Published by Bob Ciura on March 22nd, 2017
As an oil refiner, PBF Energy (PBF) experienced a much milder impact from falling oil prices, than most other stocks within the energy sector.
This allowed the company to maintain its hefty 5.5% dividend yield during the oil crash of 2014-2016, when so many other energy stocks cut or eliminated their dividends.
PBF’s relative strength has attracted a high-profile investor to the stock: Seth Klarman, Chief Executive Officer and Portfolio Manager of Baupost Group.
Seth Klarman is a noted value investor, and manages a stock portfolio that is filled with cheap, high-yield dividend stocks.
As of December 31, 2016, Baupost held a 16% stake in the company, worth $438 million.
PBF was formed in 2008 and began paying dividends in 2013. As a result, it is not a Dividend Achiever, a group of 271 stocks with 10+ years of consecutive dividend increases.
You can see the full Dividend Achievers List here.
This article will discuss why PBF could be a hidden gem for growth and dividends in 2017.
PBF has a diverse asset base, with operations in several major U.S. regions.
The company has total refining capacity of 884,00 barrels per day, good for the fourth-most among U.S. independent refiners.
Source: January 2017 Investor Presentation, page 4
Its operations are focused on the following regions:
- Mid-continent (19% of daily capacity)
- East Coast (42% of daily capacity)
- Gulf Coast (21% of daily capacity)
- West Coast (18% of daily capacity)
The crash in oil and gas prices from 2014-2016 wreaked havoc across the entire energy sector.
Fortunately, there were a select few industries within the energy sector, that were spared from the worst of the crisis.
One of them was the refining industry.
Refiners were not hit nearly as hard as oil and gas producers, because refiners tend to benefit from volatility.
When oil prices sank, it actually widened refining spreads, and increased profit margins.
This benefited PBF—in 2016, revenue and earnings-per-share increased 21% and 5.4%, respectively.
The company attributes a lot of its success to its commercial optimization program.
Source: January 2017 Investor Presentation, page 7
PBF Energy refines mostly medium and heavy crude, which separates it from its industry competitors. It can do this because of what the company calls its complex crude processing capacity.
The company believes this provides it with a competitive advantage, by lowering costs, and providing for pricing power and scale.
Refining capacity is expected to decline in 2017, to 795,000-845,000 barrels per day.
The environment for refining has become more challenging, when oil prices stopped declining and volatility subsided.
Still, PBF has a positive future growth trajectory up ahead.
2017 will be something of a turnaround year for PBF. The company’s 2016 performance was strong, but could have been even better, if not for several operational challenges during the year.
For example, in 2016 PBF experienced a coker outage at its Delaware City facility, and another two outages at Torrance.
Management estimated that these outages cost the company more than $300 million of lost profit. This would have made a huge difference—PBF’s total profit last year was $170 million.
In addition to its core operations, PBF indirectly owns 100% of the general partner, and 44% of the limited partner, of PBF Logistics LP (PBFX).
PBF also owns 100% of the incentive distribution rights of PBFX.
Source: January 2017 Investor Presentation, page 9
With a portfolio of downstream assets and an investment in midstream assets, PBF is much less exposed to commodity prices than the typical energy company.
PBF refers to its investment in PBFX as a growth partnership.
The investment allows PBF to benefit from “drop-downs”, whereby it sells assets to the MLP subsidiary. PBF can then use the proceeds to pay off debt, which improves its balance sheet and liquidity.
This allows PBF to benefit from “drop-downs”, whereby it sells assets to the MLP subsidiary. PBF can then use the proceeds to pay off debt, which improves its balance sheet and liquidity.
PBF ended 2016 with a large backlog of drop-down opportunities, which could boost its cash flow growth in 2017.
For example, in 2017 PBF will go forward with two major projects, one of which is the construction of a 625,000-barrel tank at PBF Energy’s Chalmette refinery.
Source: January 2017 Investor Presentation, page 5
The Chalmette tank is expected to be completed by the fall of 2017.
After fees paid to PBF Logistics, PBF management expects the tank should add an additional $20 million to Chalmette’s annual refining profits, by lowering costs and increasing efficiency.
Plus, it boosts the company’s ability to export refined products from Chalmette.
Exports are a separate catalyst for PBF. The company exported roughly 22,000 barrels per day during the fourth quarter, representing about 16% of its total capacity.
With the improvements at Chalmette, PBF will be able to further expand its export volumes.
The second major project set for 2017, is the development of a natural gas pipeline to supply PBF Energy’s Paulsboro refinery.
These projects are attractive growth catalysts for PBF, because both of them will be 100% funded by PBF Logistics.
And, the projects are supported by long-term agreements, with minimum volume commitments from PBF.
PBF currently pays a quarterly dividend of $0.30 per share, which works out to $1.20 annually.
In 2016, the company had earnings-per-share of $1.74. This means it maintained a payout ratio of 69% last year.
When it comes to the balance sheet, PBF ended last year with a 35% net-debt-to-capitalization ratio.
The company has $2.1 billion of long-term debt, and $786 million in cash, cash equivalents, and marketable securities.
PBF generated $651 million of operating cash flow last year. The company should continue to generate enough cash flow to meet its financial obligations, while also covering its dividend.
Overall, its balance sheet is in good shape.
Investors should not count on a dividend raise in 2017.
Given PBF’s near-70% payout ratio and management’s expectation for slightly lower refining capacity in 2017, the company will likely be conservative with future dividend growth.
PBF is experiencing some bumps in the road, but the company’s turnaround is progressing. And, PBF’s future projects should provide growth moving forward.
PBF stock is cheap, with a price-to-earnings ratio of 12.
And, with a 5.5% dividend yield, it is an attractive stock for dividend income.
PBF has one of the highest dividend yields in the refining industry.
With that in mind, it is not surprising to see that PBF stock is one of Seth Klarman’s biggest stock holdings.