Fitch Ratings has assigned a Long-Term Issuer Default Rating of 'B+' to Par Pacific Holdings, Inc. and Par Petroleum LLC (Par).

Fitch has also assigned issue-level debt ratings of 'BB+'/'RR1' to the Senior Secured ABL facility and 'BB-'/'RR3' to the Senior Secured Term Loan. The Rating Outlook is Stable.

The rating reflects the company's exposure to niche, lower competition markets and diversification through less cyclical retail and logistics segments and energy transition friendly capital projects. Other contributing factors include Par's limited size and geographic diversification, uncertainty of cash flows inherent to refiners and an unfavorable long-term regulatory environment.

The Stable Outlook reflects expectations of moderating refining performance through the cycle offset by countercyclical retail and logistics results.

Key Rating Drivers

Positive Billings Acquisition: Fitch believes Par Pacific's acquisition of the Billings, Montana refinery decreases cash flow risk via increased scale and diversification. The transaction increasingly diversifies the company with over 50% of refining capacity located in the in the continental United States and material growth of the logistics segments via related assets. The acquisition is immediately credit-accretive given the cash-weighted funding mix and strong refining market conditions in 2Q23 and 3Q23. The Billings refinery Nelson Complexity score of 10.8 improves the overall asset quality of the company's refining segment.

Limited Scale, Niche Market Exposure: Niche markets in the Western U.S. with unique market drivers and favorable supply-demand dynamics act as counterweights to the company's relative lack of geographic diversification, limited size and below average system-wide refinery complexity (NCI Composite Estimate 7.5). Par's refineries are located in PADDs IV and V with no exposure to the Southern, Midwestern or Eastern United States.

Additionally, with 218 mbpd of throughput capacity, Fitch views Par as small-to-medium sized refiner relative to U.S. peers. While size generally restrains the credit profile, niche market access allows Par to differentiate itself relative to peers while supporting underlying cash flows. In Hawaii, Par operates the only active refinery in a state with total capacity below daily average demand on the islands. Market dynamics in Hawaii are closer to APAC than North America providing additional diversification.

Non-Refining Diversification: Par operates material Logistics and Retail segments which comprise approximately 35% of EBITDA in a midcycle environment. Retail and logistics' countercyclical performance is key to cash flow generation during refining downturns. The Billings acquisition included notable related logistics assets in addition to a long-term agreement to supply regional Exxon branded retail sites. The retail segment operates 123 locations under various brand names spread across Hawaii and the Pacific Northwest. Par also holds a 46%, non-recourse position in Laramie Energy which may provide the company dividends as market conditions allow.

Simplified Capital Structure: Par's simplification of its capital structure via the issuance of the $550 million term loan B and $900 million ABL facility benefits the company's credit profile through extended maturity and reduced financing costs. Furthermore, industry tailwinds driving significant FCF and the new $900 million ABL facility will allow Par to operate with ample liquidity in the short-to-medium term.

The company increased ABL capacity replacing an inventory management agreement related to its Washington refinery operations. We treat both the ABL and S&O agreement as debt but we expect the ABL to have a lower cost of capital. Par has a separate inventory management agreement at the Hawaii refinery which reduces the company's exposure to working capital swings. Fitch forecasts Par to operate with EBITDA leverage of 2.9x at midcycle price levels ($60/bbl Brent, $57/bbl WTI)

Regulatory Pressure: Refiners face several unfavorable regulatory headwinds that will cap long-term demand for refined products domestically. These include Renewable Identification Numbers (RINs) cost under the Renewable Fuel Standard program, higher corporate average fuel economy (CAFE) standards, and regulation of greenhouse gas emissions. Par is investing in energy transition assets to offset potential regulatory exposure including projects in Washington and Hawaii. An added benefit of these projects is that management expects Par to become a net RINs producer upon their completion.

Growth-Oriented Capital Allocation: Fitch expects Par will prioritize capital expenditures to improve efficiency at existing assets as well as energy transition related opportunities. Fitch believes capex will be relatively high in 2024 and 2025 given turnaround schedules and the Hawaii SAF renewable jet fuel project while trending lower in the outer years of the forecast period. Management has indicated an openness to opportunistic M&A with a preference for funding to be drawn from cash on hand and the ABL. Material debt reduction is unlikely given that the company has met management's stated gross debt target. Par has a share repurchase program that it has deployed opportunistically (~$32 million YTD as of 3Q23).

Historically Volatile Sector: Refining remains one of the most cyclical corporate sectors, and is subject to periods of boom and bust, with sharp swings in crack spreads over the cycle. A substantial and prolonged increase in crude oil prices without a corresponding increase in refined product prices would negatively affect cash flows, which is especially true for non-transportation refined products like asphalt.

Fitch notes that Par's niche markets have witnessed strong performance through 3Q23 which we expect to moderate in the short-to-medium term following crack spread tightening in the continental U.S. during 4Q23. Other medium-term concerns include increased Chinese fuel exports, refinery capacity growth in the Middle East and Asia and the slowing GDP growth driven by restrictive central bank policies. Par Pacific offsets some volatility through hedging at their Hawaii refinery.

