HollyFrontier: Upside Supported By Both Fundamentals And Technicals

Sep. 19, 2018 8:06 AM ETHF Sinclair Corporation (DINO)10 Comments


  • We really like the operating environment for HollyFrontier and believe that synergies with Red Giant Oil are underappreciated, as is the company's intention to pursue further acquisition opportunities.
  • Technical support and strong fundamentals suggest a run up is likely into late fall and into 2019.
  • Shares are undervalued and below $70, we plan to initiate a position for a trade, while longer-term investments should enjoy limited downside.
  • On a forward basis, our earnings projections suggest a $95 share price target if traded at recent historical ratios.
  • Investor risks include unforeseen negative catalysts moving the energy market below our conservative outlook for 2019, or meaningful capacity add-ons at existing or base chemical new plants.
  • This idea was first discussed with members of my private investing community, BAD BEAT Investing. To get an exclusive 'first look' at my best ideas, start your free trial today >>

HollyFrontier Corporation (HFC) is on our radar this week, declining nearly 8% in recent sessions. We believe the chart suggests there is underlying technical support, and the medium-term fundamentals suggest a renewed runup is likely in shares from present levels. We're keen to scale into the name under $70. We believe the stock is still reeling from the company having some unexpected downtime in Q2, which resulted in a miss versus expectations on the earnings front. However, based on our modest projections in oil and gas pricing, limited capacity increases in coming years, and synergies from acquisitions, our expectations for performance going forward suggest the stock offers investors a compelling risk-reward ratio. Let us discuss.

Investing thesis

We believe HollyFrontier shares are undervalued. We think the stock could trade well over $100 by 2019, provided the macroeconomic outlook remains similar to the present situation and our near-term expectations for energy to trade in a range bound fashion hold.

There are several key reasons we believe investors should consider this name. The first is that we project the price of oil to be relatively stable into 2019. The second is that the spreads between what the company pays for its input, raw oil, and the costs for what it sells its products for, is projected to remain wide (if not widen). Third, the company's refiner downtimes are temporary, and while turnaround is costly, they are a long-term benefit to help boost capacity which is extremely limited for base III oils with so few companies in the space. Coupled with rising demand for base III oils in several industries, the demand/capacity picture is attractive. We will add that a possible rollback of fuel standards, and also RIN credits which are required and costly biofuel additives, could reduce expenditures longer-term. Fourth, the recent purchase of Red Giant Oil, with management telegraphing it is working on future synergistic deals, is underappreciated. Fifth, the company is

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Disclosure: I am/we are long HFC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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