Morningstar | HollyFrontier Reaps Benefit of Wide Crude Discounts in 2Q
HollyFrontier reported a sharp increase in second-quarter adjusted earnings to $258.9 million compared with $116.0 million the year before on the strength of its refining segment. The strong report is of little surprise, although earnings did fall short of market expectations, as we’ve highlighted how HollyFrontier is currently a beneficiary of several market tailwinds including wide crude spreads and lower RIN prices. The good times are likely to continue for HollyFrontier as refined product markets are well balanced, which should support margins, and wide crude spreads are likely to persist through 2019, benefiting its midcontinent concentrated portfolio. However, we think the current share price is discounting these strong conditions into perpetuity, which is unreasonable, in our view. Our fair value estimate and narrow moat rating are unchanged.Reported earnings of $345.5 million benefited from $86.6 million in special items including an inventory revaluation and a small refinery RIN exemption. Refining segment operating income soared to $429.3 million from $45.8 million the year before as Holly’s refineries benefited from strong product margins and wide crude spreads during the quarter, evidenced by an increase in the realized gross margin to $16.57 a barrel from $11.36 a year ago. Holly Energy Partners' operating income increased to $56.9 million from $52.8 million last year on higher volumes and the acquisition of new pipelines, while lubricants and specialty products operating income fell to $29.4 million from $33.8 million last year as a result of weakness in base oil markets and planned maintenance.
The company repurchased $28.6 million worth of shares during the quarter. Relative to peers, HollyFrontier’s repurchase activity is limited, given the firm's desire to hold cash (nearly $1 billion) to deploy for acquisitions to expand the business. However, if deals fail to materialize, management has committed to returning excess cash to shareholders.
HollyFrontier is a petroleum refiner that produces products such as gasoline, diesel fuel, jet fuel, other lubricant products, and specialty and modified asphalt. The company's segments are: Refining, which involves the purchase and refining of crude oil and wholesale and marketing of refined products; Lubricants and Specialty Products, which includes the production of lubricant products such as base oils, white oils, other products and finished lubricants; and the company's subsidiary, Holly Energy Partners, L.P., which owns and operates logistics and refinery assets consisting of petroleum product and crude oil pipelines, terminals, tankage, loading rack facilities and processing units.
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