How Will the Bond Issue Affect HFC’s Leverage?



Peer comparison

HFC’s net debt to EBITDA (earnings before interest, tax, depreciation, and amortization) stood at 0.52x in 4Q15. This is lower than the industry average ratio of 1.1x.

In calculating the industry average, we have considered 11 American refining companies including Delek US Holdings (DK), PBF Energy (PBF), and Western Refining (WNR). For broad-based exposure to energy sector stocks, investors can consider the Energy Select Sector SPDR Fund (XLE). In 4Q15, HFC’s total debt-to-capital ratio stood at 15.2%, which is lower than the industry average of 35.3%.

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Net debt to EBITDA is rising

HollyFrontier’s (HFC) net debt to EBITDA ratio rose from -0.43x in 4Q13 to 0.52x in 4Q15.

HollyFrontier had negative net debt in 4Q13 due to higher cash and equivalents including marketable securities compared to total debt. HFC’s net debt turned positive during the period between 4Q13 and 4Q15 due to a steep fall in cash. HFC’s cash fell to $210 million, but the total debt rose to $1,040 million in 4Q15. The decline in cash and the rise in total debt was to fund capex, pay dividends, and buy back shares. This led to a rise in net debt to $829 million in 4Q15.

In 2015, EBITDA rose on account of higher earnings in HFC’s refining segment. However, a steeper rise in net debt compared to EBITDA from 4Q13 to 4Q15 led to a rise in the net-debt-to-EBITDA multiple.

Impact of bond issue on HollyFrontier’s leverage

On March 22, 2016, HFC completed its public offering of $250 million of senior notes due in 2026. This bond issue is likely to raise the company’s total debt more. This, in turn, is likely to push up the leverage curve. But to what extent? It depends on the changes in the future earnings compared to changes in the net debt levels.

Even though HFC’s leverage ratios are lower than its peers, this situation raises the question: To what extent can rising debt be sustained in a cyclical refining margin environment? Ascertaining that limit will be imperative for HollyFrontier to maintain its financial stability going forward. This is a key point investors will be watching.


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