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November 17, 2011 HollyFrontier Corp (HFC) -- Fade the Seaway Pipeline News
NYSE:HFC
Stock Price Market Cap Enterprise Val Beta $23.93 $5.0b $5.1b 0.90 LTM EPS: $ 6.11 P/E: P/CF P/S: 3.9 3.2 0.4 FY+1 EPS: P/E: P/CF P/S: $7.50 3.2 2.2 0.3 FY+2 EPS: P/E: P/CF P/S: $5.45 4.4 LTM ROE: 24.5% 38.8% 11.2% 6.4% Insiders Own 1.9%
I bought HFC near the close on November 17 for a speculative short-term trade. I've been looking for a high-beta, high-quality, out-of-favor name to play a potential bounce following a market sell-off. Being out of favor was important to me because in this quickly in this market sentiment can change quickly and drive short-term gains, and buying a refiner in this current market seems like one of the worst things to do right now. In addition, I think HFC may have a better risk-reward profile than trading a leveraged ETF at this point. The stock of HollyFrontier Corp, a 440,000 bpd petroleum refiner is a case in point -- HFC is currently down 37% percent from its 52-week high of $38.20 set on August 1. HFC is currently trading at 3.8x the NTM consensus EPS estimate of $6.47x. This is in line with its 2008-low PE of 3.9x and slightly above a YTD low of 3.6x reached on October 4. The stock's decline is likely due to a combination of general negative sentiment plus smaller refining margins as the spread between Brent and WTI oil prices have narrowed recently. CommodityOnline has a good of overview of recent pipeline news impacting the Brent-WTI spread, citing a Barclays analyst that expects spreads to range $0 to $15 and average $5 in 2012. According to this chart on Bloomberg, using first month futures contracts, the spread has narrowed from a recent high of $26 on October 13 to $9. WTI prices have moved up with news of pipeline capacity being added from Cushing, OK to the Gulf of Mexico, and Brent prices have declined a bit due to macro fears, which has drastically narrowed the Brent-WTI spread. Refiners like HFC have been able to purchase oil at WTI prices and refine it into petroleum-based products that are priced off of Brent.
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In my opinion, I think there is a good chance the market may be overly discounting the impact of the Seaway pipeline immediately following its announcement. The pipeline has not been re-engineered yet to reverse the flow of oil, and projects have a way of getting delayed. A new 150,000 bpd pipeline by the second quarter of 2012 is a long way off in a market that has recently been defined moment to moment by sovereign debt yields in Europe. I could be wrong of course, but it's been my experience that at times the market overreact in the short-term to announcements of capacity additions. If I'm right about the market overly discounting the negative impact of narrowed Brent-WTI spread, then HFC and perhaps other oil refiners look good as a short-term trading idea. HFC looks particularly attractive to me because it is a well-managed company with strong-backward looking operating momentum trading at a historically low multiple.
Ranking Data as of November 11, 2011 HollyFrontier Corporation NYSE:HFC Energy Oil and Gas Refining and Marketing
Ascendere Ranking
5 = Best Rank Relative Value 5 Operating Momentum 5 Analyst Revisions Momentum 5 Fundamental Quality 5
3.3 1.2
CY1 Consensus EPS Est. CY2 Consensus EPS Est. Latest Annualized Dividend
$ $ $
Source: Capital IQ data and estimates, and Ascendere Associates LLC data and estimates.
