Holly Corp. (HOC): Executing well, but shares look fully valued versus peers - Goldman Sachs - May 13, 2008
What's changed
Holly reported 1Q2008 EPS of $0.17, slightly ahead of both our estimate and the First Call consensus estimate of $0.15. The company’s total realized refining margin of $7.81/bbl was ahead of our $6.83/bbl estimate, while operating costs of $4.84/bbl came in slightly higher than our $4.68/bbl estimate. We are slightly lowering our 2Q-4Q 2008 EPS estimates. Our full year 2009-2012 EPS estimates are unchanged.
Implications
We maintain our Neutral rating on shares of Holly following 1Q2008 earnings. Holly reported relatively solid results given the difficult market environment and appears to be well-positioned from a balance sheet perspective. We also view favorably the company’s ongoing commitment to current capital projects and share repurchases as we believe Holly does not face the liquidity concerns that have recently emerged for others in the industry. That said, on relative basis shares appear expensive to us, trading at 2008E EV/DACF of 10.5X versus mid-continent refining peer Frontier Oil (Buy-rated) at 6.0X and Valero Energy (Buy) at 5.9X. Like both Frontier and Valero, Holly should similarly benefit from its disproportionate exposure to widening light-heavy crude oil spreads, though given the current relative valuation disparity we remain Neutral-rated on its shares. More broadly, the key to refiners rallying remains a sustained recovery in gasoline demand as we head into the summer season. Although we do forecast a recovery in gasoline cracks, we think upcoming headwinds including potential negative 2Q2008 EPS estimates could limit near-term upside for the sector.
Valuation
Holly trades 6% above our unchanged, 12-month $41 target price, which is based on asset value, P/E and cash flow valuation analyses.
Key risks
Key risk is sustained lower refining margins. |
