Earnings Preview: HollyFrontier Corporation

| About: HollyFrontier Corp. (HFC)
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HollyFrontier Corporation (NYSE:HFC) reports earnings before Monday's open. The oil refining company is expected to report between $1.2-1.22 EPS for the quarter on $4.47 Billion in revenue. Here are some things to consider before and after the report.

Trading Range

HFC's stock trades erratically. Prone to both oil price shocks and general macro shocks, plus its own intrinsic issues, the stock will often swing two or three percent on any given day, before reversing that swing later in the week. It currently rests right around its 200-day moving average, at 30.27 as of Thursday's close. HFC's market value per share appears to be within the range of 30-32, with frequent fluctuations. Most recently, it hit a valley at 28.38 in mid-April and rebounded to 31.70 by the end of April, before settling where it is.

(Source: TD Ameritrade)

HFC vs. 9, 27, 200-day MAs (Source: TD Ameritrade)


Analysts' opinions on HFC are no more constant than the stock's share price. Dahlman Rose issued the most recent coverage of the stock with a buy rating (as part of an assessment of refiners in general), which countered downgrades to hold from Credit Suisse and S&P and to underperform from Raymond James (as well as an about-face from Barron's on the stock).

Estimates have moved around a good deal going into this quarter as well. Per Yahoo, estimates were .96 EPS 90 days ago, 1.15 60 days ago, 1.30 30 days ago, 1.22 a week ago, and 1.20 now.

Oil Spreads

The main indicator for how HFC will trade is the 321 crack spread (compare it to HFC over 1 year), which predicts HFC's margin. As refineries are essentially margin plays - they make money by processing oil and selling it for more than they buy it, and revenues are not a telling metric - the size of the crack spread largely predicts the earnings a refiner like HFC will achieve, especially when they rely on the glut of cheap oil coming down from Canada that cannot be shipped easily elsewhere. HFC's stock as such has generally traded at a slight lag to the 321 crack spread (this pre-earnings surge for HFC in the last two weeks is the exception to the rule).

The crack spread neared its highs of last summer at the end of March and beginning of April, but have tailed off since then. Still, for the whole first quarter the crack spread was high and rising, which should bode well for HFC's earnings.


HollyFrontier Corp is often seen as the best of breed among U.S. inland refiners, especially those connected to the Cushing glut. That makes the recent reports from HFC's peers another bullish tell for their earnings. A rundown of peer earnings reports:

Western Refining (NYSE:WNR) - Beat earnings estimates, growing tremendously compared to last year (200% growth). Also reported in their press release that, "The widening price differentials between WTI Cushing crude oil and WTI Midland crude oil are contributing to refining margins that are stronger than those in the first quarter."

Delek US Holdings (NYSE:DK) - Beat earnings estimates handily ($.79 actual versus $.61 expected). The press release also cited widening crude oil spreads in the first quarter.

CVR Energy (NYSE:CVI) - Beat earnings and revenue estimates. CEO Jack Lipinski reported that the company's refineries, "benefited from the favorable crack spread environment. As we enter the second quarter, we expect to achieve strong financial results driven by solid operating performance, continuing wide crack spreads and differentials between Brent and WTI crudes."

Marathon Petroleum Corporation (NYSE:MPC) - Beat earnings estimates handily ($1.7 actual versus $1.34 expected). CEO Gary Heminger said, ""We continue to believe that crude oil differentials will be wider, for longer, than most market observers believe," in their conference call, as per Dow Jones Newswires.

Tesoro Corporation (TSO) - Beat earnings estimates. The press release highlighted that, "In the mid-continent region, crude oil priced off of West Texas Intermediate (WTI) traded at a discount to Brent."

Valero (NYSE:VLO) - Beat on adjusted earnings estimates. Cited lower margins as part of why the company lost money on a GAAP basis.

Valero is the exception in the group. Each of these other refineries with access to mid-continent oil beat estimates and forecast strong margins for the quarter to come. HFC has reserved the anchor spot for themselves in the refineries' reporting lineup. As such, they have the plate set for them to beat earnings.

