Holly Corp. (HOC): Maintain Buy; HOC a key beneficiary of our bullish refining view - Goldman Sachs - February 20, 2008
What's changed
Holly reported 4Q2007 EPS of $0.90 (including a $15.1 million pre-tax benefit from sulfur tax credit sales, or approximately $0.19 per share in EPS), ahead of our $0.65 and the First Call consensus estimate of $0.62. Realized margins during the quarter were slightly below our assumptions, though this was more than offset by the tax credit sales and greater throughput and product sales volumes at the company’s Navajo refinery. The company also commented that current capital projects remain largely on schedule and on budget, with some minor timing adjustments. We have made upward revisions to our 2008-2012 EPS estimates to incorporate updated project timelines, share repurchases, and minor other modeling adjustments.
Implications
We maintain our Buy rating on Holly shares following 4Q 2007 results. Even excluding the positive effect of sulfur tax credit sales, 4Q results were modestly ahead of our estimates. Management commentary on initial signs of strength heading into the spring and summer gasoline seasons is consistent with our own bullish view, and we view favorably the company’s continued successful execution at key capital projects. Our constructive view of refining margins drives the meaningful upside we see for the refining sector. We particularly favor refiners with disproportionate exposure to the Mid-Continent region, which in addition to Holly include Conviction Buy-rated Frontier Oil and CVR Energy.
Valuation
We see 18% upside to our unchanged, $63 12-month price target, which is based on asset value, P/E and cash flow valuation analyses.
Key risks
Key risk is sustained lower refining margins. |
