Image Source: HollyFrontier corporate website
Most of 2015 was a very good year for refiner HollyFrontier (HFC). The combination of slumping oil prices and strong gasoline demand across the U.S. led to some of the best refining margins the company had seen in a long time. This quarter, like so many fourth quarters, though, was not as robust. Let's take a quick look at the numbers for the fourth quarter and put HollyFrontier's results into a little perspective to see how investors should view this quarter.
By the numbers
| Metric (in millions, except per share data) | Q4 2015 | Q3 2015 | Q4 2014 |
| Gross Profit (revenue minus feedstock costs) | $353.5 | $706.5 | $96.5 |
| EBITDA | $16.5 | $404.5 | ($263.4) |
| Net income | ($43.9) | $196.3 | ($222.2)_ |
| EPS | ($0.24) | $1.04 | ($1.13) |
Source: HollyFrontier earnings release
For several years now, the fourth quarter has traditionally been a down quarter. Gasoline demand across the U.S. declines from the peak summer driving, and many refiners use this time to do maintenance and turnaround work. So don't look too much into the large sequential decline between this quarter and the third quarter and focus more on the year-over-year figures.
Also, baked into those results was a $143.5 million non-cash, pre-tax inventory charge to adjust for lower oil and gasoline prices. If we strip out this charge, the quarter ended with a net income of $0.24 per share, which is up from the $0.12 per share in adjusted net income from last year.
While management didn't generate as much free cash flow in the quarter, it was enough that the company could pay its dividend with a little left over. The company also bought back $261 million in shares during the quarter, which helped to reduce HollyFrontier's total shares outstanding by 7% in 2015 alone. Ever since the merger of Holly Corporation and Frontier Oil in 2011, the company has lowered its share count by 14% and has plans to keep buying back shares at an accelerated rate.
The operational highlights
The prior two quarters were a good time to be a refiner. Refining margins and crack spreads across the U.S. were very strong. This quarter didn't quite build on that momentum, but HollyFrontier continued to keep its operational costs low and maintain a high utilization rate across all of its refineries.
| Company | Refining Gross Margin | Operational Costs per Refined Barrel | Utilization Rate |
| HollyFrontier | $9.91 | $6.15 | 92% |
| Tesoro (ANDV) | $7.63 | $5.62 | 95% |
| PBF Energy (PBF 0.78%) | $8.79 | $4.55 | 86% |
Source: Company earnings releases
HollyFrontier has a higher gross margin -- and a higher operational costs -- because of two main points: 1. It runs a higher slate of heavy crude, which costs less than benchmark crudes, and 2. it has a higher yield of high value products such as gasoline. So each barrel of refined product gets a little better profit margin. Conversely, processing more of this harder to refine crude does translate to slightly higher per barrel costs.
HollyFrontier was able to hold up to its peers this quarter in terms of gross margin and utilization rate, but the more promising sign was that it was able to reduce its per barrel costs from the same time last year, mostly attributed to a higher utilization rate across its refineries.
What management had to say
From freshly appointed CEO George Demaris:
We have begun to see the benefits from the successful execution of our business improvement plan in our 2015 results. For the year, our reliability and process safety initiatives drove our refinery utilization rate to 97.6%, the highest level achieved since our merger and a 6% increase compared to our 2014 utilization rate of 91.7%. Additionally, improved operational reliability, our cost management initiative and lower natural gas costs contributed to a 7% reduction in operating expenses compared to 2014. Strong operational performance, improved realized margins and lower operating costs drove a 74% increase in earnings per share compared to 2014 (exclusive of inventory valuation charges).
What a Fool Believes
The fourth quarter is rarely a great one for refining companies in general, so don't get too caught up in seeing HollyFrontier's earnings slip into the loss column from those inventory writedowns. The were some real positives here, such as the company's ability to maintain a high utilization rate and produce some pretty strong refining gross margins compared to its peers. As long as the company continues to do these things, and churn out free cash flow to support its dividend and share repurchase program, then investors in HollyFrontier can sleep well knowing the company is doing exactly what it is supposed to do.
