Refinery Reliability And Renewable Shifts Spark Hope Amid Forecasts Of Shrinking Profits

Key Takeaways

• Strategic growth initiatives and operational improvements in refineries bolster revenue streams by diversifying products and enhancing production efficiency.
  
• Focused on returning value to shareholders through stock repurchases and operational excellence to improve net margins by managing costs effectively.
  
• Sensitivity to seasonal demand, global inventory levels, and operational costs poses risks to revenue, net margins, and the execution of growth initiatives.

Catalysts

Owns and operates energy and infrastructure businesses.

• The improvement in refinery operational reliability and completion of maintenance activities, such as those in Billings, enable higher utilization rates to meet market demand, potentially enhancing revenue streams by maximizing production against solidified demand.
  
• The strategic growth initiatives, including the reliability improvements in Billings and the renewable hydrotreater conversion in Hawaii, are set to bolster future revenue by diversifying product offerings and tapping into the renewable fuel markets.
  
• Enhanced margin capture through strategic hedging and optimization of refined product sales, as observed in Hawaii with elevated margin capture supported by fuel oil lag contract and crack hedge gains, may improve net margins by managing feedstock costs and product pricing effectively.
  
• The repurchasing of more than $65 million of stock signifies a commitment to returning value to shareholders, potentially leading to an increase in earnings per share as the number of outstanding shares decreases.
  
• Operational excellence demonstrated in maintaining high levels of throughput at various refineries and extending the turnaround cycles, such as pushing the scheduled 2025 turnaround in Hawaii into 2026, can lead to more efficient production processes and lower operating costs, thus potentially improving net margins through reduced expenses.

Assumptions

• Analysts are assuming Par Pacific Holdings's revenue will decrease by -10.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.4% today to 1.8% in 3 years time.
• Analysts expect earnings to reach $112.3 million (and earnings per share of $3.29) by about October 2027, down from $475.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.1x on those 2027 earnings, up from 2.0x today. This future PE is lower than the current PE for the US Oil and Gas industry at 10.5x.
• Analysts expect the number of shares outstanding to decline by 15.4% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 10.34%, as per the Simply Wall St company report.

Risks

• The dependence on market demand, especially in summer months, suggests vulnerability to seasonal fluctuations and potential downturns in demand, impacting revenue.
  
• Exposure to global product inventory levels and refining margins could lead to revenue volatility, especially if global dynamics lead to lower than expected margins.
  
• Uncertainties related to the execution and completion of strategic growth initiatives, like the renewable hydrotreater conversion, pose risks to capital expenditure and future earnings sustainability.
  
• Fluctuations in crude differentials and operational costs, as seen with the Billings coker maintenance, introduce risks to net margins by potentially increasing costs unexpectedly.
  
• The refining and logistics segments show sensitivity to regional market dynamics and crude supply changes, potentially affecting earnings through an imbalance in supply and demand.

Valuation

• The analysts have a consensus price target of $24.86 for Par Pacific Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $30.0, and the most bearish reporting a price target of just $21.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $6.2 billion, earnings will come to $112.3 million, and it would be trading on a PE ratio of 10.1x, assuming you use a discount rate of 10.3%.
• Given the current share price of $17.1, the analyst's price target of $24.86 is 31.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.