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Aug. 8, 2022, 3:30 p.m. EDT

10-Q: HF SINCLAIR CORP

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(EDGAR Online via COMTEX) -- Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations

This Item 2 contains "forward-looking" statements. See "Forward-Looking Statements" at the beginning of Part I of this Quarterly Report on Form 10-Q. In this document, the words "we," "our," "ours" and "us" refer only to HF Sinclair Corporation ("HF Sinclair") and its consolidated subsidiaries or to HF Sinclair or an individual subsidiary and not to any other person with certain exceptions. Generally, the words "we," "our," "ours" and "us" include Holly Energy Partners, L.P. ("HEP") and its subsidiaries as consolidated subsidiaries of HF Sinclair, unless when used in disclosures of transactions or obligations between HEP and HF Sinclair or its other subsidiaries. This document contains certain disclosures of agreements that are specific to HEP and its consolidated subsidiaries and do not necessarily represent obligations of HF Sinclair. When used in descriptions of agreements and transactions, "HEP" refers to HEP and its consolidated subsidiaries. References herein to HF Sinclair "we," "our," "ours," and "us" with respect to time periods prior to March 14, 2022 refer to HollyFrontier Corporation ("HollyFrontier") and its consolidated subsidiaries and do not include Hippo Holding LLC, the parent company of Sinclair Oil LLC, Sinclair Transportation Company LLC or their respective consolidated subsidiaries (collectively, the "Acquired Sinclair Businesses"). References herein to HF Sinclair "we," "our," "ours," and "us" with respect to time periods from and after March 14, 2022 include the operations of the Acquired Sinclair Businesses. Unless otherwise specified, the financial statements included herein include financial information for HF Sinclair, which for the time period from March 14, 2022 to June 30, 2022 includes the combined business operations of HollyFrontier and the Acquired Sinclair Businesses.

OVERVIEW

We are an independent energy company that produces and markets high-value light products such as gasoline, diesel fuel, jet fuel, renewable diesel and other specialty products. We own and operate refineries located in El Dorado, Kansas (the "El Dorado Refinery"); Tulsa, Oklahoma, which comprise two production facilities, the Tulsa West and Tulsa East facilities (collectively, the "Tulsa Refineries"); Anacortes, Washington (the "Puget Sound Refinery"); Artesia, New Mexico, which operates in conjunction with crude oil distillation, vacuum distillation and other facilities situated 65 miles away in Lovington, New Mexico (collectively, the "Navajo Refinery"); Woods Cross, Utah (the "Woods Cross Refinery"); Sinclair, Wyoming (the "Sinclair Refinery") and Casper, Wyoming (the "Casper Refinery"). We market our refined products principally in the Southwest United States, the Rocky Mountains extending into the Pacific Northwest and in other neighboring Plains states. We supply high-quality fuels to more than 1,300 Sinclair branded stations and license the use of the Sinclair brand at more than 300 additional locations throughout the country. In addition, our subsidiaries produce and market base oils and other specialized lubricants in the United States, Canada and the Netherlands, and export products to more than 80 countries. Through our subsidiaries, we produce renewable diesel at two of our facilities in Wyoming and our facility in New Mexico. We also own a 47% limited partner interest and a non-economic general partner interest in HEP, a master limited partnership that provides petroleum product and crude oil transportation, terminalling, storage and throughput services to the petroleum industry, including HF Sinclair subsidiaries.

Market Developments

Our results for the second quarter and first six months of 2022 were favorably impacted by continued strong global economic activity with global demand for transportation fuels, lubricants and the transportation and terminal services having returned to pre-pandemic levels. The rapid increases in crude oil prices and market crack spreads during the second quarter were driven by both sustained increases in demand and the global supply disruption related to actions taken in response to both the COVID-19 pandemic and sanctions imposed on Russia for its invasion of Ukraine. We continue to adjust our operational plans to the evolving market conditions. The extent to which our future results are affected by the COVID-19 pandemic or volatile regional and global economic conditions will depend on various factors and consequences beyond our control.

