In December, one of the largest U.S. independent refiners went public. The IPO of PBF Energy (PBF +2.21%) didn't make much noise, but that doesn't mean investors shouldn't pay attention. Today we'll look into what PBF is, and whether it merits investment consideration for your portfolio.
The rundown
PBF Energy produces unbranded petroleum products, including heating oil, petrochemical feedstocks, and lubricants. It operates three refineries -- one each in Toledo, Ohio, Delaware City, Del., and Paulsboro, N.J. -- and combined capacity is about 540,000 barrels per day.
The Toledo refinery processes light sweet crude from the Bakken, Canada, Gulf Coast, and the Mid-Continent regions. Its Nelson complexity rating -- the number that indicates the cost and value of a refinery's capacity -- is 9.2.
The Delaware City refinery is one of the largest and most complex refineries on the East Coast. It has a throughput capacity of 190,000 barrels per day, and a Nelson complexity rating of 11.3. The Paulsboro refinery has a capacity of 180,000 bpd and a Nelson rating of 13.2.
Here's a snapshot of a few important statistics for the company.
|
Price |
$28.50 |
|
Market Cap |
$2.68 billion |
|
P/E |
7.4 |
|
Total Cash (Most Recent Quarter) |
$50.17 million |
|
Total Debt |
$804.86 million |
|
Operating Cash Flow |
$250.47 million |
Source: Yahoo! Finance.
PBF Energy has returned 8.57% since its Dec. 13 IPO.
The company is led by CEO Thomas J. Nimbley, who has extensive refining experience, previously serving as senior vice president and head of refining for Phillips Petroleum. Most of the members of the Board of Directors have oil industry experience, and a few have private equity experience.
Two trends at play
On the brink of extinction, East Coast refineries are now finding new, and often obscure, ways of staying in business. Unable to access cheap domestic crude in mass quantities, East Coast refineries were forced to import expensive foreign crude. Turns out it was too expensive, and refinery owners opted to shut down their facilities to keep from losing money.
In the wake of numerous shutdowns and selloffs, the East Coast refining paradigm was dissolved. Last spring, Delta Airlines (DAL 2.03%) announced that it would buy a refinery in an attempt to mitigate soaring fuel coasts. It purchased a Phillips 66 (PSX +2.71%) refinery in Pennsylvania for $150 million, in an unprecedented move for an airline.
Then this fall, Sunoco -- now owned by Energy Transfer Partners (ETP +0.00%) -- announced that it was reopening its Marcus Hook refinery, to be reborn as a natural gas processing facility. Instead of refining expensive oil from overseas, the Pennsylvania refinery will now process cheap ethane and propane from its backyard, receiving natural gas from the Marcellus Shale from a Sunoco Logisitics (NYSE: SXL) pipeline.
PBF's model is again different. It, too, will forgo expensive foreign oil, in favor of a supply of cheap domestic crude that will arrive at its Delaware City refinery by train, highlighting another new trend in the oil world: shipping via rail.
By constructing a crude-oil rail unloading facility at its Delaware refinery, PBF opened itself up to the numerous producers shipping their oil out of the Bakken Shale and western Canada in rail cars. Rail offers more flexibility than pipelines -- which are all already full anyway -- and allows producers to fetch a higher price for their Bakken crude by selling it in unconventional markets. Domestic oil is trading at a $20 discount to Brent crude, which would allow PBF to exploit margins not seen in East Coast refining in quite some time.
Risks
Of course, there are risks. Aside from the standard risks that revolve around balance sheets and management's ability to make good decisions, there's the macro-level energy game to consider here. There are inherent risks in processing commodities whose prices can and do swing wildly. Refining is a game of margins, and the prices of gasoline, jet fuel, diesel, et al., matter tremendously. For now, gasoline is priced as a world good, so cheap domestic oil is a boon for refiners. If anything changes on the world stage, that could be troubling for refiners. In addition, if domestic demand for refined products continues to decline, any refiner without export capacity will suffer as well.
On top of that, refining is a dangerous business, and repairs and maintenance can keep facilities offline for months. PBF operates only three refineries, so if one of them went down it would have a huge impact on the business.
Where to go from here
PBF Energy is beginning to make the rounds on the presentation circuit, with events scheduled for Jan. 24 and Feb. 7. Interested investors may want to wait to get a better feel for management, as well as the company's fundamentals and plan for future growth, before investing. In the meantime, check out the company's website and prospectus.
