Analyst Note| Allen Good, CFA |
Before first-quarter earnings, HollyFrontier announced that it purchased Shell’s 149-thousand-barrel-per-day Puget Sound refinery in Anacortes, Washington, for $350 million plus $150 million-$180 million in inventory. To fund the purchase with cash and secure its credit rating, Holly also suspended its dividend for a year. The valuation of the refinery is attractive, but the strategic value makes less sense. Investors, however, are less likely to be pleased with the dividend suspension, given management expects the purchase to be accretive to free cash flow immediately. Management conceded that the suspension was out of an abundance of caution regarding its credit rating. The lack of payout is likely to stand out in an industry where investors are increasingly demanding cash returns and punishing growth. We plan to incorporate the purchase into our model, given the high probability it closes as planned in the fourth quarter, but we don’t expect a material change to our fair value estimate given the valuation. Our narrow moat rating is unlikely to be changed, either.