Upcoming SAF Project And Cost Savings Will Support Efficiency But Revenue Decline Will Remain A Risk

Key Takeaways

• Strategic cost reduction and logistics efficiency are expected to enhance operating efficiency and earnings stability in varying market conditions.
  
• Sustainable fuel projects and potential share buybacks could boost future revenue streams and positively impact earnings per share.
  
• Par Pacific faces revenue risks due to challenging refining margins, declining fuel volumes, project execution risks, and potential failures in reducing operating expenses.

Catalysts

Owns and operates energy and infrastructure businesses.

• Par Pacific is targeting a reduction in 2025 fixed operating expenses by $30 million to $40 million, which is expected to impact net margins positively by making the company more efficient and better positioned in both high and low cycle environments.
  
• The ongoing Hawaii SAF (Sustainable Aviation Fuel) project set to start in the second half of 2025 is anticipated to capitalize on improving renewable fuels market conditions, potentially enhancing future revenue streams.
  
• Strategic growth initiatives, including investments in Billings' reliability improvements, show promise in boosting operational efficiency and competitive positioning, which could lead to improved earnings.
  
• The focus on logistics efficiency, with a mid-cycle guidance of annualized $115 million Logistics EBITDA, suggests sustained earnings contributions even in challenging utilization environments, positively impacting overall earnings stability.
  
• Significant potential for share buybacks supported by a strong liquidity position (total liquidity at $633 million), which could positively affect earnings per share (EPS) by reducing the number of shares outstanding.

Par Pacific Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Par Pacific Holdings's revenue will decrease by -9.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.7% today to 3.8% in 3 years time.
• Analysts expect earnings to reach $237.5 million (and earnings per share of $4.26) by about January 2028, down from $311.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $320 million in earnings, and the most bearish expecting $148.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.0x on those 2028 earnings, up from 3.1x today. This future PE is lower than the current PE for the US Oil and Gas industry at 12.6x.
• Analysts expect the number of shares outstanding to decline by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.53%, as per the Simply Wall St company report.

Par Pacific Holdings Future Earnings Per Share Growth

Risks

• Par Pacific is operating in a challenging refining margin environment, which is testing breakeven levels for many operators and could lead to reduced margins or losses if conditions do not improve. This poses a risk to the company's revenue and earnings.
  
• The decline in same-store fuel volumes by 1.4% indicates potential challenges in maintaining or growing revenue from its retail operations, which may impact net margins and overall earnings if not counterbalanced by other growth initiatives.
  
• The company's reliance on completing major capital projects, such as the SAF project in Hawaii, introduces execution risk. Delays or cost overruns could negatively impact future earnings and cash flow.
  
• Although it aims to reduce operating expenses, there are inherent risks associated with achieving $30 million to $40 million in fixed operating expense reductions by 2025. Failure to realize these savings could pressure net margins and profitability.
  
• The low capture rates and challenging market dynamics in Washington illustrate a vulnerability to regional margin pressures. Prolonged unfavorable conditions could adversely affect the refining segment's earnings potential.

Valuation

• The analysts have a consensus price target of $22.29 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 $26.0, and the most bearish reporting a price target of just $19.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.3 billion, earnings will come to $237.5 million, and it would be trading on a PE ratio of 7.0x, assuming you use a discount rate of 10.5%.
• Given the current share price of $17.09, the analyst's price target of $22.29 is 23.3% 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.