PBF Energy

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

A leading independent petroleum refiner and supplier of unbranded transportation fuels, heating oil, petrochemical feedstocks, lubricants, and other petroleum products primarily in the United States.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

PBF Energy Inc. (PBF) is one of the largest independent petroleum refiners and suppliers of unbranded transportation fuels, heating oil, petrochemical feedstocks, lubricants, and other petroleum products in the United States.

The company operates through two segments: Refining and Logistics, with refining being the main component. PBF’s refining operations focus on crude oil refining into various finished products, such as gasoline, diesel, jet fuel, and other petroleum products. These products are sold primarily in the domestic markets.

Revenue Distribution

PBF’s revenues are derived primarily from the sale of refined products, and a smaller portion of revenues is generated from the logistics operations. The company’s main customers include wholesalers, retailers, and other independent petroleum product marketers, so they are more of a Business to Business model. Most of PBF’s revenues are generated in the US markets. The logistics segment generates income from terminalling services and storage services.

While the refining business is volatile, the logistics segment provides the company a reliable income stream.

The refining industry is characterized by cyclicality, with profitability heavily influenced by supply and demand dynamics, and crack spread. The crack spread is the difference between the price of crude oil and the price of refined petroleum products and is a measure of refining profitability. Changes in crude oil prices, product demand, and refinery capacity can lead to significant fluctuations in these crack spreads and thus the PBF financials.

The industry is also influenced by global refining capacity, which impacts overall product supply. Regulations related to emissions, biofuels, and renewable fuel standards can affect both the demand for and the cost of producing refined products. Geopolitical risks, economic conditions, and weather events also have the potential to influence prices and supply.

In recent years, there has been an increasing focus on energy transition, which may have some impact on demand for petroleum products in long term, with governments pushing towards more green energy sources and alternative fuels.

Competitive Landscape

The petroleum refining sector in North America is fairly consolidated. PBF Energy competes with major oil companies with integrated downstream assets as well as other independent refiners. PBF has a capacity to process 1.1 mmbbl/d, and it is one of the largest players in the space, this also makes it have a good scale advantage. There are many participants and competitors in the market both large and small, that provides a lot of competitive pressure on price.

Key competition comes from companies with integrated refining assets, who might have better logistics advantages and bargaining power to push higher product prices. Independent refiners may compete with PBF based on price, operating efficiencies and production capability. Some players are more geographically dominant in specific areas.

The biggest threat is the very cyclical nature of the refining business, as crack spread can wildly fluctuate and affect earnings and therefore profits.

What Makes PBF Different?

PBF’s business model is focused on highly complex refining operations with a focus on operational efficiency and production of high-value refined products such as diesel and gasoline. Their refineries have high-complexity capacity allowing them to process heavy and cheaper crude oils.

This reduces PBF’s input costs, and provides them with a cost advantage over competitors with low-complexity refineries that are forced to buy expensive crude.

PBF is also geographically diverse, with refineries located in the East Coast, Midwest, and West Coast regions of the US. The company benefits from the supply of domestic crude oil, and the fact that US refineries are the second lowest producer of carbon emissions worldwide. In addition, PBF benefits from the fact that the US is the biggest consumer of transportation fuels, as well as being relatively stable and consistent, offering a good stable customer base.

Unlike smaller refiners who may operate a smaller number of refineries in specific locations, the sheer size and scope of operations for PBF, allows it to utilize its geographical diversification to access various markets, and provide supply chain security. With a strong position in the US, PBF is insulated from imports from places such as Russia and other foreign nations. This makes them be less affected by geopolitical and global trade issues.

Financials

PBF Energy has gone through several ups and downs financially over the past few years as is expected of a company operating in a cyclical industry. The company reported a loss of $380 million for FY 2023 and is not very profitable overall.

Income Statement

PBF’s revenue is greatly impacted by the crack spreads. The company has very high revenues, but it also has high operating expenses, resulting in a much smaller profit margin.

  • The company revenues have been growing steadily, up from $27.26B in 2021 to $34.45B in 2023.
  • Net loss of $380M was recorded in 2023. The company was profitable in 2022 and 2021, with net income of $1.62B and $490.8M, respectively.
  • The company operating expenses have been quite high, with more than $32 billion spent in 2023 and $25 billion in 2022 and 2021 each.
  • Operating profit has been volatile, affected by changes in price and other dynamics. It declined to -$315.9M in 2023 from a profit of $2.21B in 2022. In 2021, the company saw an operating profit of $1.24B.

