HollyFrontier Is Undervalued
Recent results distract from the refiner’s long-term earnings potential.
Little went right for HollyFrontier (HFC) in the second quarter, and its earnings report reflects as much. High product inventories, narrow crude spreads, and increasing RIN (renewable identification number) prices resulted in realized margins falling by half, to $8.88 a barrel from $17.42/bbl a year ago. Meanwhile a decline in volumes and turnaround activity drove operating costs to $5.51/bbl from $5.14/bbl a year ago. Excluding impairment charges related to the Cheyenne refinery, net income fell to $48.7 million from $273.2 million a year ago.
Unlike the market, which has cut the share price nearly in half over the past year, we do not think second-quarter results are indicative of HollyFrontier’s long-term earnings potential. While we don’t expect conditions to improve meaningfully this year, the shares appear to be overly discounting a recovery in market conditions and contributions from self-help initiatives during the next several years. As a result, we still see HollyFrontier as undervalued based on various valuation metrics, leaving it as one of the most attractive names we cover in the energy sector. We plan to update our forecast with the latest guidance and market conditions, but we don’t expect a material change in our fair value estimate or narrow economic moat rating.
Allen Good does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.