If the current refining environment in the U.S. wasn't tough enough right now, HollyFrontier (HFC) made it even harder for itself this past quarter by electing to shut down a significant portion of its capacity for maintenance work. That decision resulted in a loss this past quarter.
Taking a loss today isn't necessarily a bad thing, though. Let's take a look at the company's most recent results, why management decided to do so much maintenance right now, and how that could potentially set the refiner up well for the rest of the year.
By the numbers
|Results*||Q1 2017||Q4 2016||Q1 2017|
This quarter was a tough one, especially for the refining business. Refining margins alone were lower for the quarter as product costs increased, and HollyFrontier didn't help its situation by running a less-than-ideal feedstock and product mix. It used more light, sweet crude oil than normal -- light, sweet crude is typically more expensive than more sour or heavier crude varieties. Also, the product mix was a little disadvantageous as it produced more low-margin products -- think jet fuel and asphalt -- than higher-margin gasoline and diesel.
There was a pretty good reason for this, though. Management elected to do a lot of turnaround and maintenance work in the quarter. That included its Navajo refinery complex and its Tulsa facility. Furthermore, there was an issue with a supply pipeline for its Woods Cross facility, so utilization rates were lower than normal.
The other business units at HollyFrontier performed reasonably well this past quarter, though. Its Petro-Canada Lubricants business, which HollyFrontier purchased from Suncor Energy late last year, more or less met expectations for the quarter. Its equity investment in subsidiary partnership Holly Energy Partners maintained a steady pace aside from an early debt extinguishment charge.
What management had to say
CEO Goerge Damiris commented on the significant amount of maintenance activity this past quarter and how it should set the company up well:
First quarter crude rate was negatively impacted by our planned turnaround at Navajo, planned maintenance at the El Doradovacuum tower, unplanned maintenance at the Tulsa CCR [catalytic] reformer, and the crude supply pipeline outage to our Woods Cross refinery. We are pleased with the results from the Navajo turnaround and the efficiency and debottleneck projects that were implemented during the turnaround. During the Tulsa outage, we were able to accelerate other maintenance and a catalyst upgrade originally planned for later this year, all of which will allow us to benefit from higher liquid yields and octane during the summer driving season. We are also encouraged by the results we have begun to see from our focused efforts to improve operations and reliability at Cheyenne; crude rate was over 48,000 barrels per day in March. With no major planned downtime until November, our refineries are well positioned for strong operational and financial performance for the remainder of the year.
Damiris also noted on the performance of its most recent acquisition:
We closed the PCLI [Petro-Canada Lubricants] acquisition on February 1st and PCLI continues to meet or exceed our expectations. Adjusted EBITDA for February and March was $28.0 million, in line with our annual guidance range. We remain confident in our $20.0 million per year synergy target and in the potential for significant margin uplift by increasing Group III base oil production through feedstock optimization. We are excited about our growing presence in the lubricants industry and are encouraged by our progress integrating PCLI into HFC.
What a Fool believes
Oil refining has been a tough business in the U.S. lately, and the only real way to turn a profit in a low-margin environment is to run at a high utilization rate. Unfortunately, refiners also have to shut down facilities for routine maintenance. These factors can leave HollyFrontier's management in a pickle as to what to do. This past quarter, the company elected to shut down and do maintenance.
Making that decision in today's refining environment might be a good idea. Margins have been depressed lately because of high inventory levels of refined products suppressing prices. By electing to shut down some refining units, that lowers total production capacity and should force a drawdown of inventories. Couple lower inventories with freshly maintained and upgraded facilities, and it wouldn't be surprising if we see a nice turnaround over the next few quarters.
HollyFrontier's management has a reputation for running efficient operations and being good stewards of capital. There is nothing in this earnings report that should change that view. The most important factor for investors to watch now is to see how well management progresses with the integration of Petro-Canada.