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Morningstar | HollyFrontier is Well Positioned to Capture Ongoing Crude Discounts

HollyFrontier is a relatively small player, with 510,000 barrels per day of crude oil throughput capacity. Although it's smaller than its Gulf Coast peers, its refineries are competitively well positioned to capitalize on North American crude discounts. HollyFrontier is the largest independent refiner that has all of its facilities located in the midcontinent, Rockies, or Southwest region. As a result, it has benefited from the recent difference in price between inland light crudes, particulalry in the Permian, and other high-quality waterborne crude such as Brent. With access to abundant supplies of WTI-priced crudes, HollyFrontier's refineries have enjoyed the additional margin that this spread offered. While the spread is likely to remain volatile, we expect it to remain wider than historical levels (prior to 2010) when WTI and Brent traded close to par. Ultimately, we think the transportation costs to move light crude from the midcontinent to the Gulf Coast result in a long-term WTI average differential to Brent of $5 per barrel. HollyFrontier also has a crude advantage, thanks to the complexity of its refineries and their proximity to cost-advantaged feedstock. HollyFrontier has a systemwide complexity rating of 12.1, which allows it to process heavy crude and produce comparable yields of refined product more cheaply than refineries that use only the easier-to-refine, but more expensive, light crude. Given its location, HollyFrontier should have ample supply of heavy crude to process, thanks to Canada's increasing oil sands production.Holly recently acquired the Petro-Canada lubricants business to diversify its earnings stream. The business should generate $100 million-$200 million of EBITDA annually, bringing total lubricants contribution to about 20% of total EBITDA. It also offers synergy opportunities with the refining assets such as its Tulsa refinery, as well as providing a platform for future growth. While further bolt-on acquisitions to expand the business are likely, it also plans to focus on organic growth and finding opportunities to upgrade existing base oil production to higher-value products and capture higher margins.