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.
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.
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.
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
You didnt do your research very well PARR just lost a major contract that sources say “I think this is going to make [Hawaii Independent Energy’s] refinery go away,” a source told PBN. “They have to come up with a different revenue plan, [and] if they don’t, they will go away.” Sure Par said they can ship fuel oil to Japan/ Malaysia but they will lose money doing that. In addition, the COO of the refinery and CEO of their logistics business just retired? Seems like rats abandoning a sinking ship. AVOID.ReplyDelete
The Hawaiian Electric contract was only 8% of the refinery's revenue, and low profit margin revenue at that, it seemed like an overreaction to me, but you're right, deserves mention. It also points more to the reasoning behind the Mid Pac acquisition to gain more distribution channels for their products within Hawaii.Delete
I don't know the specifics of Peter Coxon's retirement, you make it sound like to two people, but it's the same person in both roles. The logistics business is a pretty small piece, it's bit of a stretch to claim its the rat(s) abandoning a sinking ship. On the other side of the coin, they've been beefing up their board recently with a number of energy deal makers.
Thanks for the comment, but I think you're missing the bigger picture here. Par is really an acquisition platform to monetize the NOLs, they need and will do a lot more deals.
Actually, I think you are missing the big picture here - #1 Par is losing money, and even had to restate their financials, so weak controls. #2 There are massive state and federal regulations being phased in starting next year that were already going to make this a tough acquisition. Do you really think its a coincidence that Chevron wants out of the state? Did you also notice that Exxon put Torrance up for sale? Whats happens if state starts condemnations of storage and pipelines? #3 Compression of Brent -WTI and relaxation of US export rules. #4 Why was Tesoro willing to walk away from Par refinery and eat decommissioning costs? Do you seriously believe that Zell and "part-time" CEO Monteleone know business better than Tesoro and Chevron? #5 The state did fairly rigorous analyses of what losing HECO as a customer would cost both refiners, their number was about $200 million for both. I am pretty sure their consultant is the guy that said this could put Par refinery out of business. Maybe his numbers are wrong. MAYBE Par can mitigate that somewhat in Japan, but that may only work until the reactors restart, and if pricing is so great in Japan after transportation costs, why arent they doing it already? And why is company being so vague? #6 Why are Midpac and Aloha looking to sell their gas stations if it it such a great business? Does it have anything to do with the massive rail construction project? #7 Costco sells a lot of gas in HI. #8 Same guy? The two executives are Bill Haywood and Peter Coxon. Again, you seem like you really dont know what you are talking about, and your lack of any valuation makes yours a weak analysis at best.ReplyDelete
Dont get me wrong, I admire Zell especially for what he has done at Equity, but I think he could be in real trouble here, and there are much better opportunities elsewhere.
All fair points regarding HIE, many of these are why PARR has fallen in the past few months and a potential opportunity exists. I meant "big picture" in that Zell is not going to let the NOLs go to waste, there will be more to PARR than just HIE. But thank you for the comments, I appreciate hearing the other side.Delete
"SGGH" is much better, similar play with CEO that made his shareholders 80x their money in 5 years at Esmark.ReplyDelete
Thanks for the idea, I'll take a look, been meaning to for a while now.Delete
Yesterday's announcement looks detrimental to minorities. Private placement at 25% discount to last closing price. Interests do not seem to be aligned. What is your opinion?ReplyDelete
It does appear strange and I am a little sour that it wasn't structured as a rights offering where everyone could participate at the $22 price. But something strange happened last week when the stock parabolic for seemingly no reason? If you take out last week's price action, it was a fairly normal discount when doing a private placement. There might have been some restrictions in place for those that got in on the deal and as a result there were a lack of sellers last week which drove the price up, who knows. PARR feels fairly valued around $24-25 to me, Zell has made some recent commentary about the energy sector being a prime "grave dancing" opportunity and the company has hinted at buying mid-stream assets from distressed E&P companies needing to fix their capital structure. I still like it, added to my position in the summer after the Rights Agreement was posted and seemed to freak people out that Zell was selling when he wasn't. They needed to raise capital, with the stock price in the mid-$20s, seemed like a good time to do it, wasn't my ideal way to do it, but maybe there's stuff at play that's not clear to outside investors. With Zell locked in for the long term, interests seem to be highly aligned to me, something just strange happened to the share price last week.Delete
Thanks for the comment, I should probably do an update as this post was a little weak, I've spent a lot more time on the company since.
Thanks for your thoughts. Looking forward to your update.ReplyDelete