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HollyFrontier Corporation
HFC Energy Oil and Gas Refining and Marketing
500 2000
499 1999
498 1998
497 1997
496 1996
500 9/30/2011 Gross Revenue High Low EBITDA High Low EBIT High Low EPS quarter High Low Shares Outsanding Diluted Shares Outsanding
Source: consensus estimates via Capital IQ
# Estimates Forecast 5 $ 5,104 $ $ 7,219 $ 4,241 6 $ $ $ 8 $ $ $ 15 $ $ $ 903 $ 967 841 855 $ 906 783 2.32 $ 2.59 1.77 208
Actual Variance 5,173 $ 69 $ (2,045) $ 933 900 $ $ $ 853 $ $ $ 2.51 $ $ $ 106 110 (2) (67) 60 (2) (53) 70 0.19 (0.08) 0.75 (102)
LTM Margin
12.3%
11.2%
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FQ42011 Current -1 Week Revenue $ 4,466 $ 4,085 EBIT $ 648 $ 612 EPS $ 1.87 $ 1.77 FY2011 Revenue EBIT EPS FY2012 Revenue EBIT EPS
FQ42011 Revenue EBIT EPS FY2011 Revenue EBIT EPS FY2012 Revenue EBIT EPS
-1 Week -1 Month -3 Month 9.34% 10.06% 2.17% 5.87% 32.70% 69.52% 5.59% 34.06% 44.43%
$ 15,476 $ 15,327 $ 15,397 $ 14,294 $ 2,070 $ 2,041 $ 1,895 $ 1,553 $ 7.53 $ 6.91 $ 6.80 $ 5.61
$ 17,557 $ 17,254 $ 17,556 $ 18,737 $ 2,047 $ 1,971 $ 1,946 $ 1,745 $ 5.59 $ 5.46 $ 5.21 $ 4.58
Energy FQ+1 Revenue EBIT EPS FY+1 Revenue EBIT EPS FY+2 Revenue EBIT EPS Rating Changes
-1 Week -1 Month -3 Month -0.50% -1.38% -2.41% -1.17% -3.52% -5.82% -0.28% -0.95% -3.34%
All stocks on major U.S. exchanges w ith a market cap above $750m Source: Capital IQ consensus estimates and Ascendere Associates models.
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Historicals not pro-forma for Frontier acquisition. Note however, by my estimates that the combined company may have a higher economic profit and ROIC compared to its history. Forecasts are based in part on consensus estimates.
HollyFrontier Corporation NYSE:HFC Economic Profit Model Adjusted Working Capital Net PP&E Other fixed assets Operating Capital Cost of Debt Cost of Equity WACC* (implied, or arbitrary override) Economic Charge
Estimate 12/30/12 120 3,199 2,279 5,598 8.2% 12.2% 6.9% 384
Estimate 9/29/12 120 3,160 2,279 5,559 8.2% 12.2% 6.9% 381 2,234 7 2 (14) 2,229 35.7% 17.3% (386) 1,843 Estimate 9/29/12 1,843 381 1,462 -13% 1,843 5,559 32.3% -23%
6/30/11 62 1,860 2 1,924 8.1% 12.1% 7.7% 149 643 7 2 (3) 648 34.4% 23.3% (151) 497 6/30/11 497 149 348 48% 497 1,924 26.0% 27%
3/31/11 125 1,802 (2) 1,924 8.8% 12.8% 8.1% 156 445 8 2 (1) 453 33.6% 13.7% (62) 391 3/31/11 391 156 235 283% 391 1,924 20.4% 82%
12/31/10 137 1,757 (34) 1,860 9.3% 13.3% 8.2% 152 263 8 2 2 276 30.8% 22.5% (62) 214 12/31/10 214 152 61 -916% 214 1,860 11.2% 65%
9/30/10 139 1,697 59 1,895 7.4% 11.4% 7.1% 135 167 6 1 174 27.2% 26.6% (46) 128 9/30/10 128 135 (8) -76% 128 1,895 6.8% 11%
6/30/10 225 1,670 60 1,954 7.2% 7.5% 7.4% 144 114 6 1 121 17.5% 7.0% (8) 112 6/30/10 112 144 (32) -77% 112 1,954 6.2% 1408%
3/31/10 243 1,639 59 1,941 5.8% 8.3% 7.5% 147 20 4 (1) 23 0.0% 69.2% (16) 7 3/31/10 7 147 (139) 97% 7 1,941 0.4% -89%
12/31/09 164 1,630 64 1,858 4.7% 8.4% 7.2% 134 80 3 (1) 82 17.0% 23.6% (19) 63 12/31/09 63 134 (71) -187% 63 1,858 3.9% -72%
9/30/09 105 1,469 149 1,723 5.4% 7.8% 7.1% 123 218 3 2 222 33.7% 8.2% (18) 204 9/30/09 204 123 81 -23% 204 1,723 14.0% -16%
EBIT 2,026 Interest on Operating Leases 7 R&D Expenditure R&D Amortization Goodwill Amortization 2 Adjustment for Provisions, Nonrecurring and Nonoperating Items (11) Adjusted EBITA 2,024 Effective Tax Rate Operating tax rate Taxes on EBITA Increase in deferred taxes (smoothed) NOPLAT NYSE:HFC NOPLAT Economic Charge Economic Profit Sequential growth NOPLAT Operating Capital ROIC (NOPLAT / Operating Capital) Sequential growth 35.7% 17.3% (350) 1,674 Estimate 12/30/12 1,674 384 1,290 -12% 1,674 5,598 29.4% -9%
Source: Capital IQ data and estimates, and Ascendere Associates data and estimates.
