For an industry that is supposed to be in the dumps right now, oil refiner HollyFrontier (HFC +0.00%) put together a second quarter that really exceeded expectations. Part of that has to do with a recent acquisition, but it also helped that management shored up one of its weakest-performing business segments.
Here's a review of HollyFrontier's most recent results, what went right this quarter, and whether we can expect performance like this to continue.
Image source: Getty Images.
By the numbers
| Metric | Q2 2017 | Q1 2017 | Q2 2016 |
|---|---|---|---|
| Revenue | $3.4 billion | $3.1 billion | $2.7 billion |
| Operating income | $121.6 million | ($32.7 million) | ($420.5 million) |
| Net income | $57.7 million | ($45.4 million) | ($409.3 million) |
| EPS | $0.33 | ($0.26) | ($2.33) |
Data source: HollyFrontier earnings releases.
HollyFrontier has long prided itself as a geographically advantaged and efficiently operated oil refiner. This quarter, we got to see that geographic advantage in action. Most other independent oil refiners that have reported earnings have shown weaker gross margins. HollyFrontier's refineries in the Permian Basin and the Rocky Mountains, however, were able to take advantage of lower crude oil costs and selling to constrained retail markets to produce a gross profit margin of $11.47 per barrel.
Another big contributing factor to this surprising earnings result was its high refinery utilization rate. HollyFrontier was able to run its entire refining operation at a utilization rate of 102%. This run rate was well above the prior quarter's, which came in at 81% because of a heavy slate of maintenance and turnaround work.
What was so encouraging about this performance was that the company was able to get great results from its Rocky Mountain refining segment. This segment has historically been the weakest of the business, but management has dedicated some extra time to these refineries lately. As a result, the combined utilization rate for its Cheyenne and Woods Cross refineries increased from 67% to 77% and produced a $19.47-per-barrel gross margin. There is still some room for improvement at these refineries, but their geographic advantages scream potential.
The other key to HollyFrontier's impressive quarter was the addition of its Petro-Canada Lubricants business. Management is still integrating this recent purchase into the rest of HollyFrontier's business, and there was some down time for maintenance. Overall, though, it provided $17.5 million in operating income for the quarter.
Finally, its midstream subsidiary Holly Energy Partners maintained its growth trajectory even though it didn't add any assets in the quarter.
What management had to say
Aside from the small amount of downtime at its lubricant business, HollyFrontier didn't have much to highlight during its conference call apart from its great operating results. According to CEO George Damiris, we can reasonably expect to see similar operating results for at least another quarter.
Production levels [at our lubricants facility] were lower in the quarter due to down time taken to upgrade and maintain certain underinvested refining assets. Our plant is now back to normal operations and our go-forward plan is to run the plant at natural capacity. As we progress with the integration of PCLI, we remain confident in our ability to achieve operational and financial synergies between our two lubricants businesses.
...
Looking forward, we remain focused on operating our plants safely and reliably, and executing on our business improvement plan and growth strategies. With no major planned downtime until October, we are well-positioned to continue on the path of strong operational and financial performance for the remainder of the year.
What a Fool believes
From an operating standpoint, asking anything more from HollyFrontier in any given quarter is just being nitpicky. It had its highest refinery throughput in the company's history and generated higher-than-industry-average margins.
It's hard to tell what the refining market will throw at refining companies in any given quarter, but HollyFrontier's inherent geographic advantages and well-run operations are signs of a good investment in the oil refining business.