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HF Sinclair acquired Sinclair HoldCo's refining, branded marketing, renewables, and midstream businesses. The branded marketing business supplies high-quality fuels to more than 1,300 Sinclair branded stations and licenses the use of the Sinclair brand at more than 300 additional locations throughout the United States. The renewables business includes the operation of a renewable diesel unit located in Sinclair, Wyoming. The refining business includes two Rocky Mountains-based refineries located in Casper, Wyoming and Sinclair, Wyoming. Under the terms of the Contribution Agreement, HEP acquired STC, Sinclair HoldCo's integrated crude and refined products pipelines and terminal assets, including approximately 1,200 miles of integrated crude and refined product pipeline supporting the Sinclair refineries and third parties, eight product terminals and two crude terminals with approximately 4.5 million barrels of operated storage. In addition, HEP acquired STC's interests in three pipeline joint ventures for crude gathering and product offtake including: Saddle Butte Pipeline III, LLC (25.06% non-operated interest); Pioneer Pipeline (49.995% non-operated interest); and UNEV Pipeline, LLC ("UNEV") (the 25% non-operated interest not already owned by HEP, resulting in UNEV becoming a wholly owned subsidiary of HEP). The addition of Sinclair Oil and STC to the HollyFrontier business created a combined company with increased scale and ability to diversify and is expected to drive growth through the expanded refining and renewables business. In addition, the HFC Transactions added an integrated branded wholesale distribution network to our business.

See Note 2 "Acquisitions" and Note 3 "Holly Energy Partners" in the Notes to Consolidated Financial Statements for additional information.

Puget Sound Refinery Acquisition

Renewable Fuel Standard Regulations

Under the RFS regulations, the EPA is required to set annual volume targets of renewable fuels that obligated parties, such as us, must blend into petroleum-based transportation fuels consumed in the United States. These volume requirements are used to determine an obligated party's renewable volume obligation ("RVO"). The EPA released a final rule on June 3, 2022 that, among other things, reduced the volume targets for 2020 and established targets for 2021 and 2022. In 2020, we recognized the cost of the RVO using the 2020 volume targets set by the EPA at that time, and in 2021 and the three months ended March 31, 2022, we recognized the cost of the RVO using our estimates. As a result of the final rule released by the EPA on June 3, 2022 as noted above, we recognized a benefit of $72.0 million in the three and six months ended June 30, 2022 related to the modification of the 2020 and 2021 volume targets.

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OUTLOOK

Within our Refining segment, for the third quarter of 2022, we expect to run between 630,000 - 650,000 barrels per day of crude oil. This guidance reflects the strong underlying demand trends in our markets, the reduction of refined product supply driven by the global reaction to Russia's invasion of Ukraine and a full quarter's operating results from the Sinclair and Casper refineries.

Within our Lubricants and Specialty Products segment, for the third quarter of 2022, we expect continued strength in earnings in our Rack Forward business as well as strong performance in our Rack Back business due to the reduction in base oil supply from Russia.

Within our Renewables business, we completed construction of the Artesia renewable diesel unit and commenced start up in the second quarter of 2022. The Sinclair and Cheyenne renewable diesel units and the Artesia pre-treatment unit are all on-line. For the third quarter of 2022, we will continue to ramp up production across these assets as we expect to reach full production levels by the end of the third quarter. We are suspending construction of the Sinclair pre-treatment unit until 2023 pending a review of project economics and other potential alternatives.

In the third quarter of 2022, HEP expects to hold the quarterly distribution constant at $0.35 per unit, or $1.40 on an annualized basis. HEP remains committed to its distribution strategy focused on funding all capital expenditures and distributions within operating cash flow and maintaining distributable cash flow coverage of 1.3x or greater with the goal of reducing leverage to 3.0-3.5x.

Our Board of Directors declared a regular quarterly dividend in the amount of $0.40 per share, payable on September 1, 2022 to holders of record of common stock on August 18, 2022. In the second quarter of 2022, we resumed the repurchase of our common stock under our existing $1.0 billion share repurchase program and expect to remain active throughout the second half of 2022.

On March 27, 2020, the U.S. government passed the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), an approximately $2 trillion stimulus package that included various provisions intended to provide relief to individuals and businesses in the form of tax changes, loans and grants, among others. At this time, we have not sought relief in the form of loans or grants from the CARES Act; however, we have benefited from certain tax deferrals in the CARES Act and may benefit from other tax provisions if we meet the requirements to do so. During the second quarter of 2022, we received $83 million in cash tax benefit in 2022 from the net operating loss carryback provisions under the CARES Act.

A more detailed discussion of our financial and operating results for the three and six months ended June 30, 2022 and 2021 is presented in the following sections.

