EUR 850.00 For Business Accounts Only

Morningstar | Wide Crude Discounts Translate Into Strong Earnings for HollyFrontier Again

HollyFrontier reported fourth-quarter earnings that exceeded our expectations as it continued to benefit from its advantageously located refining footprint to capture wide crude differentials during the quarter. Our fair value estimate and moat rating are unchanged. Adjusted earnings rose to $393.9 million, excluding market inventory valuation adjustments, from $124.6 million last year as strength in the refining segment offset weakness in lubricants and midstream. Refining and marketing adjusted EBITDA soared to $583.4 million from $233.1 million a year ago on wider crude spreads, which increased the realized gross margin to $22.17 a barrel from $12.54 last year and offset a decrease in throughput volumes due to a planned turnaround at the El Dorado facility. Lubricants and specialty products EBITDA fell to a loss of $3.9 million from a gain of $40.5 million last year on weakness in base oil markets and a turnaround at the Mississauga plant. Full-year results for the segment were weaker than the year before, but management expects improvement in 2019, given fewer turnarounds and an improved supply/demand balance. Meanwhile, Holly Energy Partners' EBITDA fell to $89.9 million in the fourth quarter from $124.6 million last year on lower volumes and unplanned maintenance on a refinery process at Woods Cross.

Operating cash flow of $424.5 million went toward paying $57.6 million in dividends and $185.2 million in share repurchases during the quarter, an increase from the amount repurchased in the third quarter. Given excess cash on the balance sheet of about $650 million and the likelihood of continued strong results during the year, we expect repurchases to continue, barring a larger acquisition. Management also indicated a dividend increase was also likely to occur in the near future, given the growth of the lubricants segment.

During the last year, HollyFrontier has been the beneficiary of two strong tailwinds: lower RIN prices and wider crude differentials. While we expect the first to persist as the Trump administration has been more liberal with the granting of small refinery waivers, undermining demand, the latter looks to be waning. The startup of new pipeline capacity from the Permian by year-end should result in narrower light crude differentials, which have buoyed HollyFrontier’s earnings. Meanwhile, Canadian heavy differentials have narrowed somewhat with production cuts while sufficient pipeline capacity should be in place by year-end 2020. The introduction of IMO 2020 could keep spreads wider than transportation economics would imply. In total, however, the likely narrowing of light crude spreads during the year should result in HollyFrontier’s earnings reverting closer to midcycle levels. On the basis of this assumption, we see the shares as fully valued.