Looking at the refinery sector right now, one well known Warren Buffett quote springs to mind, “Be fearful when others are greedy and greedy when others are fearful.”
I have commented on the value on offer at HollyFrontier Corp (NYSE:HFC) before, but right now the company appears to offer even more value after the stock and indeed the sector as a whole has fallen out of favor with investors due to falling profit margins.
However, looking closely at HollyFrontier Corp (NYSE:HFC)’s Q2 10-Q, it becomes obvious that the company is actually creating value.
HollyFrontier financial analysis
For a start, HollyFrontier Corp (NYSE:HFC) paid down $346 million in debt during the quarter, boosting total stockholders’ equity by 4%. This debt was paid down by cash on hand but current assets still cover total liabilities 1.2 times. The reduction in debt resulted in a 27% fall in interest costs from the same period last year.
Moreover, while income from operations has declined 19% compared to the first six months of 2012, cash flow from operations has actually expanded by 5%, and surprisingly the company’s cash conversion ratio has nearly doubled from 31% during the first six months of 2012, to 50% during the first six months of this year.
Cash and marketable securities are still worth $9.9 per share and the reduction in debt has increased the company’s book value from $32.9 per share, to $34.8 per share, indicating that at current prices, the price-to-book value has fallen from 1.36 to 1.28. That said, the company’s current ratio has deteriorated slightly from 2.7 at the end of 2012, to 2.4 currently.
Elsewhere, the company’s dividend payouts look to be fairly secure. Free cash flow covers the total amount of dividends paid out for the first six quarters of the year at least once, including special dividends. Over the past year the company has paid out $2.95 per share in dividends, an annualized yield of 6.6%.
If HollyFrontier Corp (NYSE:HFC) achieves its predicted EPS of $5.50 for this year, the company will be trading at a forward earnings multiple of 8, which when combined with the new higher book value per share, gives a graham value of $65.5, a 45% premium to the company’s current share price.
HollyFrontier points to ‘light, sweet’ oil flows from Oklahoma
HollyFrontier Corp (NYSE:HFC) is creating value for shareholders despite falling profits, however, it is not irrational to believe that profits could deteriorate further if the Brent-WTI spread continues to contract. That said, HollyFrontier’s management remains upbeat and states within the Q2 report that:
“Differentials are likely to continue to be volatile in the near term. However, we expect the Brent to WTI differential to reemerge upon completion of additional northern tier pipeline capacity into Cushing, Oklahoma, which we believe will overwhelm Gulf Coast processing capacity with light sweet crude oil flows.”
So, management is positive about the company’s future outlook as a return of a wide Brent-WTI spread will once again send HollyFrontier’s earnings skywards. With revenues at five-year highs and debt being eliminated HollyFrontier Corp (NYSE:HFC) and its investors look set to receive a big payoff when the Brent-WTI differential returns.