HOC: Holly Corporation Message Board

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Gold/Mining/Energy : HOC: Holly Corporation

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From: Dennis Roth	12/5/2007 3:38:06 AM
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Initiating coverage with a Neutral rating - Goldman Sachs - December 03, 2007 Investment view We are initiating coverage of Holly Corporation with a Neutral rating, but consider it our favorite Neutral-rated refining equity following recent sharp underperformance both on an absolute basis and versus its closest peers Frontier Oil and CVR Energy. Following a notable recent performance divergence, we are initiating a pair trade recommendation for investors to be long Holly versus short Frontier. The relative performance and valuation gap between Frontier and Holly now seems especially large to us. We believe the trade can return on the order of 15%-20% based on our target prices for the two companies. Core drivers of growth Core drivers of growth include: (1) exposure to refining margins; (2) expansion opportunities at its Artesia and Woods Cross refineries; and (3) acquisitions. Risks to the investment case Key risks are sustained lower refining margins, as well as major disruptions at its two refineries. Valuation We see 31% upside to a $63, 12-month target price for Holly, which is based on asset value, P/E and cash flow valuation analyses. Industry context We have a bullish secular outlook for the refiners and believe the sector in general is trading at very inexpensive valuations. We recently lowered our coverage view to Neutral owing to growing uncertainty as to the non-OECD economic outlook and the potential for a “recoupling” of BRICs/China growth with United States weakness. We see the potential for a return to a more favorable view if we gain confidence in the resiliency of non-OECD economic growth coupled with a US soft landing.

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