Shares of HollyFrontier Took It on the Chin in May. Why, Exactly?

Despite some positive signs that would suggest better results at HollyFrontier, shares took a dive last month.

Tyler Crowe
Tyler Crowe
Jun 5, 2017 at 12:13PM
Energy, Materials, and Utilities

What happened

In a month where one might have assumed refining stocks would start to look better, shares of HollyFrontier (NYSE:HFC) and its subsidiary partnership, Holly Energy Partners (NYSE:HEP), both dropped by double digits in May. What is surprising about this is that many of HollyFrontier's bigger competitors didn't experience such large declines.  

So what  

HollyFrontier and Holly Energy Partners didn't exactly start off on the right foot last month. Both reported earnings that were a little disappointing because of unplanned outages and other turnaround work that significantly decreased refinery output. Typically, this wouldn't be as much of an issue for Holly Energy Partners since it is mostly a transportation and logistics company, but late last year it purchased some of HollyFrontier's refining assets at the Woods Cross facility in Salt Lake City. The deal -- designed to free up some cash so that HollyFrontier could acquire Suncor Energy's lubricant facility -- now makes Holly Energy Partners' results much more at risk in the event of a shutdown at the Woods Cross facility. 

Pipeline headed into refinery

Image source: Getty Images.

So perhaps Wall Street was reacting to this news, but it seems a bit odd to see shares stumble like this considering recent data. Over the past month, two things have happened that should work in HollyFrontier's favor. One is that refined product inventories are starting to come down and the other is crude oil prices are on the way down. Both of these events should result in a larger price spread between crude oil feedstocks and refined products. 

Another element that should suggest that HollyFrontier could be headed for better times is that management capitalized on all of those operational hiccups last quarter to do some upgrading and turnaround work at its facilities. Management estimates it can run all of its facilities until November without any planned downtime. If that can be done while gasoline demand is high and crude oil prices are on the slide, the company could produce some much-improved results. 

HFC Chart

HFC data by YCharts.

Now what

The refining business is a tough one, but HollyFrontier's and Holly Energy Partners' management teams have proven to be adept at working through the ups and downs of the business cycle and prudently allocating capital. In fact, the purchase of Suncor's lubricant facility is an excellent example of buying when assets are cheap and avoiding the trap of making acquisitions when prices are high. With HollyFrontier and Holly Energy Partners sporting dividend yields of 5.5% and 7.9%, respectively, this past month's stock slide could be the buying opportunity investors have been waiting for.