Summary
- Thanks to the record refining margins in the United States, PBF Energy saw a massive cash windfall during the second quarter of 2022.
- In fact, it was so insanely strong that their operating cash flow even surpassed the combination of their full-year 2019 and 2021 results.
- This dramatically reduced their net debt by almost two-thirds, thereby seeing them deleverage much faster than previously expected.
- Despite this change of fortune, they have not reinstated their dividend because, oddly, management is still focused on deleveraging.
- Given the lack of shareholder returns and the current level of their share price, I believe that maintaining my hold rating is appropriate.
Introduction
Upon entering 2022, it appeared that PBF Energy ( PBF ) was out of the fire, proverbially speaking, as operating conditions recovered, notwithstanding the years of deleveraging ahead, as my previous article discussed. Even though they since saw a massive cash windfall that far surpassed anything expected and thus expedited this timeline, disappointingly there was still nothing for shareholders who are left waiting for their dividends to be reinstated, as discussed within this follow-up analysis.
Executive Summary & Ratings
Since many readers are likely short on time, the table below provides a very brief executive summary and ratings for the primary criteria that were assessed. This Google Document provides a list of all my equivalent ratings, as well as more information regarding my rating system. The following section provides a detailed analysis for those readers who are wishing to dig deeper into their situation.
Author
*Instead of simply assessing dividend coverage through earnings per share cash flow, I prefer to utilize free cash flow since it provides the toughest criteria and also best captures the true impact upon their financial position.
Detailed Analysis
Following their cash flow performance starting to recover in 2021, the booming operating conditions during the first half of 2022 provided a massive cash windfall that few investors expected, especially as they were materially driven by the otherwise tragic Russia-Ukraine war. This pushed their operating cash flow to a massive $2.269b, which was obviously many magnitudes higher than their previous result of only a relatively tiny $65m during the first half of 2021. In fact, the first half of 2022 was so insanely strong that their result still easily tops the combined full-year results for 2019 and 2021 of $1.411b, despite representing merely one-quarter of the length of time. Whilst the first quarter of 2022 was strong, the vast majority of this cash windfall actually arose from just the second quarter as refining margins in the United States reached never before seen levels, as the graph included below displays.
This same story is shared, regardless of whether viewing their surface-level operating cash flow or their underlying result that excludes temporary working capital movements, with both being very similar. Thanks to this massive operating cash flow, their free cash flow still landed at $1.831b for the first half of 2022, despite them also pushing their capital expenditure much higher to $437m. Given this day and night difference, their two closest peers who also enjoyed similar results, CVR Energy ( CVI ) and Delek US Holdings ( DK ) reinstated their dividends but alas, the shareholders of PBF Energy are left waiting. Unsurprisingly, their second quarter of 2022 results conference call saw management directly asked about reinstating their dividends, but disappointingly, it seems that dividends are not their priority as they remain focused on deleveraging, as per the commentary from management included below.
“So from our standpoint, it is simply a matter of continuing to reduce the overall net debt balance, operate well, take advantage of the market when it is afforded to us, and ultimately be reliable because otherwise profitability will not translate into free cash flow.”
-PBF Energy Q2 2022 Conference Call.
They have also recently announced an acquisition of the remaining public stake in their PBF Logistics ( PBFX ) subsidiary, which was floated as a Master Limited Partnership back in 2014. Since PBF Logistics is already consolidated into their financial statements, the main cash flow difference will only relate to the distributions paid to public unitholders, which during 2021 amounted to $39m. In the grand scheme, this is a relatively minor amount of money given their multi-billion dollar operating cash flow, and thus this transaction cleans up their corporate structure more than enhancing the outlook for their shareholders.
The benefit of their massive cash windfall is easily visible when examining their capital structure after the first half of 2022, which now sees dramatically lower net debt of $1.095b versus where it ended 2021 at $2.954b, thereby representing a massive decrease of almost two-thirds. In fact, their net debt plunged so rapidly that it is now even less than its previous level of $1.25b at the end of 2019 before the onset of the Covid-19 pandemic. Obviously, this far exceeds anything expected when conducting the previous analysis heading into 2022, plus also sees their gearing ratio down to only 22.43% and thus far below the 40% target laid out by management at the start of the year and mentioned within my previous analysis.
Since PBF Logistics is already consolidated into their financial statements, the only impact on their capital structure relates to paying the $9.25 per unit cash portion of their offer, as they already own 47.70% of the 62,740,190 units, this equates to a cost of circa $277m. Given their free cash flow and their non-existent shareholder returns, this cost should be very easy to fund during the coming quarters and thus not materially increase their net debt versus its latest level.
Thanks to their now dramatically lower net debt following the first half of 2022, unsurprisingly, their leverage followed in tandem with their respective net debt-to-EBITDA and net debt-to-operating cash flow down to only a mere 0.25 and 0.27. Apart from these now sitting well beneath the threshold of 1.00 for the very low territory for the first time in recent history, they mark a massive change versus the end of 2021 when their net debt-to-operating cash flow was 6.19 and thus well into the very high territory. Even though the difference within their net debt-to-EBITDA is far less with their previous result being only 2.70, this stems from the latter seeing abnormally large inventory market valuation adjustments that skew this sequential comparison, as my previously linked article discussed.
Whilst very low leverage is a very positive change of fortune, especially after such a short length of time, it stems from booming operating conditions boosting their financial performance and thus the bigger question is how they would fare if operating conditions were to revert lower. If their current net debt of $1.25b is compared against their operating cash flow of $934m for 2019, which saw business-as-usual operating conditions, it produces a net debt-to-operating cash flow of only 1.34 and thus towards the bottom end of the low territory of between 1.01 and 2.00. Even if this same process was taken with their weaker operating cash flow of $477m from 2021 as they battled their way out of the severe Covid-19 downturn, it still only sees a result of 2.62 and thus still safely within the moderate territory of between 2.01 and 3.50. This means that heading forwards they are now in a solid position to weather any storms and thus bodes well for their dividends to be reinstated, if not for the focus management continues to place upon deleveraging.
Apart from sending their leverage plunging, their cash windfall also helped keep their liquidity strong with a current ratio of 1.08 and a cash ratio of 0.32, despite their current liabilities now recording a $1.257b debt maturity. Thankfully, this only stemmed from accounting standards because they repaid their 2025 senior secured notes well ahead of time in July 2022 and thus as of June 30 th , they were considered as a current liability. Following this move, their next upcoming debt maturity is during May 2023 when their $525m of 2023 senior notes for their PBF Logistics subsidiary mature, as the table included below displays. Regardless if they opt to repay or refinance this debt, this should not pose any issues given their dramatically improved leverage.
PBF Energy Q2 2022 10-Q
Conclusion
Normally, the massive cash windfall they enjoyed during the first half of 2022 would find its way back to the pockets of shareholders via dividends or share buybacks, at least partly, as was the case with their closest peers. Although in this situation, management is staying focused on deleveraging even though their net debt is already down by almost two-thirds and their leverage is very low. In my eyes, it should only be a matter of time before their dividends are reinstated as both the incentive and pressure from their shareholders grows as their net debt continues dropping lower. Even though they have seen very positive changes since conducting my previous analysis, I still believe that maintaining my hold rating is appropriate with their share price around its level from late 2019, plus the lack of shareholder returns.
Notes: Unless specified otherwise, all figures in this article were taken from PBF Energy’s SEC Filings , all calculated figures were performed by the author.
For further details see:
PBF Energy: Massive Cash Windfall, But Nothing For Shareholders