Seth Klarman Buys Refiner with Temporary Setbacks
The New Buy: PBF Energy (PBF)
Klarman purchased 955,140 shares of PBF Energy Inc. (PBF), a 0.61% weighting in his portfolio. The third quarter share price of the stock was $23. Shares have since climbed 25% from the average to trade around $28.32 each on Tuesday.
PBF Energy is a $1.12 billion market cap company whose shares gained just over 7% since its IPO in December 2012. Year to date the stock has fallen about 3%. The company is an independent petroleum refiner and supplier of unbranded transportation fuels, heating oil, petrochemical feedstocks, lubricants and other petroleum products. It owns and operates three domestic oil refiners which it bought in 1010 and 2011, and which have a combined processing capacity of 540,000 bpd.
Klarman purchased the stock a quarter before a significant change occurred at the company. By the fourth quarter of this year, PBF expects to complete an expansion project that will double its heavy crude unloading capability to 80,000 barrels per day. The completed project will enable PBF Energy to deliver more than 150,000 barrels per day of crude-by rail direction into its Delaware City refinery.
Says Tom Nimbley, PBF Energy’s CEO: “We believe that increasing PBF’s crude-by-rail capacity will allow us to reduce our feedstock costs by displacing waterborne crude oils with cheaper North American crudes as we strive to provide our entire refining system the most economic and cost-advantaged crude slate.”
Throughout the year, PBF has been struggling with the rising costs of complying with the government’s Renewable Fuels Standard (RFS) which forces it to purchase what are called Renewable Identification Numbers (RIN). RINs are attached to each gallon of renewable fuel produced to ensure that companies within the industry are allocating the required quantity of renewable fuel in on-road fuels.
The requirements set by the United States Environmental Protection Agency (EPA) are expected to cost PBF over $200 million in 2013.
Says Tom O’Malley, PBF’s Executive Chairman: “This is one of the company’s largest single cost categories other than crude oil purchases. It exceeds the salaries and wages we pay to operate all three of our refineries.”
For the third quarter, the company reported a net loss of $19.8 million, which included a hit by $40 billion of RIN expense.
However, the company is fighting back against the rule. On Oct. 30, 2013, it joined several other companies in a lawsuit against the EPA, and filed a petition for a partial waiver of the RFS mandate for 2014. RFS believes it could see a drop in regulation costs shortly.
Says Nimbley, “We expect RINs cost to drop in the fourth quarter based on the expected publication of theEPA's adjusted requirements for 2014. Average RINs prices for the fourth quarter are less than half of the third quarter levels. Additionally, PBF is utilizing all available venues to minimize the impact of RINs on our refining business.”
PBF Energy’s third quarter loss also included approximately $96 million in non-cash LIFO charges from rising costs attached to its combined hydrocarbon inventory during the quarter. It recorded revenue of $4.86 million, declined from $5.4 million in the third quarter 2012. Operating cash flow generated during the quarter totaled $180 million.
In addition, the company’s cash dropped to $57.4 million in the third quarter, from $285.88 million at year-end 2012. Its debt was $738.57 million, and $729.98 million in the same periods. PBF had negative return on equity and return on assets for the third quarter.
It also has a P/E of 47.7, P/B of 1.7 and P/S of 0.06, which is close to a one-year low. Its dividend yield at 4.28% is close to a one-year high.
Other Third Quarter Moves
Though his buying was sparse, Klarman in the third quarter sold out of five portfolio positions, primarily miners: American International Group (AIG), Yamana Gold Inc. (AUY), Kinross Gold Corporation (KGC) and Pretium Resources Inc. (PVG).
For more Seth Klarman stocks, see his portfolio here. Also check out the Undervalued Stocks, Top Growth Companies, and High Yield stocks of Seth Klarman.
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