Saturday, June 18, 2016

Par Pacific Holdings: Wyoming Refining Acquisition, Rights Offering

I wrote a poorly timed update of Par Pacific Holdings about six weeks ago, since then the shares have dropped over 20% as crack spreads continued to tighten at the same time as Par Pacific's principle refinery asset in Hawaii is shutting down for a period to undergo significant maintenance.  Crack spreads are of course volatile, however management has guided to the Hawaiian business generating $100MM in mid-cycle EBITDA keeping the valuation thesis largely intact.  The growth story relies on Sam Zell's handpicked team making additional acquisitions in the currently distressed energy sector in order to finally start making a dent in the large tax asset.

This past week, Par Pacific announced the acquisition of Wyoming Refining, it operates a small refinery (18,000 bpd) and related logistics assets in Newcastle, WY which supplies the Rapid City, SD market and nearby Ellsworth Air Force Base.  The refinery is in the attractive Rocky Mountain region (PADD IV) where oil supply outstrips local refining capacity and where demand is growing due to the increased industrial activity (although much of it is oil and gas related) in the region, this creates wider average crack spreads.

Par Pacific is paying $271MM for Wyoming Refining from a private equity owner and its expected to generate $50MM in EBITDA, or a 5.4x multiple, which unfortunately doesn't appear like a particularly distressed asset.  The previous owners have invested significant capital recently to increase the capacity of the refinery which should minimize near term capex needs, but I was hoping the next deal would be a fire sale asset from a distressed E&P company, but onto the deal details and resulting change to the valuation.
Note the rights offering and quick July 15th close, more details will follow on the structure of the rights offering but any current shareholders should be prepared to fully participate or face dilution.
The crack spreads for this niche refinery are pretty huge, at least in comparison to the high single digits seen at Par's Hawaiian refinery, much of that can be attributed to difference in the supply chain, Hawaii has to source crude oil from at least half an ocean away whereas the Wyoming refinery is close to new fracking supply that's come online in recent years.

Proforma Valuation
Using the same basic frame work from a couple months back and updating for the recent Q1 results and Wyoming Refining acquisition:
The market is roughly assigning no value to Par Pacific's ownership in Laramie Energy (which is maybe right? I'm not smart enough to value an E&P) and no value to the NOL as well (which could be right as well, quickly finding out its not easy to generate taxable income in the energy sector).

Disclosure: I own shares of PARR

9 comments:

  1. Any updates on National Beverage (FIZZ? This thing could be huge. Then next MNST?

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    1. No update. I flat out missed it and maybe I'm just sucking my thumb now, someone I regularly discuss ideas with pushed it to me for months when it was around $20. I just couldn't get comfortable with the management communication style and minimal disclosure in the SEC filings.

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  2. Yep monster run. Disclosure is a problem. But near term growth appears real

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  3. Hi MDC - Any view on the price decline in PARR shares - could it be as simple as the stock price gravitating toward the rts offering price?

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    1. It's a bit of a disaster, obviously there's the crack spread headwinds for all refiners right now. But PARR closed below the $12.25 offering price yesterday, I don't believe Zell is backstopping this offering which is strange, it's back above $12.25 today but they have to be readying plans to amend the rights offering so it actually gets done, a bit embarrassing. My best guess is the rights are creating some uncertainty and an overhang, you might have had some current holders waiting to add to their position with the rights offering, now you might have people waiting to see if they re-strike the offering price. All this for a relatively small amount that would have been better done through another private placement, but some holders got upset about being left out last year (at $22!). Maybe this is a be careful what you wish for as a small holder situation. What's your current view of PARR? Still pessimistic or coming around to it at these prices?

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    2. I had not been paying attn until saw the price recently - so need to refresh on it. At times, rts offerings do create opp like we saw in BIOF, remember that one?

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    3. I definitely do, still own GRBK, but that one raised capital that dwarfed the size of the previous enterprise causing some weird price action where the pre-record date price kept rising and it kind of fed on itself. Here it's less than 10% of the equity and probably only done to appease investors who caused a stink when they did a private placement last year instead of a rights offering. This whole thing was unnecessary.

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    4. Speaking of GRBK, at some point, please take a look at LGIH which is in the same business and with a sizable geo overlap with GRBK. That equity trades at >2.5x BV and GRBK would be a $20 stock at the same valuation. LGIH also uses sig higher leverage but not anything crazy.

      Makes me wonder if GRBK is being run to preserve family wealth rather than generate superior returns for shareholders - - there is a difference between the two objectives. And if I am right, then staying in GRBK is not a good proposition. I invest in stocks to make a nice return as do you, from what I can tell. If I wanted just safety, then equities are not the right place to be.

      I guess what I am saying is that GRBK's business model is likely not a good one for shareholders but probably good for Brickman Family Trust.... and no, just because they have a large stake in the company does not align them with other shareholders if wealth preservation alone is the objective.

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    5. I didn't realize LGIH traded for the high of a multiple, thanks, I'll take a look at it. I'm still giving the Brickman's the benefit of the doubt, my concerns are around whether they really are/can generate 20% unlevered returns on the land development side as they underwrite to, sounds too high or manipulated in some way. Then you have the 50% leakage at the homebuilder level, would like more disclosure around how these were setup and what benefits GRBK is receiving from giving up half of the homebuilding profit. It will insulate them a little in a market downturn, but I worry they're just giving away return to their friends and family through that structure.

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