PAR PACIFIC HOLDINGS INC PARR
November 08, 2016 - 12:39pm EST by
Seastreak
2016 2017
Price: 14.00 EPS 0 0
Shares Out. (in M): 46 P/E 0 0
Market Cap (in $M): 635 P/FCF 0 0
Net Debt (in $M): 358 EBIT 0 0
TEV ($): 995 TEV/EBIT 0 0

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  • Zell no carry

Description

PARR

This idea is a basic asset value play with reason to think that the stock price will soon (within the next 12 moths) reflect the underlying asset value which is likely 60+% higher than where the shares trade now.

Shares of Parr, an energy and infrastructure business, have traded down recently from a high of $28.00 last year to around $13-$14 now on concerns about weaker crack and crude spreads as well as a recent completed rights offering to finance its latest acquisition of some logistics and refining assets in Wyoming. While spreads may impact the near term performance of the stock they do not impact the long-term investment thesis or value of the assets. It is also worth noting that spreads improved in significantly late in the quarter and continues to into October/November – with spreads back at normalized levels.  PARR posts the crack spreads that relate to their assets on their website on a weekly basis – so you can track them.

http://www.parpacific.com/Profiles/Investor/Investor.asp?BzID=2193&from=du&ID=66748&myID=16004&L=e&Validate=3&I=

Parr is a creation of Sam Zell, who owns approximately 33% of the shares outstanding. Mr. Zell has an excellent track record of placing capable management in his investments to create value and we believe his involvement will have a meaningfully positive influence over Parr as its business develops.

Parr’s current share price in the area of $13.00 offers a compelling risk/reward over the next few years with asset values in the area of $20.00 - $26.00 based on mid cycle earnings with upside to around $30.00+ should Parr’s only refining competitor in Hawaii exit the market, which is something I think is likely over the next couple of years. The company’s assets consist of a refinery and associated retail gasoline stations and distribution infrastructure in the well-protected, niche Hawaiian market where the company operates in a duopoly as well as a refinery and logistics assets in a niche Wyoming market.  In addition, the company has an investment in a natural gas project which I believe is non-core and could be monetized at an attractive rate in the next year or two.  If successful, and assuming mid-cycle rates, the business can generate at least $140-$150 million in annual EBITDA and $100 million in FCF, making the business worth $20 to $26 per share when adding in around $4 per share for its large NOL and $3 - $5 for its investment in natural gas assets.  I would also note that the CEO has his equity options that he received when he assumed his roll struck in the $21.00 area.

During the last quarter, Chevron sold its refinery to Island Energy Services, LLC, a subsidiary of One Rock Capital Partners. Island Energy Services is unlikely to generate the same levels of profitability as Chevron, given the lack of integration with Chevron’s network of refining assets on the U.S. West Coast. It seems likely that the private equity buyers bought the asset for its import/export terminal, logistics assets and retail gasoline stations and not for the refinery.  Hawaii is a market that over the long run will likely only support one refinery (it did for a couple of years already) and the Chevron facility was the smaller, less efficient and worse positioned for the local market given its slate.  Moreover, the company could be required to spend as much as $250 million in capital expenditures on the refinery to meet environmental regulations before January 1, 2017 as well as on an upcoming turnaround that is needed. Therefore, there is a real possibility that the refinery could be shuttered, a free call that would allow Parr to assume a dominant, monopoly-like, position in the Hawaiian market, which we estimate to be worth at least $6.50 to $8.00 per share of value. Basically it likely lifts Parr EBITDA by around $50 million by allowing more on island sales at import parity price as well as allowing PARR to run at higher utilization rates.  Its monopoly-like position would, in our view, reasonably justify a higher multiple suggesting a share price in the range of $30+.

 

As summary of the assets is:

 

    Mid Cycle                   
                           
Old PARR   EBITDA   FCF % of EBITDA              
  Refinary  $            40                      
  Logistics  $            30                      
  Retail  $            30                    
     $          100    $               65 65%                
                           
Wyoming                          
  Refinary  $            40                      
  Logistics  $            10                      
     $            50    $               35 70%                
                           
Total Refinary  $            80                      
  Logistics  $            40                      
  Retail  $            30                      
  Total  $          150    $             100 67%                
                           
Capitalization                        
Shares Old 45.5                      
  New                        
  Pro Forma 45.5                      
Equity Cap      $         637.0                  
                           
Net Debt Old Cash  $          (51)                      
  New Cash                        
  Debt               409                      
  Pro Forma  $          358                      
                           
Enterprise value      $             995                  
Larmamie      $             129 @BV.  PV10 at current prices 6/30/16 would be $546.5 of which PARR owns 42.3%.  
NOL        $             168 Pretax earnings at $50 PV at 10% (NOL of $1.4 BN)        
Adjusted Enterprise Value    $             698                  
                           
      Mid Cycle                
Adjusted EBITDA Post NOL   4.7x                  
Adjusted EBITDA Pre NOL   5.8x                  
                           
Adjusted FCF Yield Post NOL   29%                  
Adjusted FCF Yield Pre NOL   20%                  
                           
        Base Case - MID Cycle       High Case - MID Cycle          
  Midcycle   Per Share       Per Share        
SOTP Refinary @ 5.0x  $             400  $       8.79 @ 6.0x  $        480  $     10.55        
  Logistics @ 8.0x  $             320  $       7.03 @ 10.0x  $        400  $       8.79        
  Retail @ 8.0x  $             240  $       5.27 @ 10.0x  $        300  $       6.59        
  Larmamie   a)  $             129  $       2.84   a)  $        231  $       5.07        
  NOL   b)  $             168  $       3.69   b)  $        168  $       3.69        
  Total      $         1,257  $     27.63      $    1,579  $     34.69        
  Net Debt      $             358  $       7.87      $        358  $       7.87        
  Total SOTP      $             899  $     19.76      $    1,221  $     26.82        
  Upsdie from Chevron Closing  $             300  $       6.59      $        350  $       7.69        
  Upside SOTP ('c)    $         1,199  $     26.35      $    1,571  $     34.52        
                           
  a) Investment Book Value @ $129.  PV10 Value at $545 of which PARR owns 42.3%  or $230 or $4.61 per share  
  b) Pretax earnings at $50 PV at 10% (NOL of $1.4 BN)              
  c)  Mgt thinks adds about $50 million in EBITDA from better pricing on gasoline that can stay on island. Worth 6x-7x, as should 
    help add monolpoly premium.                
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Sale of nat gas assets, mid-cycle spreads

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