The Sinclair acquisition furthers HFs push into renewable diesel, adding a production facility and pre-treatment project

Business Strategy & Outlook

After the acquisition of Sinclair Oil, HollyFrontier, now HF Sinclair, is a fully integrated independent company composed of refining, marketing, renewables, specialty lubricants, and midstream businesses. Its refining footprint has grown to seven refineries totaling 678 mbd in total capacity, including the recently acquired Puget Sound refinery. The latter deal extends the company’s footprint to the West Coast, beyond its historical midcontinent and Rockies roots and into a more difficult refining market with less competitive advantages. However, the foothold in the West Coast should help with the growing renewable diesel business given the region’s growing biofuel mandates. The Sinclair acquisition furthers HF’s push into renewable diesel, adding a production facility and pre-treatment project. Combined with HF’s existing projects (two RD units and a pre-treatment unit), it expects to produce 380 million gallons annually once complete in 2022.

Adding Sinclair’s marketing group of over 300 distributors, 1,300 wholesale brand sites, and 2 billion gallons a year of branded sales adds a stable earnings stream HF previously lacked as a merchant refiner. In addition, it offers the ability to generate RINs whose high costs have put HF at a disadvantage in the recent past. HF had already begun to diversify its earnings when it acquired the Petro-Canada lubricants business, Red Giant Oil, and Sonneborn to diversify its earnings stream. It expects the segment to generate $250 million EBITDA annually while also serving as a platform for future growth. At the same time, HF’s MLP Holly Energy Partners acquired Sinclair’s midstream assets including 1,200 miles of pipelines, eight product terminals with 4.5 mmbbl of storage, and interests in three pipeline joint ventures. The incremental EBITDA of $70 million-$80 million will increase HEP’s annual EBITDA to about $450 million while opening up future organic and external transaction growth opportunities.

Financial Strengths

HF Sinclair’s debt increased amid the difficult market conditions and acquisitions in the last few years. However, with completion of the Sinclair acquisition, net debt was only 16% at the end of the third quarter, including Holly Energy Partners’ debt, among the lowest of its peer group. To fund the Puget Sound acquisition with cash, management suspended the dividend but reinstated it in the first quarter 2022, earlier than expected. The Sinclair acquisition was done with equity. By first-quarter 2023, management planned to have returned $1 billion to shareholders through dividends and repurchases, but did so by third-quarter 2022 given the strong market conditions. It has already authorized another $1 billion in repurchases as part of its guidance of an ongoing 50% payout ratio of adjusted net income through dividends and repurchases. Capital spending doubled in 2021 to $1.2 billion primarily driven by planned investments in renewable diesel, with the remainder earmarked for refining and lubricants. Spending should fall in 2022 as renewable diesel projects are completed but increase slightly in 2023. Management has set the minimum cash balance target at $500 million.

Bulls Say

HF Sinclair stands to benefit from continued discount of light and heavy mid continent crude. Also, its Navajo refinery is well positioned to capitalize on growing Permian production.
The Sinclair acquisition adds refining assets complementary to HF’s legacy footprint while adding a marketing business that its portfolio lacked, improving competitiveness.
Investments in renewable diesel should deliver free cash flow and high returns while offering diversification from petroleum, reducing carbon intensity, and generating valuable RINs.

Company Description

HF Sinclair is an integrated petroleum refiner that owns and operates seven refineries serving the Rockies, midcontinent, Southwest, and Pacific Northwest, with a total crude oil throughput capacity of 678,000 barrels per day. It is investing to produce 380 million gallons of renewable diesel annually. It holds a marketing business with over 300 distributors and 1,300 wholesale branded sites across 30 states. It also has a 47% ownership stake in Holly Energy Partners, which owns and operates petroleum product pipelines and terminals principally in the southwestern US.

(Source: Morningstar)

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