For all of the talk of rising and falling oil prices in the U.S. in 2018, it didn't have much of an effect on HollyFrontier's (NYSE:HFC) earnings results. The company was able to capitalize on differing regional crude oil prices to produce incredible refining margins that gave it the flexibility to invest in other parts of the business. Of course, with a cyclical business like this, investors are always going to wonder when the cycle is going to turn. Based on the way HollyFrontier's stock is priced, it appears that the market thinks that time is soon.

Let's take a look at the company's most recent results, what management has in mind in 2019, and whether today's stock price is worth an investment after such an incredible run of earnings results.

Oil refinery.

Image source: Getty Images.

By the numbers

Metric Q4 2018 Q3 2018 Q4 2017
Revenue $4.34 billion $4.77 billion $3.99 billion
Operating income $217.6 million $503.5 million $364.8 million
Net income $141.9 million $342.7 million $521.1 million
EPS (diluted) $0.81 $1.93 $2.92

DATA SOURCE: HOLLYFRONTIER EARNINGS RELEASE. EPS = EARNINGS PER SHARE.

As is common with companies that hold commodities like crude oil and refined products in inventory, HollyFrontier took a significant charge related to fair value accounting of its inventories. This past quarter, it was a $329 million charge, whereas it had a $93 million benefit this time last year. Adjusting for this paper loss, earnings for the fourth quarter were $393.9 million, or $2.25 per share. So this is certainly a case in which you need to look past the headline numbers. Also, the company realized a large tax benefit in the fourth quarter of 2017 that makes the prior-year quarter look even better.

In the past six months, HollyFrontier has completed two acquisitions related to its lubricant and specialty product business. The first of these, locomotive engine oil marketing Red Giant, is now part of its earnings. The deal for its most recent acquisition, specialty product manufacturer Sonneborn, closed at the beginning of February, so we won't see the impact of that $655 million acquisition until the next quarter.

Even though HollyFrontier is looking to expand its lubricant business and continues to get steady results from its equity stake in Holly Energy Partners, refining remains the company's bread and butter. Its refining segment results reflect that large inventory adjustment cost, but it still remains the company's largest segment by a wide margin. Management also noted that its lubricant business suffered this past quarter from some downtime at its Ottawa lubricant facility and a weaker market for base oil lubricants.

Bar chart of HFC operating income by business segment for Q4 2017, Q3 2018, and Q4 2018. Shows decline for refining and lubricants.

Data source: HollyFrontier.

What management had to say

HollyFrontier has been known for some time as an active acquisition company. So just about every quarter, an analyst asks CEO George Damiris for his thoughts on the M&A environment. Clearly, after the acquisition of Sonneborn, he thinks there are some opportunities in lubricants, especially in those in what the company calls the rack forward side of the business, which is branded products and retail sales. Outside of rack forward investments, though, Damiris doesn't see much on the horizon.

So the high level on M&A, as Rich highlighted in our waterfall for capital uses, we still have a desire to grow and improve our Company. We want to do it intelligently and prudently. And we think that Sonneborn acquisition is a good example of that. It ties in very well with what we already have in the HF LSP [HollyFrontier lubricant and specialty product] segment, yet at the same time, it also brings us into new markets in new customer segments. We continue to be pleased by the deal flow we see in that Rack Forward market. Red Giant being another example of that that we executed on last year. So we'll continue to look at opportunities like that to continue to bolt on logical additions to our HF LSP portfolio.

On the refining side, as you know, there's not that many refineries in the US, about 125 in total. They don't come up for sale very often. So it's very intermittent and we'll look at them as they come available, but they're not as ratable as what we're seeing on the lubricant side.

You can read a full transcript of HollyFrontier's conference call here.

Check out all ourĀ earnings call transcripts.

HFC Chart

HFC data by YCharts.

Waiting for the other shoe to drop

It was an up-and-down year for HollyFrontier, but overall it has been a good run for the mid-continent refiner. Refining margins have been incredibly high thanks to crude oil infrastructure bottlenecks across North America. As much as it would be great for these kinds of results to continue indefinitely, chances are they won't. This is, after all, a cyclical industry. That's probably the largest reason the company's shares trade for an absurdly low price-to-earnings ratio of 6. Essentially, the market is expecting the other shoe to drop sooner than later.

What the stock does from here is anyone's guess, because there's no telling when these fat refining margins will narrow. The one thing we can count on right now is that management plans to increase its presence in lubricants and branded specialty products to help increase earnings from the less cyclical portions of the business. Management mentioned that as earnings from these segments increase, it expects to increase its regular dividend. That's encouraging for a stock that hasn't seen a dividend increase in close to four years. If the company can do this in 2019, then perhaps today's stock price is attractive no matter what refining margins do from here.