Cash Flows

The company has seen very volatile cash flows. For instance, net cash flow from operating activities has been $1.3B in 2021, and $2.1B in 2022, but declined to -$200M in 2023. This is a major concern that PBF is struggling to generate consistent cash flow. Net cash from financing activities has been highly erratic with no consistent pattern. They depend on borrowings to fund capital expenditures. For 2023, there is a major increase in cash outflows, due to an increase in net debt, which is a point of concern.

  • Net cash flow from operations was -$198 million in 2023, but $2.1B in 2022 and $1.37B in 2021. This highly variable cash flow depends on the company’s earnings which are greatly influenced by external factors.
  • Net cash used for investing activities is also erratic, with $312 million in 2023, $1.08B in 2022, and $668 million in 2021.
  • Net cash provided from financing activities was $1.4B in 2023, while it was a negative value of $985 million in 2022, and $412M in 2021. This is partly due to the companies increased debt.

Balance Sheet

PBF’s balance sheet consists of assets which are mainly property, plant, and equipment. The liabilities are also quite high, with debt being a substantial part of the liability side.

  • The company total assets stand at $11B in 2023. They have also added a lot of intangible assets to the tune of $5B, which are primarily good will assets acquired from other companies.
  • Total debt was $3.7B and preferred stock was $1.4B at the end of 2023. Equity sits at about $6B. The company has a negative equity-to-asset ratio, which is quite concerning.
  • The company working capital was -$3.8B in 2023, implying the company has a very high short term liabilities compared to its short term assets. This is a cause for worry.

Recent Concerns / Controversies

PBF has faced some recent concerns in relation to the California market. They have cited that the California market is undergoing a supply squeeze, due to which refining margins and profitability have been severely affected. They have indicated that it would be challenging to operate the refineries there if profitability isn’t restored to reasonable levels.

PBF is also a subject to several environmental risks and government policies, which may force them to invest more or spend more on compliance.

Moat Analysis

Based on the analysis above, PBF has a Moat of 2 out of 5. Here is the reasoning.

Strengths:

  • Economies of scale: PBF is among the largest independent refiners, giving it an advantage to use its size to get better terms and contracts.
  • Location and complexity of refineries: They have high complexity refineries located at strategic areas in the US, with access to large markets. This also allows them to have lower raw material costs.
  • Strong position in the US: PBF primarily operates in the US market which is the world’s biggest market for finished products, reducing exposure to geopolitical tensions in other nations.

Weaknesses

  • Cyclicality: The biggest weakness is the highly cyclical nature of the refining business, with the crack spread being a very variable measure. The company’s profits are entirely dependent on these external factors.
  • Lack of pricing power: Petroleum and refined products are considered commodity products. Therefore the company does not have much pricing power and is greatly impacted by market prices and competition.
  • Low switching costs: The customers of refined fuel can easily switch to another supplier.

Risks to the Moat and Resilience

  • Technological disruptions by alternative fuels or changes in vehicle propulsion system may decrease the demand for refined oil products.
  • Geopolitical changes in the price of oil and market situations may completely change supply-demand dynamics.
  • Regulations may affect the cost of oil refinery operations, and reduce margins. Environmental regulations are a big risk.
  • Economic recession may lead to decreased demands for energy products.
  • Natural disasters and weather can impact refinery operations and therefore affect cash flows.
  • The company relies heavily on crude oil, and the availability and stability of prices is a risk.
  • Increased Competition from new entrants or established players expanding their refining capacity may intensify competition.

PBF has shown that they are resilient and well operated by the management, and they are capable of increasing efficiency and taking corrective measures whenever there are problems, as was evident in how they dealt with their inventories and costs in 2023. However, the risks described above remain major risks, the impact of which PBF has little to no control over, and will continue to affect the company.

Understandability Rating

Based on this, the company’s understandability is 3 out of 5. PBF operates in the refining industry, which is not easy to understand due to its volatility. The business is greatly affected by multiple external factors which are hard to control. However, the core operations of PBF aren’t that hard to understand with enough knowledge about the industry. Therefore, for someone knowledgeable it will be moderately easy to understand the company and its business.

Balance Sheet Health Rating

PBF Energy’s balance sheet health is 3 out of 5. Although the company’s total asset levels are considerable at $11B, the major red flags are, large amount of intangible assets, negative working capital of $3.8B and massive amount of long term and short-term debt. While the asset side is stable, they liabilities side is a cause of concern.