HollyFrontier Corp Is a Value Trade

HFC is down 36% year to date, catching up to the decline in oil, but still producing solid profits

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Jul 19, 2016
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HollyFrontier Corp. (HFC, Financial) is a large independent petroleum refiner in the U.S. It operates five complex refineries producing over 440,000 barrels of crude oil every day.

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Currently trading with a forward P/E of 9, at a price that is just 2 points off a 52-week low and producing a 5% yield means the stock deserves a closer look.

HollyFrontier grew sales from $4 billion to $20 billion between 2005 and 2012, but in the last few years has seen a massive downturn in revenue. The company has earned more than $31 per share after taxes, while doubling its net income despite the lower revenue run. More importantly, it has grown book value from $4.18 to $28.82, an increase of 645%, and raised dividends from 14 cents to $1.32.

Management has been able to buy back shares in the last five years to help shareholders, but gasoline profit margins have fallen to their narrowest levels since 2010, dropping by $5 per barrel even as gasoline demand rises.

The price of oil is currently hovering around $45, but I do not think it is unfair to predict $100 per barrel in the future. Despite our newfound penchant for new renewable energy and my previous comments on the coal industry, I think the shift away from oil will happen a lot slower.

There are a few questions that surround the company and industry.

One question is whether HFC will still be around in 10, 20 or 30 years? And if the company is around, will it continue to be profitable? Financially speaking, HFC is in good shape at the moment. Last year alone, it generated $532 million in net income on $5.2 billion in total equity and carries just over $1 billion in long term debt.

Another question is whether it will be a growth company or just a great dividend producer. I cannot see it growing without there being a real cost to the economy in terms of higher oil and gas prices.

Refining margins will likely stay weak throughout this year and into the next. This has prompted the company to issue $250 million in senior notes at 5.875% (10 year maturity) to fund possibly capital expenditures and stock buybacks. During quarter one, HollyFrontier spent $133 million buying back stock to help support per share earnings. The company will continue to benefit by being the low cost producer based on the proximity of many of its refineries to the source. And, if efforts to improve operations pan out accordingly, they will have a net benefit to profitability

Analysts still appear to have high hopes for the stock with both Valueline and Morningstar estimates above $45. If HollyFrontier continues to buy back stock, can increase net profit just 20% from current levels and have a normal P/E ratio, the stock could easily reach $35 in the next few years. A lot of ifs, but in the meantime, investors have the advantage of getting a nice dividend to wait. In addition, the company has a high enough margin of safety at this price to withstand any adverse decreases in value over the short term as long as fundamentals do not seriously deteriorate.

Disclosure:Â I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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