Those items are contextual. Here are a few things investors should watch for in HFC's press release and conference call:

Navajo Refinery Shutdown

The one major news item out of HollyFrontier's camp this quarter was the shutdown of the Navajo refinery for 10-15 days. The Navajo refinery, located in New Mexico, is the 3rd largest of HFC's five refineries, and the company foresaw a loss of 800,000 barrels of production over the time of the shutdown. This shutdown was unscheduled and came on top of planned maintenance during the quarter. This announcement came after the quarter ended, so it shouldn't materially affect the results of the quarter, but it is worth listening for any news from the company on the impact of this shutdown, especially considering there has been no press release announcing its return to full capacity.

Forward Crack Spread

More than the actual earnings report, the company's view on the crack spread going forward will be the most decisive factor in the conference call for their stock price. Five of their peers predicted good margins for the next quarter, if not longer. Does HFC see it the same way? Ultimately, if the market disagrees, management's view won't matter, but it would be good nevertheless to hear a vote of confidence.

Seaway Pipeline Reversal Impact

One of the major overhanging bits on the crack spread and HFC's prospects is the reversal of the Seaway Pipeline, which will increase outflow of oil from the glut in Cushing, OK to the Gulf Coast. This is now scheduled to start in two weeks. What is HFC's latest view of the impact of the pipeline reversal on their margins? Again, that view might not sway the analysts or market as a whole, but it can be instructive to investors.

Earnings Reactions

While it's important to sift through HFC's earnings, don't expect the reaction to follow on the results. In three earning reports since completing the merger last summer (of Holly and Frontier Oil), the stock beat twice and missed once. After the first beat, the stock dropped almost 9% before bouncing back into its prior range and hovering there for the rest of the quarter. After the second beat last November, the stock dropped 6.4% as the start of a 35% drop over the next two weeks. Then, after recovering most of that ground, the company missed expectations at year-end and was subsequently rewarded with an initial trading day drop but then recovery and ultimately a 8-9% rise over the following weeks.

If you have a decided feeling on HFC one way or the other and are waiting for earnings, feel free to make an ambitious limit order to take advantage of the volatility, and don't be surprised if the market's response runs opposite of logic.

Special Dividend

Since merging, the company has paid out three special dividends that amount to a split-adjusted $1.50 per share and has raised their regular dividend twice. The regular dividend provides a 1.32% yield at Thursday's closing price of 30.27. The special dividends, though, have been, well, special. Annualized, the dividend would be $2.40 per share, or 7.93% yield. It's a semi-secret benefit to HFC shareholders.

Still, HFC has built expectations that they will continue to pay out the specials. As CEO Mike Jennings said in response to a question about paying out the dividends in cycles on last quarter's conference call:

"The concept of paying special dividends is something that we'd like to maintain over a full cycle, whether it's $0.50 or a $1.25 it's really hard to predict. But if we were able with a $0.60, $0.35 a quarter regular dividend I mean sure we would be committed to it but the fact is people would discount it because there're some likelihood we couldn't sustain it through the downturn."

Essentially, if HFC remains in their up cycle and hits or even comes close to earnings estimates, they will be expected to announce a special dividend of $.50 or greater per share. The past three announcements have come a week before earnings, a day before earnings, and about a week after earnings. So watch out for an announcement on this. No news would certainly be bad news in this case.


HollyFrontier Corporation's main challenge is not to show good earnings, but to make the case that this is not just a temporary boon they are reaping. They need to make a case that their positioning and expertise will provide long-term quality earnings, and that they are not completely dependent on possibly unsustainable margins.

The results of their peers in the U.S. refining business are encouraging, and HFC seems a decent bet to beat earnings, with a better chance of blowing them away than of missing them. Still, with questions about margins, Seaway pipeline, and the company's long-term earnings prospects, there is a lot that might weigh the stock down, regardless of the results.

If not in the stock yet, I would consider the company's response to these questions in the call and, if I wanted to enter, wait until it pulls back to 28 or below, either in response to earnings or in the coming weeks. Being in the stock already, I would hedge my position if I was a savvier trader.

Disclosure: I am long HFC.