I rarely take note of professional analysts' earnings-per-share (EPS) estimates. Frontier Oil's (NYSE:FTO) quarterly report reminds me why: Wall Street wasn't even close this time. The highest estimate on record lagged actual results by 16%. I think it's only the latest example of how badly the market has underestimated Frontier.
There's more to the market's miscalculation than crack spreads and crude differentials, although both factors were a huge boon to the company this quarter. Frontier earned a startling $36.73-per-barrel gasoline margin for the quarter, more than 75% higher than last year, and way greater than the cracks at larger competitors Valero Energy (NYSE:VLO) and Tesoro (NYSE:TSO).
Diesel cracks fared well too, at $29 and change. They've also held up much better than gasoline cracks during recent weeks' significant compression. On the call, management noted that gasoline margins have fallen to the mid-to-high teens, while diesel margins still average more than $20.
I mentioned differentials in my first-quarter forecast. We tend to think of oil as a monolithic commodity, but there are a whole gamut of crude grades that vary in their viscosity and sulfur content. Frontier can handle a lot of heavy crude, with more than half of it coming from Canada, in the case of the Cheyenne refinery.
Differentials simply refer to the discount of one type of crude relative to a benchmark. Frontier was able to buy heavy Canadian crude at a $14 to $19 discount to benchmark crude, which partially explains how its margins outpaced those of many of its peers. Management said that it expects differentials to remain favorable through the winter.
I'm guessing that analysts may have doubted that Frontier would execute its Cheyenne refinery turnaround without a hitch. Hard to blame 'em, but this team has done a remarkable job. When valuations settle down, the company will swing back to acquisition mode. But for now, Frontier will just keep improving its operations and returning excess capital to shareholders. I'd suggest that you not underestimate the potency of this strategy.
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Fool contributor Toby Shute doesn't own shares in any company mentioned. The Motley Fool is hitched to its beloved disclosure policy.
