As I've noted before, when it comes to refining stocks, it's great to own the company whose facilities are not bursting into great balls of fire. Monday's explosion at an Alon USA (NYSE: ALJ ) refinery took shares down a peg when trading resumed on Tuesday; meanwhile, the rest of the group advanced briskly. The explosion in the share price of Holly Corp. (NYSE: HOC ) , which competes with Alon in the Permian Basin, probably had just as much to do with the company's unexpectedly strong results for the fourth quarter.
Like Frontier Oil (NYSE: FTO ) , Holly operates two refineries, so its results are pretty easy to parse.
At the Navajo facility in New Mexico, utilization significantly improved compared to the disappointing third quarter. Crack spreads narrowed about 25%, from $10.66 per barrel to a nickel under $8. That's a pretty big bite, but lower operating expenses prevented net operating margins from getting gored. For the year, margins were actually modestly higher. Also, because Navajo produces gasoline that exceeds EPA requirements, this refinery also generates significant sulfur credits. Sales of these credits generated $23 million in revenue during the year, but this figure doesn't show up in Navajo's results.
Utah's Woods Cross refinery, which Holly picked up from ConocoPhillips (NYSE: COP ) back in 2003, had another strong outing. While margins slipped sequentially, they were higher versus the prior year. Ditto for the full year's results.
Woods Cross has a significant position near the Uinta Basin, which holds large reserves of "black wax" crude oil. This lower-grade crude can't be transported beyond Salt Lake City, or else it solidifies. Black wax also competes with heavy Canadian crude, so producers find themselves with far more black wax than they can economically sell. Understandably, local producers Newfield Exploration (NYSE: NFX ) and Berry Petroleum (NYSE: BRY ) are eager to sign supply contracts with Holly, as the refiner increases its ability to convert the stuff into gasoline and diesel fuel.
Strategically, Holly reminds me of both Frontier and Valero Energy (NYSE: VLO ) . The company has smart expansion plans under way, but cash generation far exceeds capex needs. Thus, the company has repurchased over 20% of outstanding shares since initiating a buyback. My Foolish advice is to stick with this shareholder-friendly group.
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