HollyFrontier: Refinery Resurrection?
07/28/2016 8:00 am EST
Phoenix from the ashes, Lazarus from the dead: pick your cliché, because you could apply either to this pipeline giant, states Steve Mauzy, editor of High Yield Wealth.
Energy Transfer Partners (ETP) has seen its units double since mid-February, thus driving its distribution yield down to a subdued 10.9% from a vertigo-inducing 22.5%.
When Energy Transfer units were trading in the high teens with a yield in the low twenties, we urged investors not to give up. Those who didn’t give up are reaping the rewards today. We think more rewards – a higher unit price and distribution increases – reside in the future.
Now, the question is, can oil refiner HollyFrontier (HFC) undergo a similar resurrection? Its shares are down 40% year to date.
We think the answer is "yes." Oil refining is a notoriously cyclical business, and the cycle is certainly down. Gasoline profit margins have fallen to their lowest seasonal level since 2010.
High imports have kept gasoline inventories high, even as demand rises heading into the summer driving season.
HollyFrontier’s business has been further hampered by elevated ethanol costs. Refiners are mandated to oxygenate gasoline. Ethanol is a commonly used to oxygenate gasoline throughout the Midwest.
A lousy first quarter also weighs on HollyFrontier’s share price. Gross refining profit margins were cut in half year over year to $7.59/barrel from $16.99/barrel.
EPS posted at $0.12 compared to $1.16 a year earlier (and this is after reporting a $0.26 per-share loss in the fourth quarter of 2015).
Management remains upbeat, though. It was quick to point out during a first-quarter earnings call that gasoline crack spreads have recovered during the second quarter.
HollyFrontier’s website shows that the average spreads at its refineries were 22% to 48% higher than the first-quarter average.
While waiting for the cycle to turns up, we can take comfort in knowing that HollyFrontier remains sufficiently liquid to buy back shares and maintain its dividend.
In the first quarter, HollyFrontier repurchased 3.7 million shares. The company has $179 million more to spend on an existing share-repurchase authorization.
The $0.33 per-share quarterly dividend was also recently affirmed. That dividend yields 5.5% today.
The big dividend, the prospect of an upturn in the business cycle, the continual share buybacks, and the improving refining margins all point to a HollyFrontier resurrection sometime in 2016.
By Steve Mauzy, Editor of High Yield Wealth