Seeking Alpha
Profile| Send Message|
( followers)  

Refineries in the U.S.

The highest concentration of refineries in the U.S. is located in the Midwest and the Gulf Coast. This is due to the production of oil in these regions (especially Midwest), the import of coastal crude (Gulf coast) and the delivery of oil (Midwest).

North American Oil Production on the Rise

Due to the shale oil boom and Canadian oil sands, oil production in North America has been increasing for the past few years, and it is expected that the U.S. may decrease imports from the Middle East to zero by 2035.

Refineries Shifting Toward Heavy Crude Oil Over Past Few Years

Global oil production has steadily been moving towards heavier, sourer crudes, because the easily available deposits of light, sweet crude are depleting, which has forced refineries to evolve and switch towards refining heavy crude oils.

A refinery designed to refine light crude oil cannot refine heavy crude oil, and to do so, it will require very high investment. Therefore, refiners in the U.S. have been switching towards refining heavy crude oil. There is abundant supply of sand oil (heavy) from Canada in the U.S. at a significant discount. However, refiners on the Gulf Coast have faced inland supply constraints due to a lack of infrastructure that would allow for the transport of the fuel from the North to the South, as the laid pipelines were traditionally used to transport petroleum products North to Cushing, Oklahoma. Recently, certain pipelines are being reversed to transport heavy oil South to the Gulf Coast refineries.

Bakken Shale Oil Opportunity for Refiners in Midwest

Crude oil produced from the Bakken shale, North Dakota, is fairly sweet, and it API gravity is mid-weight. Refineries in the region are equipped to refine the production from the said shale.

Company Overview

Founded in 1947 and based in Dallas, Texas, HollyFrontier Corporation (NYSE:HFC) is an independent refining and marketing company in the U.S. HFC owns five refineries with a combined crude oil processing capacity of 443,000 barrels per day.

Refining Capability

All the refineries operated by HFC have the capability and complexity to refine light and heavy crude oil. HFC refineries can convert the heavy and sour crude oils (trading at a discount) into high percentages of diesel, gasoline and other high value refined products.

Refineries, Location and Capacities

Name

Location

Capacity

Cheyenne Refinery

Cheyenne, Wyoming

52,000 barrels per day

El Dorado Refinery

El Dorado, Kansas

135,000 barrels per day

Navajo Refinery

Artesia, New Mexico

100,000 barrels per day

Tulsa Refinery

Tulsa, Oklahoma (near Cushing)

125,000 barrels per day

Woods Cross Refinery

North of Salt Lake City, Utah

31,000 barrels per day

Source: Company Website

Financial performance

The following information shows refinery production, utilization, feedstock and net refinery margins.


(Click to enlarge)

Source: 10K

As can be seen from the data, HFC's production has increased due to the merger, which took place on July 1, 2011. Refinery utilization has increased, which can be attributed to the increasing net refinery margins, which have increased due to the discounted oil available domestically as compared to the Brent.

HFC buys oil from domestic sources, and as mentioned before, the oil available domestically (light and heavy) is trading at a discount to imported oil. This has drastically increased the gross and net refining margins of HFC.

As can be seen above, feedstock dependence on sweet crude oil and heavy sour oil has increased, while the reliance on sour crude oil is decreasing. This trend is due to the increased use of oil from the Bakken shale and Canadian sand oils.

Production Mix

As can be seen below, the production mix for HFC has remained stable over the time periods.


(Click to enlarge)

Source: 10K

$ million

% change

2011

% change

2010

2009

Sales and other revenues

86%

15,440

72%

8,323

4,834

EPS

562%

6.42

385%

0.97

0.20

Source: 10K

Sales and other revenues increased by 72% and 86% in 2010 and 2011 to reach approximately $15 billion for 2011. The company's earnings have seen a drastic increase of 385% and 562% in 2010 and 2011, for the EPS to reach $6.42 for 2011.

$ million

% change

2011

% change

2010

2009

Cash flow from operations

373%

1,338

33%

283

212

CAPEX

76%

374

-30%

213

303

Cash dividends

347%

1.34

0%

.30

.30

Source: 10K

Cash flow from operations increased by 33% in 2010 and 373% in 2011. The CAPEX, on the other hand, decreased 30% in 2010 and increased 76% in 2011.

Dividends, on the other hand, increased by 347% due to the company's improved financial conditions.

The EPS of $1.16/share for 1Q2012 showed an increase of 46% as compared to EPS of $0.79/share for 1Q2011, which shows that the company is continuing its growth path. The company also announced a dividend of $0.60/share for 1Q2012 as compared to a dividend of $0.075 for 1Q2011, showing a growth of 700%.

Share Repurchase

The board has authorized share repurchase of $700 million up till now for the calendar year 2012. The latest share repurchase program was announced on June 28, 2012 for $350 million, representing 5% of the market cap.

Competitors

HFC's competitors include Marathon Petroleum Corporation (MPC), and Tesoro Corporation (TSO).

MPC is trading at P/E and P/B ratios of 7x and 1.6x, and offers a dividend yield of 2.2%. The company has shown decent growth in EPS, and is expected to continue doing so. It enjoys a medium level profit margin.

TSO is trading at P/E and P/B ratios of 6.46x and 0.97x. The company's net margin is very low, and 1Q2012 EPS has shown a decline of 48%. We believe the company's profitability should improve going forward.

Outlook

Reasons why we believe HFC should continue to perform going forward:

  • Increased gross and net refinery margin.
  • Increased capacity utilization.
  • Reversal of pipelines to transport sand oil to the Gulf Coast.
  • Increased production of unconventional oil from Bakken shale and other sources.
  • Complete reliance on domestic crude oil as input, which is trading at a discount to imported oil.
  • All HFC refineries are complex refineries, and have to ability to refine light and heavy crude oil.
  • Future expected growth.

Sell side Review

Sell side analysts expect an earnings decrease of 25% for HFC in 2012, however we think that the company will keep positing positive results.

It is also worth mentioning that the significant increase in revenues, profitability and dividends in 2011, is due to the merger that took place on July 1, 2011.

HFC is trading at a P/E ratio of 9x. It offers a dividend yield of 1.60% and has witnessed a growth in its profitability over the past few years, and that trend has been witnessed in 1Q2012 as well.

Based on the factors mentioned above, we have a positive outlook on HollyFrontier Corporation.

HFC

MPC

TSO

P/E

9.11

6.95

6.46

P/B

1.47

1.63

0.97

P/S

0.4

0.2

0.12

Dividend Yield

1.60%

2.20%

N/A

1Q EPS growth

186%

12.70%

-47.70%

Net margin

6.54%

3.24%

1.59%

3 month performance

16.58%

4.91%

2.13%

YTD performance

56.84%

32.77%

10.92%

52 Week Performance

2.14%

4.74%

12.36%

Source: Increased Domestic Oil Supply Favors HollyFrontier Corp