottom-line growth which would translate to a higher share price as the valuation multiples stays the same, I think there is risk here. Stock-based competition seems to be one of the primary reasons behind this increased number of shares outstanding. In the last 12 months, compensation reached nearly $11 million in total. I don't like that PARR is doing this compensation practice, all the whilst also buying back shares. I think you would get more out of the capital if compensation was halted, they sort of cancel each other out otherwise, which is a negative in my view. Concluding the risks, I think there isn't enough here to sway the by-case I already have for them. Significant oil production increases from OPEC could potentially lead to lower oil prices in the short term, which I think is a highly unlikely move, but something that could pressure the share price down for PARR nonetheless.
Final Words
Oil is not a field that is anywhere close to being uninvestable, it still showcases a lot of resilience and high demand, all the whilst the tech sector for instance has seen a tough period following rising interest rates. PARR is a well-diversified business and with them taking over a refinery in Montant in mid-2023 I think their outlook and production increases make for a very strong opportunity here. I am initiating coverage on the business and will do so by rating it a buy. The risks like share dilution and volatile oil prices are not sufficient to suppress a buy here, as over the long-term I believe strongly in that market.
For further details see:
Par Pacific Holdings Stock: Despite The Run-Up In 2023, It Still Looks Solid