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HollyFrontier Corporation NYSE:HFC Economic Profit Model Adjusted Working Capital Net PP&E Other fixed assets Operating Capital Cost of Debt Cost of Equity WACC* (implied, or arbitrary override) Economic Charge
Estimate 9/29/12 98 3,177 2,279 5,554 8.2% 12.2% 6.9% 381 1,693 7 2 (14) 1,688 35.7% 17.3% (292) 1,396 Estimate 9/29/12 1,396 381 1,015 -29% 1,396 5,554 24.7% -33%
6/30/11 62 1,860 2 1,924 8.1% 12.1% 7.7% 149 643 7 2 (3) 648 34.4% 23.3% (151) 497 6/30/11 497 149 348 48% 497 1,924 26.0% 27%
3/31/11 125 1,802 (2) 1,924 8.8% 12.8% 8.1% 156 445 8 2 (1) 453 33.6% 13.7% (62) 391 3/31/11 391 156 235 283% 391 1,924 20.4% 82%
12/31/10 137 1,757 (34) 1,860 9.3% 13.3% 8.2% 152 263 8 2 2 276 30.8% 22.5% (62) 214 12/31/10 214 152 61 -916% 214 1,860 11.2% 65%
9/30/10 139 1,697 59 1,895 7.4% 11.4% 7.1% 135 167 6 1 174 27.2% 26.6% (46) 128 9/30/10 128 135 (8) -76% 128 1,895 6.8% 11%
6/30/10 225 1,670 60 1,954 7.2% 7.5% 7.4% 144 114 6 1 121 17.5% 7.0% (8) 112 6/30/10 112 144 (32) -77% 112 1,954 6.2% 1408%
3/31/10 243 1,639 59 1,941 5.8% 8.3% 7.5% 147 20 4 (1) 23 0.0% 69.2% (16) 7 3/31/10 7 147 (139) 97% 7 1,941 0.4% -89%
12/31/09 164 1,630 64 1,858 4.7% 8.4% 7.2% 134 80 3 (1) 82 17.0% 23.6% (19) 63 12/31/09 63 134 (71) -187% 63 1,858 3.9% -72%
9/30/09 105 1,469 149 1,723 5.4% 7.8% 7.1% 123 218 3 2 222 33.7% 8.2% (18) 204 9/30/09 204 123 81 -23% 204 1,723 14.0% -16%
EBIT 1,414 Interest on Operating Leases 7 R&D Expenditure R&D Amortization Goodwill Amortization 2 Adjustment for Provisions, Nonrecurring and Nonoperating Items (11) Adjusted EBITA 1,411 Effective Tax Rate Operating tax rate Taxes on EBITA Increase in deferred taxes (smoothed) NOPLAT NYSE:HFC NOPLAT Economic Charge Economic Profit Sequential growth NOPLAT Operating Capital ROIC (NOPLAT / Operating Capital) Sequential growth 35.7% 17.3% (244) 1,168 Estimate 12/30/12 1,168 384 783 -23% 1,168 5,603 20.7% -16%
Source: Capital IQ data and estimates, and Ascendere Associates data and estimates.
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$ 24 HFC NTM EPS $ 6.47 Energy NTM PE 3.70 Oil and Gas Refining and Marketing R/R 20.5 to 1
18.0
$40
16.0
$35
14.0
$30
P / E
12.0
$25 10.0 $20
8.0 $15
6.0 $10
P r i c e
4.0
2.0
$5
N-01
N-06
N-09
N-02
N-03
N-04
N-05
N-07
N-08
N-10
M-03
M-08
M-02
M-04
M-05
M-06
M-07
M-09
M-10
M-11
P/E
Average
+1 St. Dev.
-1 St. Dev.
