Refiners in the U.S. are struggling to make profits because of high input costs that can't be passed on to end consumers. They'll never go out of business en masse, simply because you can't fill your gas tank with crude oil. They can do a lot of trimming and cost-cutting, but in the long run, the smarter players that have solid business models and are fortunate enough to obtain cheaper crude oil will turn out to be the best oil companies to invest in.

Dallas-based HollyFrontier (NYSE: HFC) may be one of those companies. Its latest quarterly earnings seem to put it a cut above the rest and could be indicative of exciting prospects that the market has yet to factor in.

This is what I call increasing value
Following Holly's merger with Frontier last July, overall efficiency improved significantly in terms of refinery utilization, which now stands at 92%. That's a remarkable jump of 13 percentage points from last year's first quarter, and that's why I believe the company is capable of increasing shareholder value.

For the first quarter this year, total revenue came in at $4.9 billion, with a gross margin of 10.2%. Fellow refiners just weren't that efficient; with Marathon Petroleum (NYSE: MPC) at 8%, Western Refining (NYSE: WNR) at -0.6%, and Valero Energy (NYSE: VLO) at 2.6%. At efficient HollyFrontier, net income came in at $247 million, or $1.16 per diluted share, a 48% improvement over the $0.79 per share a year ago, before the merger.

The best-performing HollyFrontier refineries were the mid-continental El Dorado and Tulsa locations, which had a combined utilization of almost 99%, up from 84% last year. Their proximity to the West Texas Intermediate, or WTI, crude oil hub of Cushing, Okla., has played a crucial part in reducing input costs. Refinery expenses fell 20% to $4.81 per barrel. At the same time, net operating margin shot up 47% to $13 per barrel. These two refineries account for more than 60% of HollyFrontier's total crude processing volumes.

Strategic advantages
The best thing about HollyFrontier's refineries is that all of them are located close to crude oil producing areas, thus cutting down on transportation costs. They also source WTI blend crude oil, which is cheaper. Despite a lower spread between the Brent variety and WTI in the past few months, management is confident that North American crude oil production will continue to grow, an outlook that I believe is very much in line with general industry predictions. By 2016, crude oil production is estimated to go up 56% from 2011 levels. In short, HollyFrontier's long term prospects seem to be among the best in the refining and marketing space.

In terms of returning value to shareholders, HollyFrontier has done a decent job so far. Since the turn of the year, it has returned $219 million through dividends and share repurchase programs.

Foolish bottom line
As the market has been bashing the refining industry, HollyFrontier is down close to 10% over the past six months. The stock seems to be undervalued at this point, so investors should keep an eye on it. Add the company to your free personalized Watchlist.

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