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HollyFrontier Corp HFC

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HollyFrontier’s Purchase of Washington Refinery, Dividend Suspension Overshadow Q1 Earnings

Allen Good, CFA Sector Strategist

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.

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Company Profile

Business Description

HollyFrontier is an independent petroleum refiner that owns and operates four refineries serving the Rockies, midcontinent, and Southwest, with a total crude oil throughput capacity of 405,000 barrels per day. It is converting its Cheyenne petroleum refinery to renewable diesel. It also has a 57% ownership stake in Holly Energy Partners, which owns and operates petroleum product pipelines and terminals principally in the Southwestern United States.

2828 North Harwood, Suite 1300
Dallas, TX, 75201
T +1 214 871-3555
Sector Energy
Industry Oil & Gas Refining & Marketing
Most Recent Earnings Mar 31, 2021
Fiscal Year End Dec 31, 2020
Stock Type Distressed
Employees 3,891