Stock Price
Max up to ten years 11/15/01 Max PE Average PE Min PE to 18.6 11.1 3.8 11/17/11 04/29/10 11/17/11
Three years 11/20/08 Max PE Average PE Min PE to 18.6 10.3 3.8 11/17/11 04/29/10 11/17/11
One year 11/18/10 Max PE Average PE Min PE to 16.3 9.8 3.8 11/17/11 02/10/11 11/17/11
One year historically implied target range NTM EPS Max EPS $ 8.92 Average EPS $ 6.47 Min EPS $ 4.69 Target $ $ 145 $ 63 $ 18 23.93 507% 165% -25%
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N-11
0.0
$-
F-04
F-09
F-02
F-03
F-05
F-06
F-07
F-08
F-10
A-02
A-07
A-03
A-04
A-05
A-06
A-08
A-09
A-10
F-11
A-11
HFC HollyFrontier Corporation 12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010 11/17/2011 Average High Low Close Average High Low Close Average High Low Close Average High Low Close 0.7x 1.1x 0.4x 0.8x 6.4x 8.7x 4.4x 7.2x 7.7x 10.9x 5.3x 8.3x 11.9x 14.4x 8.9x 13.0x 0.8x 1.2x 0.6x 0.6x 7.4x 9.7x 5.1x 5.6x 8.4x 11.3x 5.7x 6.5x 13.4x 15.4x 10.1x 11.1x 0.4x 0.7x 0.2x 0.4x 6.2x 9.2x 3.7x 5.4x 7.5x 13.9x 4.3x 6.4x 9.6x 13.0x 3.9x 7.1x 0.4x 0.5x 0.3x 0.3x 6.2x 8.1x 4.9x 5.1x 8.1x 12.1x 6.4x 8.1x 9.0x 14.4x 7.1x 9.9x 0.3x 0.4x 0.3x 0.4x 7.4x 9.8x 5.1x 7.8x 10.4x 16.0x 7.8x 10.6x 13.1x 19.4x 9.9x 14.7x 0.3x 0.5x 0.2x 0.3x 4.4x 7.9x 1.5x 2.3x 5.3x 10.9x 1.6x 2.4x 9.3x 16.3x 3.6x 3.8x Last 5 years 0.4x 1.2x 0.2x 0.3x 6.4x 9.8x 1.5x 2.3x 8.0x 16.0x 1.6x 2.4x 10.9x 19.4x 3.6x 3.8x
Source: Capital IQ
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DISCLOSURES Ascendere is in the business of providing equity research and related consulting services to investors and their advisors. The equity research it provides includes basic quantitative model portfolios and more detailed fundamental research with respect to individual stocks. In addition, the firm manages stock portfolios for itself and clients. Ascendere currently sources financial data from Capital IQ. Ascendere does not rate stocks on any scale, but does offer individual stock commentary and valuation opinions. With regard to Ascendere's portfolio strategies, "long" or "high-quality" baskets should generally be considered buys, unless otherwise noted. Stocks in our "short" or "lowquality" baskets should generally be considered sells, unless otherwise noted. While exceptions may occasionally occur, typically stocks in the highquality basket are expected to outperform the S&P 500 over a month's time and stocks in the low-quality basket are expected to underperform. A more relevant benchmark would comprise of all stocks and ADRs that trade on major U.S. stock exchanges with a market cap above $2 billion. Ascendere adheres to professional standards and abides by codes of ethics that put the interests of clients ahead of its own. The following are specific disclosures made by Ascendere: 1) Ascendere may have a financial interest in the companies referred to in this report ("the Companies"). The research analyst covering the Companies and members of the analyst's immediate family have a financial interest in one or more of the Companies. 2) Ascendere generates revenue from research subscription revenue and portfolio management fees. At any given time it may be long or short any of the Companies. 3) Ascendere does not make a market in the securities of any of the Companies. 4) Ascendere has not received compensation from the Companies. 5) Ascendere has not managed or co-managed a public offering for any of the Companies. 6) Neither Ascendere nor any of its officers or any family member of the covering analyst serve as an officer, director or advisory board member of any of the Companies. 7) Neither Ascendere nor any of its officers or any family member of the covering analyst beneficially own 1% or more of any class of securities of any of the Companies.
