Refining Your Portfolio
Patrick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Holly Frontier (NYSE: HFC) is an independent oil refiner and wholesale marketer of refined petroleum products. They currently operate five refineries in the southwestern and Rocky mountain area of the United States, with a total crude oil processing capacity of 443,000 barrels per day. They also own a 44% stake in Jolly Energy Partners, a master limited partnership, that owns and operates petroleum logistics assets including pipelines, terminals and tankage throughout the mid-continent. They are a major refining player in the midwestern/western United States. They are well placed to take advantage of oil exploration in both the Gulf of Mexico and the Canadian oil sand operations.
The numbers on HFC are very good in comparison to others in the refining industry. With a price to earnings ratio of just 5.58 as of 10/22, they are far from over bought, and their year over year earnings per share and revenue growth are both solid. Compare this to other refiners such as Valero (NYSE: VLO) with a current P/E of 10.06, Tesoro Corp (NYSE: TSO) at 8.14, and Marathon Petroleum (NYSE: MPC) at 7.83. The current dividend yield may seem small in comparison to the others at only $0.60 (1.5%), but that number doesn't tell the whole story. HFC has a regular habit of paying out special dividends to its shareholders, including a $0.50 dividend that was paid out on October 2nd. In fact, from 8/3/11 to 9/12/12, they have announced 3 of these special dividends totaling $2.00 per share, over and on top of the regular quarterly dividend. That would put their actual dividend payout closer to a 6% yield, and there is no evidence to show that these special dividends will not continue. Add to all this that there is some good press on HFC right now, including a recent Forbes article in which they report that HFC has been added as a top 10 energy dividend stock by Dividend Channel.
Now on the other side of the issue, there are some volatility worries with HFC. Like any player in the refining industry, oil prices can impact the stock. We saw that early last week when oil prices dropped, and the share price took a hit in the process. However as a long-term investor, this kind of volatility shouldn't concern us, unless we see a change in the fundamentals of the company itself, or a serious threat to the refinery industry as a whole. I look at these types of market fluctuations as a way to pick up more shares at a discount when the price drops due to these economic factors. Another concern may be the slowdown in demand for gasoline due to rising prices. While this issue is a real one, I feel as economic conditions continue to improve, the demand will increase, at least until such time as alternative energy for transportation becomes more widespread, at which time I would begin to rethink holding this company.
Overall, I think with HFC uniquely positioned to take advantage of North American oil reserves, it's good valuation, and history of special dividends, it would make a great addition for anyone looking to add an energy stock to their portfolio.
Adhamhnon has a long position in HFC. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend HollyFrontier. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.