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HollyFrontier Doubles Down On Its Renewable Diesel Investment

Jun. 04, 2020 1:43 PM ETHF Sinclair Corporation (DINO)CVI, DAR, VLO6 Comments
Tristan R. Brown profile picture
Tristan R. Brown


  • The merchant refiner HollyFrontier announced that it was installing a renewable diesel production unit at one of its refineries last December.
  • This week the company further announced plans to convert its Cheyenne Refinery to renewable diesel production by 2022, almost doubling its total planned production capacity.
  • Three distinct developments since December's announcement contributed to management's decision to expand its investments in renewable diesel even at a time of low petroleum prices.
  • HollyFrontier's decision is highly rational under the circumstances.

Last December merchant refiner HollyFrontier (HFC) became the latest member of its sector to announce its intention to begin producing renewable diesel. At the time the company intended to build a 8,000 bpd (123 million gallon per year) renewable diesel unit [RDU] at its 100,000 bpd Navajo Refinery in Artesia New Mexico. This week the company announced an expansion of that investment via the planned conversion of its existing Cheyenne Refinery to a second RDU with an additional 6,000 bpd (90 MGY) of capacity. HollyFrontier expects to invest up to $750 million in renewable fuels, which is a substantial amount for a company with a market capitalization of $5 billion. With an expected internal rate of return of 20-30%, though, management views these investments as being worth the risk.

The Cheyenne Refinery conversion is expected to cost HollyFrontier up to $175 million. Many investors will undoubtedly be surprised that the company has decided to move forward with such a substantial investment so soon after announcing a similar project at the Navajo Refinery, especially given its share price performance in 2020 to date (see figure). The prevailing operating conditions are certainly not conducive to novel projects of this type. That said, three major developments have occurred since last December's announcement that explain why HollyFrontier is not just moving forward with its investment in renewable diesel, but actively increasing it.

The U.S. Congress, just a few weeks after HollyFrontier's Navajo Refinery announcement, passed a retroactive reinstatement and extension of the federal biomass-based diesel blenders' credit [BTC]. This credit grants a refundable tax credit of $1 for every gallon of biodiesel or renewable diesel that is blended with petrodiesel. Whereas the BTC has been frequently allowed to expire over the last decade before ultimately being reinstated, Congress opted to provide some certainty the latest time around

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Tristan R. Brown profile picture
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Comments (6)

"Renewable Diesel?" The term make me think of a guy running around in his diesel truck picking up used fry oil and poring it into his truck?
Tristan R. Brown profile picture
Renewable diesel refers to hydroprocessed lipids (HVO, or hydrotreated vegetable oil, is a common term in the industry). The hydroprocessing step converts the lipid feedstock into a hydrocarbon that meets the same spec as ULSD. So it is not quite the same as running an engine on untreated vegetable oil, despite the feedstock similarities.
Once again wasting stockholder value due to idiotic DC political bs.
Tristan R. Brown profile picture
While the merits of the subsidies are of course up for debate, I wouldn't say that HollyFrontier is "wasting stockholder value" by pursuing them, given the profit margins involved.
Thanks for the article, Tristan. One question I have is how the projected "750 million towards renewable energy" will be spent. Specifically, if the expected financial cost to convert Cheyenne is $175 million, how/where will the remaining $500 million plus be spent ?
Tristan R. Brown profile picture
The company has announced three different projects: the RDU at the Navajo Refinery, a feedstock pretreatment unit, also at the Navajo Refinery, and the Cheyenne Refinery conversion. Other companies' renewable diesel investments have cost close to $3/gallon installed capacity, so HollyFrontier's 200 MGY of renewable diesel capacity plus the pretreatment unit explain most (and possibly all) of that amount.
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