DISCLAIMERS This report is intended for informational purposes only and does not constitute a recommendation, or an offer, to buy or sell any securities or related financial instruments. The report is not intended to be in furtherance of the specific investment objectives, financial situation, or particular needs of any individual recipient. Investment decisions should be based on an individual's own goals, time horizon and tolerance for risk. The information contained herein accurately reflects the opinion of Ascendere at the time the report was released. The opinions of Ascendere are subject to change at any time without notice and without obligation or notification. The officers, affiliates or family members of Ascendere Associates may hold positions in the securities of the Companies. No warranty is made as to the accuracy of the information contained herein. The views and opinions expressed in the market commentary reflect the opinions of the author and may be based upon information obtained from third-party sources believed to be reliable but not guaranteed. These opinions are subject to change at any time based upon market or other conditions. Ascendere disclaims any responsibility to update such views. This information is intended for the sole use of clients of Ascendere. Any other use, distribution or reproduction is strictly prohibited. Investing in stocks includes a high degree of risk, including the risk of total loss. This is for informational purposes only and is not intended to constitute a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. All information, opinions and estimates are current as of original distribution by author and are subject to change at any time without notice. Any companies, securities and/or markets referenced are solely for illustrative purposes. Past performance is not indicative of future performance, and no representation or warranty, express or implied, is made regarding future performance. This report may contain This report may contain forward-looking statements, which involve inherent risks and uncertainties, and we might not be able to achieve the predictions, forecasts, projections and other outcomes we may describe or imply. A number of important factors could cause results to differ materially from the plans, objectives, expectations, estimates and intentions we express in these forward-looking statements. We do not intend to update these forward-looking statements. For Investment Professional use only. NOT FOR FURTHER DISTRIBUTION. No part of this document may be reproduced in any way without the prior written consent of Ascendere Associates LLC.
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DISCLOSURES Ascendere is in the business of providing equity research and related consulting services to investors and their advisors. The equity research it provides includes basic quantitative model portfolios and more detailed fundamental research with respect to individual stocks. In addition, the firm manages stock portfolios for itself and clients. Ascendere currently sources financial data from Capital IQ. Ascendere does not rate stocks on any scale, but does offer individual stock commentary and valuation opinions. With regard to Ascendere's portfolio strategies, "long" or "high-quality" baskets should generally be considered buys, unless otherwise noted. Stocks in our "short" or "low-quality" baskets should generally be considered sells, unless otherwise noted. While exceptions may occasionally occur, typically stocks in the high-quality basket are expected to outperform the S&P 500 over a month's time and stocks in the low-quality basket are expected to underperform. A more relevant benchmark would comprise of all stocks and ADRs that trade on major U.S. stock exchanges with a market cap above $2 billion. Ascendere adheres to professional standards and abides by codes of ethics that put the interests of clients ahead of its own. The following are specific disclosures made by Ascendere: 1) Ascendere may have a financial interest in the companies referred to in this report ("the Companies"). The research analyst covering the Companies and members of the analyst's immediate family have a financial interest in one or more of the Companies. 2) Ascendere generates revenue from research subscription revenue and portfolio management fees. At any given time it may be long or short any of the Companies. 3) Ascendere does not make a market in the securities of any of the Companies. 4) Ascendere has not received compensation from the Companies. 5) Ascendere has not managed or co-managed a public offering for any of the Companies. 6) Neither Ascendere nor any of its officers or any family member of the covering analyst serve as an officer, director or advisory board member of any of the Companies. 7) Neither Ascendere nor any of its officers or any family member of the covering analyst beneficially own 1% or more of any class of securities of any of the Companies. 8) The covering analyst certifies that this report accurately reflects such analyst's personal views.
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DISCLAIMERS This report is intended for informational purposes only and does not constitute a recommendation, or an offer, to buy or sell any securities or related financial instruments. The report is not intended to be in furtherance of the specific investment objectives, financial situation, or particular needs of any individual recipient. The information contained herein accurately reflects the opinion of Ascendere at the time the report was released. The opinions of Ascendere are subject to change at any time without notice and without obligation or notification. The officers, affiliates or family members of Ascendere Associates may hold positions in the securities of the Companies. No warranty is made as to the accuracy of the information contained herein. This information is intended for the sole use of clients of Ascendere. Any other use, distribution or reproduction is strictly prohibited. Investing in stocks includes a high degree of risk, including the risk of total loss. For additional information on risks, disclosures, disclaimers and frequently asked questions, please see the back of any monthly report or visit our website at www.ascenderellc.com.
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