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PBF reports adjusted Q4'17 loss driven by hedge exposure

PBF Energy Inc. executives explained that their 2017 fourth-quarter earnings missed analyst expectations largely due to widening Canadian crude oil differentials.

The company reported an adjusted fully converted net loss of $4.4 million, or 4 cents per share, missing the S&P Capital IQ consensus normalized EPS estimate of net income of 21 cents per share.

During the year-ago quarter, the company realized a net loss of $74.9 million, or 71 cents per share.

PBF CFO Erik Young said the earnings miss was driven largely by a $70 million derivative exposure during the fourth quarter related to West Canadian Select, or WCS, crude oil supply.

The Canadian crude product trades at a discount to West Texas Intermediate, and production growth and logistical bottlenecks have widened that differential, PBF executives explained.

"We didn't anticipate late summer when we had WCS at [a] $12 or $13 [discount] being in this position [where] all of a sudden the spread widened out," PBF Chairman and CEO Tom Nimbley said during a Feb. 15 earnings call. "Production continued to come up in Canada and, of course, we had [the] Keystone [pipeline] shut down for a bit. ... We've reached the point again where the barrel has to clear by rail, pipes are full. ... [Spreads] continue to be wide at $30. ... That really contributed to the hedge loss if you will, ... and that will all come back when we clear the barrels" in 2018.

Operationally, executives touted PBF's improved operational performance.

"During the first two quarters of [2017], we invested heavily in our assets and completed the largest turnaround in our company's history at our Torrance refinery," Nimbley said. "The improvements and strategic capital investments we completed were critical to our operational success in the third and fourth quarters and helped demonstrate the strength of our fully-operational refining system."

PBF acquired the 155,000 bbl/d Torrance refinery from Exxon in 2016. Nimbley said PBF has reduced the facility's operating costs by more than 30% since the acquisition to under $7/bbl, and that he sees the opportunity for "more upside."

On a GAAP basis for the fourth quarter of 2017, the company reported net income of $241.9 million, or $2.14 per common diluted share, up from $54.6 million reported for the fourth quarter of 2016.

The U.S. Tax Cuts and Jobs Act signed into law by President Donald Trump in late 2017 provided a net tax benefit of $173.3 million, or $1.51 per share, due largely to a reduction in deferred tax liabilities.

PBF CFO Erik Young said investors should assume a normalized tax rate, including federal and state taxes, of about 27% moving forward.

For 2017, the company reported adjusted earnings of $130.1 million, or $1.14 per share, against a 2016 adjusted loss of $145.7 million, or $1.41 per share.

On a GAAP basis for 2017, the company reported net income of $415.5 million, or $3.73 per share, up from the year-ago figure of $170.8 million, or $1.74 per share.

Nimbley said the benefits of tax reform and the improved performance at its refineries stemming from the investments it has made over the last couple of years would drive it to "buttress the balance sheet" rather than make significant capital investments or return cash to shareholders through increased dividends and share repurchases.

"We pay a very healthy dividend right now," Nimbley said. "We certainly have times where we award employees equity as part of their normal compensation program. We will look to see whether or not it makes sense to buy back shares to at least not have to dilute the existing share base."

Nimbley said he favors acquisitions over capital investment.

"Capital is not the friend of the refiner, in my opinion," Nimbley said. "I'd rather spend money buying the refineries than building new toys inside the refineries, and that has been a model that has worked well in the past."