Morningstar | HollyFrontier's First-Quarter Earnings Hurt by Weak Lubricants Results
HollyFrontier reported a decline in adjusted earnings to $93.2 million from $137.3 million the year before on weakness in the lubricants and refining segments. Refining segment adjusted EBITDA of $193.4 million fell from $200.9 million the year before as narrower crude differentials reduced realized gross margin to $12.74/bbl from $12.83/bbl last year. Lubricants adjusted EBITDA fell to $20.4 million from $52.8 million last year due to continued weak base oil market as new supply outweighs demand. Management expects markets to balance over time and reiterated its prior midcycle EBITDA guidance. Holly Energy Partners reported adjusted EBITDA of $93.5 million compared with $88.5 million the year before.Operating cash flow of $216.8 million went toward paying $56.8 million in dividends and $77.8 million in share repurchases during the quarter, a reduction from the amount repurchased in the fourth quarter. Management again indicated it is considering growing the dividend given the addition of the lubricants business, but timing is uncertain, leaving share repurchases as the primary tool to return cash to shareholders for now. Our fair value estimate and moat rating are unchanged.
We continue to see HollyFrontier as a well-run refiner with a strong competitive position. However, it rates as the least undervalued refiner in our coverage at this time. During the last year, HollyFrontier has benefited greatly from the wide inland crude spreads created by transportation bottlenecks out of the Permian and Canada. However, those issues appear to be largely resolved or in the case of Canada negated by government intervention. As such, we expect year-over-year declines in earnings toward midcycle levels as those narrower spreads result in lower margins. Relative to the first quarter, however, we expect improvement as product margins recover from historically low levels and crude spreads widen.
Gasoline inventories have already fallen due to lower industry utilization spurring a recovery in margins as we enter the summer driving season. As such, the macro outlook remains favorable, including potential margin uplift for IMO 2020, but we think shares largely already reflect it.
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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