HollyFrontier (HFC) is expected to release its second-quarter results on August 1. Before we proceed with the second-quarter estimates, let’s recap HollyFrontier’s first-quarter performance versus the forecast.

Will HollyFrontier’s Q2 Results Improve?

HollyFrontier, in its earnings release, stated that its first-quarter revenue was $3.9 billion, which exceeded Wall Street analysts’ mean estimate by about 18%. Also, the company’s adjusted EPS of $0.54 beat Wall Street analysts’ estimated EPS of $0.43 by around 26%. But the adjusted EPS declined by 30% YoY in the first quarter.

Further, HollyFrontier’s net income attributable to its shareholders declined from $268 million in Q1 2018 to $253 million in Q1 2019. Also, the company’s adjusted EBITDA decreased by 11% YoY to $282 million in Q1 2019, which was due to weaker Refining and Lubricants & Specialty Products’ earnings partly offset by better HEP (or midstream) earnings. To learn more, read HollyFrontier’s Refining and Lubricants Earnings Fell in Q1.

HollyFrontier’s second-quarter estimates

Analysts expect that HollyFrontier could post EPS of $1.61 in the second quarter, which is 11% higher than its adjusted EPS in the second quarter of 2018 and 198% higher than its adjusted EPS in the first quarter of 2019. Plus, HollyFrontier’s revenues are expected to be $4.2 billion in the second quarter, which is around 5% lower than its revenues in the second quarter of 2018.

HollyFrontier is the only company expected to post a rise in earnings in the second quarter. Peers’ earnings are estimated to decline. Valero Energy and Phillips are expected to post 23% YoY and 5% YoY lower EPS, respectively, in the second quarter. Marathon Petroleum and Delek US Holdings’ earnings are estimated to fall by 38% YoY and 27% YoY. PBF Energy’s EPS could decrease from $1.38 in the second quarter of 2018 to $0.99 in the second quarter.

In the second quarter, HollyFrontier’s refining index values rose, which could positively affect the company’s refining margin. Plus, lower renewable identification number prices in the quarter could reduce the company’s compliance costs. However, HollyFrontier’s earnings could be impacted by narrower oil spreads in the quarter. Let’s look at these in detail.

HollyFrontier’s refining earnings outlook for Q2

In the first quarter, HollyFrontier’s Refining segment’s adjusted EBITDA fell by 4% YoY to $193 million in Q1 2019. This was due to the decline in the company’s refining margins and throughputs. HollyFrontier’s refining margin dropped from $12.8 per barrel in Q1 2018 to $12.7 per barrel in Q1 2019. Now, let’s discuss HollyFrontier’s estimated refining earnings trend in the second quarter. HollyFrontier’s (HFC) refining index values point towards the refining crack conditions in the regions where the company operates.

Will HollyFrontier’s Q2 Results Improve?

Index values trend in Q2 2019

In the second quarter, HollyFrontier’s index values rose year-over-year across its operating regions of Midcon, Rockies, and Southwest. The Midcon, HollyFrontier’s largest refining region, has the El Dorado and Tulsa refineries. HollyFrontier’s Midcon region accounted for 53% of the company’s total crude throughput in the first quarter. HollyFrontier’s Midcon index value rose by $1.8 per barrel YoY to $20.0 per barrel in the second quarter. So, the rise means the industry crack in the Midcon has increased in the second quarter.

Besides, the Rockies and Southwest accounted for 20% and 27% of the company’s throughput in the first quarter. The Rockies’ value rose by $3.6 per barrel YoY to $32.2 per barrel in the second quarter, which points to a higher industry crack in the Rockies. Similarly, the index value in the Southwest rose from $30.3 per barrel in the second quarter of 2018 to $31.3 per barrel in the second quarter.

So, the YoY rise in the refining index values in all three regions point towards stronger refining cracks for HollyFrontier in the second quarter.

Narrower oil spreads

Narrower oil spreads could impact HollyFrontier’s refining margin. HollyFrontier can refine WTI-Midland crude and sour Canadian crude in its refineries, which trade at a discount to WTI-Cushing. The use of discounted crude can support HollyFrontier’s refining margin and earnings. In the first quarter, HollyFrontier refined 65,000 barrels per day of Canadian oil and 171,000 barrels per day of Permian crude in its refineries.

In the second quarter, the Midland oil spread stood at $2.3 per barrel, which was about 71% lower than the second quarter of 2018. Also, the Canadian spread at $12.4 per barrel was 30% YoY lower in the second quarter. The narrowed spreads could impact HollyFrontier’s refining earnings in the second quarter.

Mixed trend in peers’ refining margin indicators

In the second quarter, Valero Energy’s (VLO) regional refining crack indicators fell YoY in two of its four operating areas. The US Gulf Coast and North Atlantic indicators fell by 14% YoY and 9% YoY, respectively, in Q2 2019. Plus, four out of five of Valero’s oil spreads declined year-over-year in the quarter. Weaker indicators suggest lower refining earnings for the company in the second quarter.

Further, Marathon Petroleum’s refining margin indicators show a mixed trend. While the company’s sweet differential and sour differential narrowed by 20% YoY and 74% YoY, the blended crack rose by 17% YoY.

However, the benchmark crack, the USGC WTI 3-2-1, rose 9% YoY to $20 per barrel in the second quarter. The US Gulf Coast is a significant refining area for Phillips 66 (PSX), which accounts for around 36% of its crude oil throughput. The rise in the USGC WTI 3-2-1 crack could support Phillips 66’s refining margin and earnings.

HollyFrontier: Analysts’ ratings

Will HollyFrontier’s Q2 Results Improve?

17 Wall Street analysts have rated HollyFrontier (HFC). Among the analysts, three (or 18%) rated it a “buy” or “strong buy,” 11 (or 65%) rated it a “hold,” and three rated it a “sell” or “strong sell.”

Peers Marathon Petroleum and Valero Energy have been rated as a “buy” by 94% and 84% of analysts, respectively. Delek US Holdings, Phillips 66, and PBF Energy have been rated as a “buy” by 47%, 72%, and 50% of analysts, respectively.

Recently, Jefferies decreased its target price on HollyFrontier stock from $50 to $49. Also, Cowen and Company cut its target price on the stock from $55 to $49. HollyFrontier’s mean target price is $55 per share, which implies about a 14% gain from the current level.

Analysts expect lower earnings in 2019

Wall Street analysts estimated HollyFrontier’s earnings to fall in 2019 due to lower oil spreads, which could result in lower refining profits for the company. Its growing Lubricant segment is expected to face lower base oil cracks in 2019, which could result in weaker rack back lubricant earnings for the company. Thus, lower refining earnings and weaker rack back earnings could lead to a fall in the company’s profits in 2019. Analysts predict HFC’s earnings to fall 29% in 2019.

In the first quarter, HollyFrontier’s Lubricants segment’s adjusted EBITDA declined by 51% YoY to $20 million due to the fall in rack back as well as rack forward earnings. Also, the lubricant segment’s earnings included two months of earnings from Sonneborn, which the company acquired in the first quarter. This acquisition strengthened HFC’s position in the lubricants industry.

HollyFrontier has strong financials and robust growth activities

HollyFrontier has maintained its focus on growth activities. The company continues to expand its lubricant segment, modernize its refining operations, and strengthen its midstream operations. HollyFrontier has strong financials to continue its expansion spree. The company has a comfortable debt position and a decent cash flow position.

Overall, analysts hold mixed opinions on HFC likely due to its healthy financials offset by its lower earnings outlook.

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