Why HollyFrontier’s Refining Margin Is Likely to Fall in 4Q15



HFC’s refining margin trend

In the previous part of this series, we discussed the estimated 4Q15 numbers for HollyFrontier Corp. (HFC). In this post, we’ll examine HFC’s refining margin trends. Plus, we’ll look at the fourth quarter refining margin outlook.

In the past few quarters, the rise in gross refining margins, or GRMs, has led to a steep surge in refiners’ earnings. HollyFrontier Corp. (HFC) noted a rise in GRM from $4.3 per barrel over 3Q14 to $19.9 per barrel in 3Q15. Operating costs fell by around a dollar per barrel leading to an increase in net refining margin from $5.2 per barrel in 3Q14 to $14.4 per barrel in 3Q15. Plus, in 3Q15, HFC’s refinery throughput rose 13% to 493 Mbpd (thousand barrels per day).

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HFC’s peers’ GRMs have also risen. Marathon Petroleum Corporation (MPC), Tesoro Corporation (TSO), and Phillips 66’s (PSX) GRMs widened by $2.7, $5.6, and $3.1 per barrel over 3Q14 to $17.3, $20.5, and $14 per barrel in 3Q15. The Energy Select Sector SPDR Fund (XLE) has ~7.4% combined exposure to MPC, TSO, and PSX.

HFC’s refining margin outlook

In 4Q15, HFC’s refining index values, which are regional crack indicators in the areas where HFC operates, have slumped from 3Q15. The index value in Midcon stood at $13.6 per barrel in 4Q15 compared to $22 per barrel in 3Q15. Similarly, the Rockies and Southwest index values stood at $17 per barrel and $18 per barrel, respectively, in 4Q15 compared to $33 per barrel and $28.8 per barrel in 3Q15. These changes point to a likely decline in HFC’s GRM in 4Q15 compared to 3Q15.

But HFC’s index values have risen in 4Q15 compared to 4Q14. In the fourth quarter of 2015, Midcon, Rockies, and Southwest index values rose $0.3, $0.8, and $1.9 per barrel, respectively, over the same period last year.


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