HollyFrontier Corp (HFC) beat mean earnings estimates in its earnings announcement held yesterday. We maintain a positive stance on the stock due to its high gross refining margins, capacity utilization, higher production of shale oil in the U.S, increased output of Canadian sand oil, reversal of crude oil pipelines so that excess crude oil can be refined at refineries at the Gulf Coast, and the premium of Brent Crude oil over Western Texas Intermediate (WTI).
HollyFrontier Corporation is an independent refining and marketing company with operations in the U.S. and a market cap of $8.11 billion. Its recent increase in earnings were credited to higher refining margins, capacity utilization, and higher reliance on crude oil produced domestically.
The company currently operates five refineries in the Midwest and the Gulf Coast, with a refining capacity of 445,000 barrels per day.
Competitive Advantage
The refineries operated by HFC are complex, having the capability to refine both light and heavy crude oil. The company's refineries are located in the Midwest and the Gulf Coast, which gives it an edge due to the increased production from the Bakken Shale in North Dakota, the increased production of heavy Canadian sand oils, and the reversal of the flow of pipelines between Cushing, Oklahoma and the Gulf Coast.
Previous Report, its Conclusion
In our previous report, titled "Increased Domestic Oil Supply Favors HollyFrontier Corp," we discussed our bullish stance on HFC, attributed to the higher capacity utilization, gross and net refining margins, and total dependence on domestic crude oil as input for refining, which is trading at a discount to Brent crude oil (an international benchmark for crude oil).
Earnings Review
HFC announced its earnings result for the second quarter of 2012 yesterday. Revenues of $4.8 billion for the second quarter of 2012 missed consensus revenue estimates by 5.5%. However, the company reported EPS of $2.39 for the second quarter of 2012, beating sell side estimates and showing an increase of 33.5% compared to the EPS reported in the 2Q2011, and an increase of 106% sequentially.
The gross refining margins for the second quarter were $27.43 per barrel, an increase of 28% compared to gross refining margins of $21.42 per barrel for the same period last year. The gross refining margins have witnessed an increasing trend due to the premium of Brent crude oil over the Western Texas Intermediate and higher production of unconventional oil in the U.S. and the increased supply of Canadian sand oils.
Operating expenditures for the second quarter were recorded at $5 per barrel, decreasing 8.8% as compared to $5.48 per barrel for the same period last year.
The company witnessed an increase in capacity utilization of its refineries, which for 2Q2012 stood at 93%, as compared to 87.1% in 2Q2011.
Feedstock
As can be seen in the table below, there has been a trend to decrease the input of low margin sweet crude oil and sour crude oil, and substitute it for higher margin crude oils, such as heavy sour crude oil and other feedstock and blends which has aided the company to earn higher gross refining margins.
Feedstock: | 2Q2012 | 2Q2011 | 1H2012 | 1H2011 |
Sweet crude oil | 51% | 54% | 51% | 55% |
Sour crude oil | 22% | 29% | 22% | 28% |
Heavy sour crude oil | 18% | 9% | 17% | 8% |
Black wax crude oil | 2% | 3% | 2% | 4% |
Other feedstock and blends | 7% | 5% | 8% | 5% |
Total | 100% | 100% | 100% | 100% |
Sales of Refined Products
As shown in the table below, the sales for gasoline, diesel fuel, jet fuels, and LPG have witnesses an increase, while the sales of fuel oil, asphalt, lubricants and gas oil have witnessed a decline in the sales mix of the company. The increase production of high margin products like gasoline is likely to see an improvement in profitability as witnessed above.
Sales of produced refined products: | 2Q2012 | 2Q2011 | 1H2012 | 1H2011 |
Gasoline | 48% | 46% | 49% | 46% |
Diesel fuels | 32% | 31% | 32% | 32% |
Jet fuels | 6% | 4% | 6% | 4% |
Fuel oil | 2% | 3% | 2% | 3% |
Asphalt | 3% | 5% | 2% | 4% |
Lubricants | 3% | 5% | 3% | 5% |
Gas oil / intermediates | - | 3% | - | 3% |
LPG and other | 6% | 3% | 6% | 3% |
Total | 100% | 100% | 100% | 100% |
Challenges
The refining margin of HFC will be affected adversely if the premium of the Brent crude oil to the WTI is reduced, oil prices take a plunge or if oil production in the U.S. is reduced.
Outlook
We maintain our positive outlook on the company due to higher expected margins set to continue in the future, increased production of conventional and non-conventional oil in North America, reversal of the flow of pipelines between Oklahoma and the Gulf Coast, and a persistence of the spread between the prices of crude oil in the U.S. and international markets.
HFC is trading at forward P/E, P/B and P/S multiple of 6x, 1.5x and 0.5x, and offers a dividend yield of 1.53%.
Name | P/E | Dividend Yield (%) | ROE (%) | P/B | P/S |
HollyFrontier Corp | 6.2x | 1.53 | 34.68 | 1.56x | 0.53x |
Valero Energy Corp (VLO) | 7.36x | 2.43 | 13.34 | 0.97x | 0.13x |
Phillips 66 (PSX) | 6.84x | 1.99 | 19.38 | 1.08x | 0.13x |
Tesoro Corp (TSO) | 6.26x | 1.38 | 15.87 | 1.33x | 0.16x |
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
