Description

Business Description
Par Pacific (“PARR”) was created through the reorganization of Delta Petroleum in Aug ’12. The company’s main assets at the time were a ~33% stake in a Colorado-based upstream company that mainly produced natural gas ("Laramie")and a $1.4 bn NOL. Sam Zell’s investment vehicle (EGI) and Whitebox Advisors own ~45% of the company. The company’s strategy is to acquire profitable energy and infrastructure businesses to maximize thevalue of the NOL.

In Sep ’13, PARR acquiredthe largest refining (64% mrkt shr), retail, and logistics business in Hawaii ("HEI") from Tesoro. In Apr ’15, PARR acquired Mid-Pac, which owned over 80 "76" branded retail outlets in Hawaii. The Mid-Pa cacquisition helped to bolster on-island demand for PARR’s refined products by ~20%.

In Dec’ 15, Bill Pate left his role as Co-President of EGI to become CEO of PARR. Bill had spent over 20 years climbing the ranks as part of SamZell's organization and been on the Board of PARR for several years.

In Mar ’16, PARR invested an additional $55 mm into Laramie to support its acquisition of Occidental's adjacent operations. Thisinvestment increased PARR’s ownership stake in Laramie to ~42%. This acquisition was expected to be as transformative for Laramie as Mid-Pac was for HEI. Unit costs are expected to decline ~40% from Laramie's 3 year historical average of $2.55/Mcfe to $1.50/Mcfe by '18. The Laramie management team has a strong understanding of the acquired property as they previously owned it and sold it to Occidental in '07.

In Jul’16, the company acquired a refinery in WY ("WRC") with 18Mbpd capacity. WRC is believed to be an attractive asset as it has an advantaged supply dynamic that allows it to achieve high margins and relatively low maintenance cap ex.

Moving forward, it is expected that the company will continue to pursue acquisitions, largely in the downstream or midstream space, and at some point monetize its stake in Laramie.

Why Does the Opportunity Exist
The company was created through a reorganization, has little sell-side coverage, has <$1 bn market cap, and only trades ~150kshares/ day. Historically, Laramie was a higher cost source of natural gas and has a legacy bias associated with it, despite having made meaningful improvements in well economics over the last several years as cost to drill dropped from $1.8mm to $0.9mm / well, LOE's are now at 44 cents/Mmcfe, and EURs grew from 1.6bcfe to 1.9 bcfe.

Crack spreads compressed below mid-cycle ranges, hampering profitability. Energy as a sector also fell out of favor due to lower energy prices. Finally, a PE firm acquired PARR’s main competitor in HI from Chevron. It was previously believed that the competing refinery would either be shuttered or sold to PARR.

Investment Thesis
Bill Pate is a good allocator of capital who recognized a compelling enough opportunity at PARR that he was enticed to leave EGI. The company will create value through the monetization of its NOL by acquiring profitable businesses in the energy space at compelling valuations.

While crack spreads had compressed materially at HEI, the company is a critical asset in Hawaii with high barriers to entry, competitive advantages, and critical assets that was trading at a fraction of its replacement cost. As crack spreads revert back to long-term averages, earnings and profitability will increase substantially and move back towards 2015 levels.

The Wyoming downstream acquisition appears to have cost advantages and plays in a niche market with attractive FCF characteristics.

Laramie has interesting unit level economics and will benefit tremendously from an increase in natural gas prices. In the near-term, however, the company has hedged 80% of its production through '18. The acquisition of the Oxy assets should be transformative as the company is able to take advantage of Laramie's superior cost structure as well as enjoy greater economies of scale.

Pre-Mortem / What Would Indicate We Are Wrong

- Supply and demand drivers in Asia cause Mid-Pacific crack spreads to permanently deviate from historical patterns and/or competition with the Chevron plant intensifies under its new ownership.

- The management team destroys value by pursuing bad acquisitions in an attempt to utilize the NOL.

Catalyst

- Monetization of Laramie

- Strategic rationalization in Hawaii (e.g. competitor shuts down refinery and focuses on retail assets)

- Outright acquisition by a competitor