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        RESULTS OF OPERATIONS
        Financial Data
                                                                           Three Months Ended
                                                                                June 30,                                 Change from 2021
                                                                       2022                  2021                  Change                 Percent
                                                                                         (In thousands, except per share data)
        Sales and other revenues                                  $ 11,162,160          $ 4,577,123          $      6,585,037                  144  %
        Operating costs and expenses:
        Cost of products sold (exclusive of depreciation
        and amortization):
        Cost of products sold (exclusive of lower of cost
        or market inventory valuation adjustment)                    8,579,915            3,825,729                 4,754,186                  124
        Lower of cost or market inventory valuation
        adjustment                                                      34,543             (118,825)                  153,368                 (129)
                                                                     8,614,458            3,706,904                 4,907,554                  132
        Operating expenses (exclusive of depreciation and
        amortization)                                                  606,127              334,191                   271,936                   81
        Selling, general and administrative expenses
        (exclusive of depreciation and amortization)                   110,875               77,754                    33,121                   43
        Depreciation and amortization                                  164,044              124,042                    40,002                   32
        Total operating costs and expenses                           9,495,504            4,242,891                 5,252,613                  124
        Income from operations                                       1,666,656              334,232                 1,332,424                  399
        Other income (expense):
        Earnings of equity method investments                            5,447                3,423                     2,024                   59
        Interest income                                                  1,844                1,029                       815                   79
        Interest expense                                               (38,961)             (28,942)                  (10,019)                  35
        Gain (loss) on foreign currency transactions                      (905)                 583                    (1,488)                (255)
        Gain on sale of assets and other                                 2,320                7,927                    (5,607)                 (71)
                                                                       (30,255)             (15,980)                  (14,275)                  89
        Income before income taxes                                   1,636,401              318,252                 1,318,149                  414
        Income tax expense                                             383,493              123,485                   260,008                  211
        Net income                                                   1,252,908              194,767                 1,058,141                  543
        Less net income attributable to noncontrolling
        interest                                                        31,646               25,917                     5,729                   22
        Net income attributable to HF Sinclair stockholders       $  1,221,262          $   168,850          $      1,052,412                  623  %
        Earnings per share attributable to HF Sinclair
        stockholders:
        Basic                                                     $       5.43          $      1.03          $           4.40                  427  %
        Diluted                                                   $       5.43          $      1.03          $           4.40                  427  %
        Cash dividends declared per common share                  $       0.40          $         -          $           0.40                  100  %
        Average number of common shares outstanding:
        Basic                                                          222,952              162,523                    60,429                   37  %
        Diluted                                                        222,952              162,523                    60,429                   37  %
        


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                                                                            Six Months Ended
                                                                                June 30,                                  Change from 2021
                                                                       2022                  2021                  Change                  Percent
                                                                                          (In thousands, except per share data)
        Sales and other revenues                                  $ 18,620,910          $ 8,081,416                10,539,494                    130  %
        Operating costs and expenses:
        Cost of products sold (exclusive of depreciation
        and amortization):
        Cost of products sold (exclusive of lower of cost
        or market inventory valuation adjustment)                   15,081,927            6,786,034                 8,295,893                    122
        Lower of cost or market inventory valuation
        adjustment                                                      25,992             (318,862)                  344,854                   (108)
                                                                    15,107,919            6,467,172                 8,640,747                    134
        Operating expenses (exclusive of depreciation and
        amortization)                                                1,083,561              734,100                   349,461                     48
        Selling, general and administrative expenses
        (exclusive of depreciation and amortization)                   221,297              159,729                    61,568                     39
        Depreciation and amortization                                  308,645              248,121                    60,524                     24
        Total operating costs and expenses                          16,721,422            7,609,122                 9,112,300                    120
        Income from operations                                       1,899,488              472,294                 1,427,194                    302
        Other income (expense):
        Earnings of equity method investments                            9,073                5,186                     3,887                     75
        Interest income                                                  2,841                2,060                       781                     38
        Interest expense                                               (73,820)             (67,328)                   (6,492)                    10
        Gain on tariff settlement                                            -               51,500                   (51,500)                  (100)
        Loss on foreign currency transactions                             (766)                (734)                      (32)                     4
        Gain on sale of assets and other                                 6,215                9,817                    (3,602)                   (37)
                                                                       (56,457)                 501                   (56,958)               (11,369)
        Income before income taxes                                   1,843,031              472,795                 1,370,236                    290
        Income tax expense                                             404,822               95,178                   309,644                    325
        Net income                                                   1,438,209              377,617                 1,060,592                    281
        Less net income attributable to noncontrolling
        interest                                                        56,973               60,550                    (3,577)                    (6)
        Net income attributable to HF Sinclair stockholders       $  1,381,236          $   317,067          $      1,064,169                    336  %
        Earnings (loss) per share attributable to HF
        Sinclair stockholders:
        Basic                                                     $       6.86          $      1.92          $           4.94                    257  %
        Diluted                                                   $       6.86          $      1.92          $           4.94                    257  %
        Cash dividends declared per common share                  $       0.40          $      0.35          $           0.05                     14  %
        Average number of common shares outstanding:
        Basic                                                          199,149              162,501                    36,648                     23  %
        Diluted                                                        199,149              162,501                    36,648                     23  %
        Balance Sheet Data
                                        June 30, 2022      December 31, 2021
                                         (Unaudited)
                                                   (In thousands)
        Cash and cash equivalents      $   1,702,286      $          234,444
        Working capital                $   3,636,627      $        1,696,990
        Total assets                   $  19,177,854      $       12,916,613
        Long-term debt                 $   3,348,103      $        3,072,737
        Total equity                   $   9,874,910      $        6,294,465
        








