HollyFrontier (NYSE:HFC) is a good-sized refiner that has operations in many of the top shale fields in the U.S.
What’s more, as you have seen from oil prices, the difficult days of a slow global economy and tough competition from OPEC are no longer an issue. That has helped HFC stock score a 100%-plus gain in the past 12 months.
The most important aspect of refiners from an investment point of view is their margins — i.e., how much the raw material costs and how much they can sell it for to the wholesale market.
This is driven by demand. And when the economy is going well, HFC’s success is leveraged since its refining costs are pretty well fixed and as long as the prices on the back end are rising, so are its margins.
Even as OPEC has begun to pump more, it’s not really affecting the price of West Texas Intermediate (WTI), which is the benchmark price for U.S. oil. This is a good thing since it means that the “upstream” exploration and production firms (E&Ps) are getting prices that still make it profitable for them to bring the oil from the ground.
That’s good for HFC since it has a steady input with relatively steady prices now. HFC also sells off the various offshoots of the refining process to other vendors. For example it also sells specialty and modified asphalts as well as oil-derived lubricants for third parties.
HFC Stock Has a Strong History
HFC has been around since 1947, so it has seen its fair share of market dynamics, including the great oil embargo of the 1970’s. But refining is a survive and thrive kind of sector. When things are good, you’re thriving. But when things are bad, you’re simply surviving. But the fact is, a lot of refiners have come and gone during these feast and famine cycles. Not HFC.
And in the good times, the margins are thick. HFC usually can build a substantial cash pile so it can better endure the lean times. That cash also comes in handy to snap up other refiners to consolidate the business when the good times return.
Right now, the refining sector is going through a period of consolidation and prices for some of the prized refiners are getting a bit rich. HFC is one of the few independents that could still step up to the plate, but the question is whether it’s better to wait and let the market cool a bit before buying at a premium.
It’s these kinds of issues where having a seasoned management team with years of experience helps keep it all in perspective. And that’s another advantage of HFC.
For example, Q2 wasn’t a good one for HFC. Three of its five refineries were shut down at one point or another for maintenance, which lowered its production. And when you’re not refining, you’re not making money.
Refinery gross margins dropped 28% in the quarter and earnings fell by 48%. The stock has sold off, which makes this a good time to step in. The U.S. energy patch is in a growth mode, as is the economy, which are very bullish for HFC. It’s also just a handful of pure plays on refiners, which is one of the best sectors to be in as energy demand rises.
Louis Navellier is a renowned growth investor. He is the editor of four investing newsletters: Growth Investor, Breakthrough Stocks, Accelerated Profits and Platinum Growth. His most popular service, Growth Investor, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.