Par Petroleum: Zell Controlled + NOLs

Par Petroleum (PARR) was created through the reorganization of Delta Petroleum in 2012.  Sam Zell, via the Zell Credit Opportunity Fund, and Whitebox Advisors held significant stakes in the unsecured debt which were converted to equity in the reorganization preserving the $1.3B in net operating loss carry forwards.  Post reorganization, Par's assets included a minority stake in a natural gas E&P and NOLs, but the company is now focused on downstream assets with the stated strategy to "create ongoing, stable earnings capable of predictable monetization of NOLs."

Will Monteleone is the CEO, 30 years old, and receives a small base salary at Par, he also serves as an associate at Equity Group Investments where he oversaw the initial restructuring of the company and appears to be Sam Zell's main deal guy focused on the energy sector.  The company recently uplisted from the OTC to the NYSE, and the CEO has talked about engaging analysts a bit more to get the story out.  The financial statements are a bit of a mess, the company isn't currently profitable, but the platform is in place for management to make opportunistic acquisitions to where the future business is not going to look a whole lot like the current.  The three main assets currently are Hawaii Independent Energy, Piceance Energy, and then the large tax assets: 

Hawaii Independent Energy
In the summer of 2013, Par purchased a mothballed refinery on the island of Oahu from Tesoro Corporation for $325MM (including the working capital/inventory) plus up to $40MM in earn outs due to Tesoro if the 94,000 bpd refinery meets certain operating performance targets.  Included in the acquisition were some distribution and storage assets, along with a retail channel under the Tesoro brand name.  Par renamed the company Hawaii Independent Energy and has spent the last year or so reestablishing the asset in the marketplace.  Hawaii is a difficult location to compete, their refinery competes with others all across the Pacific and it's expensive to export refined products out of the islands due to its remote location.  Chevron operates the only other refinery in Hawaii, and announced today their plans to divest it due to its "somewhat isolate and finite market".

Due to this isolated market position, it makes sense to find additional ways to sell their product within Hawaii, to that goal they announced the acquisition of Mid Pac Petroleum in June for $107MM.  Mid Pac operates or owns over 80 retail sites and four terminals across Hawaii, and 22 of the retail locations are fee-owned (although partially encumbered by debt), which is a nice added perk in Hawaii.  The Mid-Pac acquisition helps Par internalize the consumption, thus reducing reliance on exports.  Management put the margin improvement at $6-10 barrel on what they sell on island compared to what its exported.  Additionally, Par will receive both the retail and refinery margin for anything sold through Mid Pac's distribution channel.

It takes time to turnaround a business, they've had to re-engage the market there in Hawaii after Tesoro essentially exited the market 2+ years ago.  The company believes it will be profitable in this segment next year which should make it a little easier for the market to value.

Piceance Energy
Par Petroleum's main upstream asset is a 33.34% non-operated equity interest in Piceance Energy, a primarily natural gas focused E&P in western Colorado.  The majority owner/operator is Laramie Energy II, the first Laramie Energy was previously sold to Plains Exploration and Production (now part of Freeport-McMoRan) for $1B in 2007 (peak of the natural gas boom) after being setup for $200 million only a few years earlier.  They currently have a one rig program running, and management has hinted that results have been good, a previously required capital contribution was put off due to strong operating results at Piceance.  Using the NYMEX forward curve as 12/31/12, Par Petroleum interest in Piceance resulted in estimated proved reserves of 433.4 Bcfe with a PV-10 value of $291.6MM (this was the upper end valuation at the time).  In investor calls, Par is optimistic the next reserve report will be even better.

NOLs
The most interesting asset to me is the $1.3B in net operating loss carry forward captive inside Par Petroleum.  This will shield an awful lot of taxable income if they can turn the corner.  The company has large aspirations, the acquisitions they have made so far aren't large enough to move the needle much on their NOLs.  With Sam Zell's team at the helm, I would imagine they'll be pretty selective buyers and apply a value/distressed approach while meeting their target hurdle rate of 15-20% returns.

In order to pursue their rollup strategy and fund these acquisitions Par has been a serial issuer of rights offerings.  Rights offerings create an efficient way for the controlling shareholders to maintain their ownership percentage which is key to the NOL eligibility.  So if you own shares in Par, be prepared to re-up via a rights offering at least once a year for the next several. 

Conclusion
Besides Sam Zell and Whitebox Advisor, respected investors Lee Cooperman of Omega Advisors, Andrew Shapiro of Lawndale Capital, and Horizon Kinetics are also shareholders.  You'll see I haven't really discussed valuation at all, I struggle to put a specific value on Par Petroleum, but I feel its one of those situations where you don't need to guess someone's weight to know they're fat.  Par is setup to be a potential long term compounder as management pursues an ambitious roll-up strategy to monetize the large NOLs.

Disclosure: I own shares of PARR