HF Sinclair Earnings: HEP Buyout Announcement Overshadows Earnings and Weighs on Shares

HF Sinclair’s DINO first-quarter adjusted earnings increased to $394.1 million from $175.6 million a year ago, exceeding expectations. The increase was largely attributable to higher refining earnings but also improvement in the renewables segment, which offsets lower lubricant results.

HF Sinclair also announced a proposal to purchase outstanding units of its MLP HollyEnergy Partners for 0.3714 of newly issued shares. Based on the exchange rate and current value of HF Sinclair, the deal will cost about $940 million at current prices to purchase the outstanding 53% of HEP it does not own. However, this implied exchange value is also below the current trading price for HEP, suggesting the offer might need to be increased. HF Sinclair shares have fallen about 15% more than HEP during the last month when the deal was priced.

While the deal makes sense strategically and simplifies the structure of HF Sinclair, the timing is relatively poor compared with last year when its shares were trading at a much greater relative value to HEP. We also see HF Sinclair shares as materially undervalued, suggesting it could have made more sense to wait until the market recognized that value again as it improves its operational issues.

We plan to update our model with the latest market margins, financial results, and HEP transactions, which should result in a modest decrease to our fair value estimate. However, shares would remain undervalued and the cheapest among our coverage. Our narrow moat is unchanged.