          Table of Content
        Other Financial Data
                                                               Three Months Ended June 30,                      Six Months Ended June 30,
                                                                2022                     2021                    2022                   2021
                                                                                             (In thousands)
        Net cash provided by operating
        activities                                     $     1,528,356               $  427,755          $    1,989,392             $  490,081
        Net cash used for investing activities         $      (153,835)              $ (175,248)         $     (539,011)            $ (322,312)
        Net cash provided by (used for)
        financing activities                           $      (261,214)              $  (48,917)         $       20,172             $ (138,478)
        Capital expenditures                           $       159,444               $  182,880          $      317,740             $  332,841
        EBITDA (1)                                     $     1,805,916               $  444,290          $    2,165,682             $  725,634
        


(1)Earnings before interest, taxes, depreciation and amortization, which we refer to as "EBITDA," is calculated as net income attributable to HF Sinclair stockholders plus (i) interest expense, net of interest income, (ii) income tax provision, and (iii) depreciation and amortization. EBITDA is not a calculation provided for under GAAP; however, the amounts included in the EBITDA calculation are derived from amounts included in our consolidated financial statements. EBITDA should not be considered as an alternative to net income or operating income as an indication of our operating performance or as an alternative to operating cash flow as a measure of liquidity. EBITDA is not necessarily comparable to similarly titled measures of other companies. EBITDA is presented here because it is a widely used financial indicator used by investors and analysts to measure performance. EBITDA is also used by our management for internal analysis and as a basis for financial covenants. EBITDA presented above is reconciled to net income under "Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles" following Item 3 of Part I of this Form 10-Q.

Segment Operating Data

Our operations are organized into five reportable segments, Refining, Renewables, Marketing, Lubricants and Specialty Products and HEP. See Note 15 "Segment Information" in the Notes to Consolidated Financial Statements for additional information on our reportable segments.

Refining Segment Operating Data

The disaggregation of our refining geographic operating data is presented in two regions, Mid-Continent and West, to best reflect the economic drivers of our refining operations. The Mid-Continent region is comprised of the El Dorado and Tulsa Refineries. The West region is comprised of the Puget Sound, Navajo, Woods Cross, Sinclair and Casper Refineries. The Puget Sound Refinery was acquired November 1, 2021, and thus is included for the period January 1, 2022 to June 30, 2022. In addition, the refinery operations of the Sinclair and Casper Refineries are included for the period March 14, 2022 (date of acquisition) through June 30, 2022. The following tables set forth information, including non-GAAP performance measures, about our consolidated refinery operations. The cost of products and refinery gross and net operating margins do not include the non-cash effects of lower of cost or market inventory valuation adjustments and depreciation and amortization. Reconciliations to amounts reported under GAAP are provided under "Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles" following Item 3 of Part I of this Form 10-Q.







                                                            Three Months Ended June 30,                 Six Months Ended June 30,
                                                             2022                  2021                2022 (8)               2021
        Mid-Continent Region
        . . .
        


Aug 08, 2022

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