HollyFrontier Eats Up Perpetual $3-Plus Gas

by Aaron Levitt | September 18, 2013 11:42 am

For 1,001 consecutive days, Americans have paid an average of $3 per gallon of gas or more — and that streak isn’t going anywhere.

Even with issues in Syria beginning to cool down, the current average of $3.52 per gallon of regular gas is only about a nickel per gallon less than the average so far this year. More importantly, AAA forecasts that this price floor of $3 a gallon is basically here to stay[1] unless we have another major recession.

AAA President and CEO Bob Darbelnet perhaps said it best:

“Paying less than $3 per gallon for gasoline may be automotive history for most Americans, like using 8-track tapes or going to a drive-in movie.”

That relatively high price for fuel has begun to put the crimp on consumer spending and retail sales. However, it’s been awesome for those making the fuel.

Over the longer haul, $3 gasoline puts a nice floor on what these refiners can earn. So while profits currently are down at major refiners — due to rising oil prices — now could be the best time to strike on the sector given the longer-term picture.

Refiners have been feasting on high gas prices as well as juicy crack spreads on the various West Texas Intermediate and Mid-Continent crude oil feedstocks. Some of the feedstock cheapness has gone away in recent months due to the removal of infrastructure bottlenecks[2]. However, high gas prices are enabling the refining set to continue pumping out high profits — just not as high as a year ago.

Data provided by the Energy Information Administration and analytic firm Sageworks shows that for every $50 the average American spends at the pump, roughly 8% (or about $4) goes right into the refiner’s pockets[3]. Taking out costs to actually refine the fuel, a barrel of gasoline produces profit margins in $10 to $20 range for the downstream firms — well above the sector’s historical average margins of about $5 per barrel.

Perhaps more importantly for today’s investors, rising gasoline exports to nations like Brazil have hit record amounts. Since gasoline is a global commodity, those rising exports and demand will ultimately help see higher gas prices here at home — no matter what our overall local demand is. This means more steady profits — and dividends — for downstream shareholders.

A Prime Downstream Pick

HollyFrontier (HFC[4]), whose refineries are all located in the American Midwest, has been one of the biggest beneficiaries of cheap crack spreads and high gasoline prices. The refiner has some of largest profit margins per barrel — currently above $20 — and could be one of the best ways to play higher overall gas prices due to exports.

Shares of HFC have fallen about 8% in the past several weeks as investors have fled the sector thanks to the fact that the WTI-Brent crack spread trade is now considered “dead.” However, that drop is substantially less than other Gulf Coast-based refiners such as Tesoro (TSO[5]) and Marathon Petroleum (MPC[6]). Both have fallen about 20% in the same time frame.

HollyFrontier should be able to handle the dwindling spread better since its transportation costs are much lower than its rivals. Some of that comes courtesy of its ownership of master limited partnership subsidiary Holly Energy Partners, LP (HEP[7]). The rest is due to that fact that it is smack-dab in the middle of shale oil country.

That huge benefit has resulted in better-than-average profit margins per barrel, as well as better-than-average dividends for shareholders. HFC sports a rapidly growing 2.9% payout, besting the bulk of its rivals. That’s important considering the dead crack-spread trade could put a damper on much of the capital appreciation on the downstream players.

The key here is that the refiners are once again back to being boring cash flow and dividend plays — not sexy, but still worthwhile.

With high gasoline and other distillate prices almost guaranteed, HollyFrontier seems like the best way to play that trend do its location and high dividend.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

  1. price floor of $3 a gallon is basically here to stay: http://www.usatoday.com/story/money/cars/2013/09/16/gas-prices-thousand-days/2821351/
  2. infrastructure bottlenecks: https://investorplace.com/2013/09/kinder-morgan-report-just-a-yawn/
  3. goes right into the refiner’s pockets: http://www.cnbc.com/id/100476690
  4. HFC: http://studio-5.financialcontent.com/investplace/quote?Symbol=HFC
  5. TSO: http://studio-5.financialcontent.com/investplace/quote?Symbol=TSO
  6. MPC: http://studio-5.financialcontent.com/investplace/quote?Symbol=MPC
  7. HEP: http://studio-5.financialcontent.com/investplace/quote?Symbol=HEP

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