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Frontier Oil: Reliability Engineering Revisited

|Includes: CLMT, Frontier Oil Corporation (FTO), MRO, VLO, WNR

We are greeted with the following press release from Frontier Oil this morning:

HOUSTON, Jul 28, 2010 (BUSINESS WIRE) -- Frontier Oil Corporation (NYSE:FTO) experienced a fire this morning at approximately 5:40 a.m. MDT in the crude unit at its Cheyenne Refinery. The fire was extinguished within approximately one hour by refinery and city fire personnel. There were no injuries. The cause of the fire and extent of the damage is currently being assessed with preliminary estimates indicating the crude unit outage will be approximately two weeks.

Frontier operates a 135,000 barrel-per-day refinery located in El Dorado, Kansas, and a 52,000 barrel-per-day refinery located in Cheyenne, Wyoming, and markets its refined products principally along the eastern slope of the Rocky Mountains and in other neighboring plains states.

In light of our previous calculations on this company, based on the current crack spreads, the effect of this on NOI, if the unit is down for the two weeks suggested in the press release, about  41Kb/d times $11 per BOD crack spread somewhere in the neighborhood of $6.5MM in lost NOI due to the effect of the lost production at roughly 80% utiilization. With a forward PE of 10, this equates to less than a dollar on the stock price, which is still relatively small given the normal market fluctuations.

But here is an example of the very thing that we discussed in our instablog of June 17 on the importance of reliabiilty engineering directly influencing NOI and therefore the stock price. This company, linked intimately with the refining crack spread, needs to keep their equipment operating in order to have a business.

They will announce their earnings in early August, this issue will be reflected in the third quarter operating results.

Disclosure: none