Have HollyFrontier Earnings Peaked for Good?

HollyFrontier (NYSE: HFC  ) will release its quarterly report on Wednesday, and after years of strong performance from the stock, shareholders have to be surprised by the weak returns the shares have delivered recently. But some troubling issues hurting HollyFrontier earnings appear poised to continue for the foreseeable future, and that could prevent a rebound in the stock unless they unexpectedly get resolved.

Refining stocks have been among the biggest beneficiaries of the energy revolution in the U.S., as domestic production of crude oil reduced their input prices and gave refineries cheap sources of the raw materials they need to produce gasoline, diesel, and other refined energy products. Yet recently, prices of U.S. crude have risen much more quickly than prevailing oil prices on the world markets, and that narrower spread has taken away much of the competitive advantage that HollyFrontier and other refineries that took advantage of cheap U.S. crude enjoyed. Let's take an early look at what's been happening with HollyFrontier over the past quarter and what we're likely to see in its quarterly report.

Stats on HollyFrontier

Analyst EPS Estimate

$1.41

Change From Year-Ago EPS

(41%)

Revenue Estimate

$4.55 billion

Change From Year-Ago Revenue

(5.4%)

Earnings Beats in Past Four Quarters

2

Source: Yahoo! Finance.

How far will HollyFrontier earnings fall?
Analysts have slashed their views on HollyFrontier earnings in recent months, cutting their June-quarter estimates by $0.50 per share and reducing full-year 2013 expectations by $1.75 per share. The stock has responded as you'd expect from such dour predictions, although declines of less than 5% since early May aren't as severe as some of its peers have experienced.

HollyFrontier set the stage for its poor quarter back in May, when the company announced its first-quarter results. The company fell short on earnings expectations, and even though planned shutdowns and maintenance work played a role, falling spreads between global and domestic oil prices also hurt earnings. With HollyFrontier having enjoyed huge margins from its midcontinent operations, it and peer Western Refining (NYSE: WNR  ) are arguably at greater risk than rivals Valero (NYSE: VLO  ) and Phillips 66 (NYSE: PSX  ) , because the latter two have a greater ability to export their products to higher-margin markets rather than selling with the domestic U.S. gasoline and refined-products market.

The other major problem HollyFrontier has faced involves EPA regulation and requirements for renewable fuel credits. With HollyFrontier CEO Mike Jennings having called the market for such credits a "casino" because of the participation of speculative players like hedge funds, the threat is that requirements to blend renewable fuels into marketable gasoline will squeeze refiners' margins. HollyFrontier said recently that it could see a 9% hit to operational cash flow because of the credits, again due in part to its lack of export markets by which it could avoid the regulations.

In the HollyFrontier earnings report, watch to see how the company's numbers fare compared to Valero, which reported earnings late last month. If HollyFrontier's midcontinent margins drop as much or more than the 18% decline that Valero saw, it could spell continuing trouble for HollyFrontier's stock.

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