Derivation Summary

Par Pacific's refining footprint (218 mbpd) is on the lower end of its peer group including Delek US Holdings (BB-/Stable, 302 mbpd), PBF Holding Company, LLC (BB/Stable, 1,023 mbpd), HF Sinclair Corporation (BBB-/Stable, 678 mbpd), Vertex Energy (B-/Stable, 75 mbpd) and CVR Energy, Inc. (BB-/Stable, 206.5 mbpd). Par's assets are located in PADDs IV & V which is unique amongst the peer group. PBF (PADD V) and HF Sinclair (PADD IV) have refineries in similar regions but the majority of their assets are located in PADDs I-III. Par's refineries are unique in the niche markets they serve which typically take advantage of local market conditions and unique supply-demand dynamics.

Par is diversified through its logistics and retail assets which differentiates the company from pure play refiners such as PBF and Vertex. Delek also has logistics and retail assets while HF Sinclair and CVR are diversified into other non-refining segments. CVR's advantaged asset quality and relative diversity increase credit quality relative to Par. Fitch expects CVR to operate with a lower leverage level through the forecast period (2.1x midcycle EBITDA leverage) compared to Par (2.9x midcycle EBITDA leverage) while liquidity is comparable.

While notably smaller than Delek in terms of both refining and non-refining segments, Fitch expects Par to operate with lower leverage through the cycle given improved EBITDA margins and a lower gross debt burden. Delek's PADD III positioning is positive relative to the PADD IV & V Par positions, but niche markets and supply-demand imbalance offset this.

Key Assumptions

Brent Assumptions of $82 in 2023, $80 in 2024, $70 in 2025, $65 in 2026, $60 in 2027;

WTI Assumptions of $78 in 2023, $75 in 2024, $65 in 2025, $60 in 2026, $57 in 2027;

Working Capital and S&O agreements align with price deck and utilization;

Capex in line with management guidance and turnaround schedules;

Crack spread assumptions decline through forecast;

Share repurchases from 2023-2026;

Interest rate/SOFR assumptions in line with Chatham Financial Fed Median.

Recovery Analysis

Fitch examined Par on both a going-concern (GC) and liquidation value (LV) basis, and expects they would be reorganized as a going-concern in the event of bankruptcy.

Fitch assumed an 80% draw on the $900 million ABL facility. In conjunction with the upsizing of the ABL, the company closed its inventory intermediation agreement related to its Washington Refinery. As such, the debt associated with that facility is excluded from the waterfall.

Fitch also deducts outstanding 'Intermediation Property' in equivalent amounts from both the inventory figure in the LV and the corresponding obligation under the S&O agreement. Par does not hold title to this inventory and it is not considered collateral. The company records the J. Aron titled inventory amount as inventory on the balance sheet with a corresponding liability until final sale to a third party. The remaining inventories' titles are held by Par (~$1.2 billion). We have assumed this portion of the inventory recovers at an advance rate of 80%.

Fitch applied a 10% administrative claim to the GC enterprise value (EV). Fitch's GC EBITDA reflects Par's recovery from a scenario in which near-term liquidity constraints result in default and bankruptcy. Fitch uses a 5.5x EBITDA multiple to arrive at our GC EV, reflecting diversification through retail and logistics segments. Other contributing factors include niche market position and favorable supply-demand dynamics in Hawaii.

Fitch's GC EBITDA of $285 million includes assumptions for the likely need of a super senior working capital facility in a bankruptcy scenario, excludes the value of J. Aron titled inventory, and reflects financing expenses related to current intermediation agreements. The figure is based on a recovery year after the nadir year in our stress case scenario. The GC EBITDA also reflects increased long-term midcycle price expectations and material investment into energy transition projects.

Par's distribution of value results in the ABL facility recovering at RR1, ahead of the first lien term loan which recovers at RR3. The unsecured and subordinated Exxon facility would recover at RR6.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade

Significant increase in size, scale and diversification, particularly in non-refining segments;

Midcycle EBITDA leverage maintained at or below 3.0x.

Factors that could, individually or collectively, lead to negative rating action/downgrade

Decline in refining sector fundamentals or deterioration of Par's market position;

Sustained ABL utilization over 50% of availability signifying a diminished liquidity profile;

Midcycle EBITDA leverage maintained at or above 4.0x.

Liquidity and Debt Structure

Improving Liquidity Profile, Manageable Refinancing Risk: Fitch does not see material near-term liquidity needs and believes the company's refinance risk is manageable following the refinancing completed earlier this year. Pro forma, Par's liquidity consisted of approximately $347 million of cash on its balance sheet (3Q23) and the $900 million ABL facility.

Additionally, Par employs inventory financing for crude and refined products associated with their refining operations. Par finances their Hawaii hydrocarbon inventory through a Supply and Offtake agreement in which J. Aron holds title to crude and refined products in tankage, Par purchases crude on a daily basis at market prices and sells refined products to J. Aron as they are produced, repurchasing and selling some volumes to third parties. Fitch treats outstanding liabilities under the supply and offtake agreement as debt.

Issuer Profile

Par Pacific Holdings, Inc and its subsidiaries are owners and operators of essential energy infrastructure in PADD IV and V markets with 218 mboepd in refining capacity, 122 retail fuel locations in Hawaii and the Pacific Northwest and related logistics assets.

Date of Relevant Committee

12 December 2023

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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