Last week, HollyFrontier (HFC) was the latest refining company to post extraordinarily strong earnings on the back of a fantastic operating environment. Also like several of its peers, HollyFrontier's management is going to great lengths right now to boost shareholder returns through some very ambitious shareholder return programs. Let's take a quick look at the company's earnings and how the company is translating its strong operational performance as of late into large shareholder-friendly initiatives.
By the numbers
| Metric | Q3 2015 | Q3 2014 | % Change |
|---|---|---|---|
| Gross profit (revenue-cost of goods sold) | $706.5 | $691.6 | 2.1% |
| EBITDA | $404.6 | $369.2 | 9.5% |
| Net income | $196.3 | $175 | 12% |
| EPS | $1.04 | $0.88 | 19% |
Source: HollyFrontier earnings release. Dollar amounts in millions, except per-share data.
One thing to note in these earnings is that the company did also take a one-time after-tax charge of $146.3 million to write down the value of some of its inventories, without that charge. Net income for the quarter would have been $1.82 per share.
Strong operational performance, even stronger shareholder initiatives
HollyFrontier, like just about every refining company this quarter, benefited immensely from high refinery margins across the United States. This past quarter, refining gross margins were $19.85 across all of its refineries.
| Company | Refining Gross Margins | Operating Costs per Refined Barrel | Utilization Rate |
|---|---|---|---|
| HollyFrontier | $19.85 | $5.05 | 103.9% |
| Marathon Petroleum (MPC -0.26%) | $17.27 | $5.27 | 101% |
| PBF Energy (PBF -0.37%) | $12.97 | $4.57 | 87.9% |
Source: Company earnings releases.
HollyFrontier was able to realize strong margins thanks to its strong operational performance and its ability to access crudes much more cheaply than its peers, thanks to refinery locations. This situation helped the company make up for middle-of-the-road operating costs per barrel refined.
Gross refining margins will come and go with the price differences between crude oil and refined products, but access to disadvantaged crude sources and strong performance across HollyFrontier's operations should allow it to perform well in almost all market environments.
Another aspect that really stood out this quarter is the company continues to buy back shares at a breakneck pace. Over that three-month time frame, management bought back $402 million in shares, $300 million of which came from the company's accelerated repurchase program that will buy back $1 billion in shares at management's discretion. This year alone, HollyFrontier has reduced its share count by 11 million. Since the merger back in 2011, HollyFontier has retired more than 11% of its shares outstanding.
HFC Total Return Price data by YCharts
Share repurchases are a pretty common theme among refiners right now. PBF Energy has a $200 million buyback plan in place, and Marathon Petroleum's board has approved a whopping $10 billion repurchase program. Some might argue that these companies are buying shares at the top of the market, though. All three of these companies' shares are trading at or near multiyear high prices.
But now that they're flush with cash and a favorable operating environment, it's hard to argue too much against having these companies use their cash in shareholder-friendly ways.
What a Fool believes
HollyFrontier has established a pretty decent track record of delivering solid results in almost all operating environments, and in doing so it has generated some of the best returns in the refining business.
Source: HollyFrontier investor presetntaion.
This past earnings report was another example of how the company is able to do this. As long as management continues to allocate capital as wisely as it has in recent years and reward shareholders with its strong dividend and generous share-repurchase programs, then investors should sleep well owning shares of HollyFrontier.
