Frontier Oil Needs To Close the Earnings GAAP

Large Cap Watch List member Frontier Oil Corporation (FTO) announced record first quarter net income of $74.7 million, or $0.68 per diluted share for the quarter ended March 31, 2007, compared to the prior record first quarter net income of $57.4 million or $0.51 per diluted share, for the quarter ended March 31, 2006. However, analysts had been expecting $0.75. According to the press release:

The first quarter 2007 results benefited from diesel crack spreads which averaged $21.66 per barrel compared to $15.51 per barrel in the first quarter of 2006. The gasoline crack spread also improved in the first quarter of 2007 to $12.92 per barrel compared to $9.22 per barrel for the first quarter of 2006. While Frontier continues to benefit from crude oil differentials, both the light/heavy crude oil spread and the WTI/WTS spread decreased from the first quarter of 2006 in part because WTI traded at a discount to other light crude oils. For the first quarter of 2007, the Cheyenne Refinery’s light/heavy differential averaged $13.24 per barrel and the light/heavy spread at the El Dorado Refinery averaged $12.46 per barrel. The WTI/WTS spread averaged $4.34 per barrel for the quarter ended March 31, 2007.

The results are complicated by the fact that the company is amortizing a tax gain over each quarter.

The first quarter 2007 results include an after-tax inventory gain of approximately $2.0 million or $0.02 per diluted share, compared to a loss of $13,000, or $0.00 per diluted share, for the same period of 2006. As expected the Company has earned the remaining approximate $8 million tax credit from ultra-low sulfur diesel production in the first quarter of 2007. However, Frontier will recognize this benefit in its income tax provision ratably (approximately $2 million per quarter) in each fiscal quarter of this year.

If the company had recognized the full gain in the first quarter (as it was all received), the earnings under Generally Accepted Accounting Principles [GAAP] would have been $0.74 - much closer to analyst estimates. However, if analysts were not including any part of the gain in their estimates, then the proper earnings comparison is $0.66 - and thus a worse miss.

Disclosure: author is long UNITED STS OIL FD LP UNITS (USO) at time of publication.

FTO 1-yr chart: