On Friday, July 19, HollyFrontier (HFC) had its price target cut from $59/share to $49/share by Imperial Capital on concerns over a series of recently unexpected down times at a number of the company's refineries. Imperial also reduced its Q2 EPS outlook of HollyFrontier by $0.18/share from $1.68 to $1.50. In the wake of Friday's news concerning Imperial Capital's near-term outlook of HFC, I wanted to examine a number of the company's positive catalysts as I consider a long-term position in this moderately-yielding oil & gas play.
Performance and Trend Status
On Monday, shares of HollyFrontier Corporation, which currently possesses a market cap of $8.78 billion, a P/E ratio of 4.86, a forward P/E ratio of 8.88, and a forward yield of 2.78% ($1.20), settled at $43.15. Based on Friday's closing price, shares of HollyFrontier Corporation are trading 3.56% above their 20-day simple moving average, 3.94% below their 50-day simple moving average, and 5.52% below their 200-day simple moving average. These numbers indicate short-term uptrend and mid-term, and long-term downtrends for the stock, which generally translates into a buying mode for most near-term traders and a selling mode for most long-term investors.
Being Prepared For A "Dead Spread"
What is a "Dead Spread"? In a recent article, Myra Picache had noted that "prices for West Texas Intermediate crude oil on the New York Mercantile Exchange traded at a premium versus Brent crude prices. That was the first time WTI cost more than Brent crude since October 2010 and WTI saw the biggest price premium over Brent since August 2010". When WTI trades at-or-higher than Brent, the spread is considered to be dead.
Dead Spreads put significant pressure on the profits of many refiners and given the fact HollyFrontier's profits are heavily dependent on this one particular metric, Q1 profits had taken a considerable hit.
On May 7, the company reported Q1 EPS results of $1.63/share compared to analyst estimates of $1.76/share in the prior year's period. Operating expenses also affected quarterly results, as they rose 21.23% or $1.17 per barrel more than the prior year's quarter ($6.68 vs. $5.51).
Although the Brent-WTI spread and an increase in operating expenses had played a vital role in pressuring the company's most recent earnings, I strongly believe the company has a solid enough financial position ($12.47 cash per share) to weather any spread-based storm that may occur in the next 12-18 months.
With the company's Q2 earnings right around the corner, and analysts predicting HFC will earn between $1.23/share and $1.72/share on average revenue of $4.55 billion, I'd look to take a conservative approach and say that if the company can demonstrate a reduction in operating expenses and meet analysts' expectations shares could experience some near-term upside.
Recent Dividend Behavior
Since March 14, 2012, HollyFrontier has increased its regular quarterly distribution three times in the last six payable quarters. When it comes to the notion of special dividends, income-driven investors should note that HollyFrontier has paid a special dividend of $0.50/share five times since March 2012. From an income perspective, the company's forward yield of 2.78% ($1.20) coupled with its continued distribution increases make this particular stock a very viable income option for long-term investors in search of a moderate-yielding play in the oil & gas refining sector.
When it comes to those who may be looking to establish a position in HollyFrontier, I'd continue to keep a watchful eye on not only the company's dividend behavior over the next 12-24 months but how the company prepares itself to deal with a very sustainable narrowing of the Brent-WTI spread.