Thursday Integrated Wrap-Up: HFC Soars; IMO Slips
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Integrated oil stocks outperformed the S&P 500 index +0.50% to +0.11% in today's session. Industry leaders included HollyFrontier Corp. (NYSE: HFC) and Hess Corp. (NYSE: HES). These stocks rose 3.65% and 1.89% on volumes of 4.04M and 5.01M, respectively. Industry laggards included Imperial Oil Ltd. (NYSEMKT: IMO) and Occidental Petroleum Corp. (NYSE: OXY). These securities fell 1.47% and 0.82% on volumes of 319.30K and 3.77M, respectively.
Sector wide news included crude oil flirting with six-week lows on demand worries; a proposal to build a new oil pipeline in North Dakota; and a report on Chinese institutions looking to North American and European technologies and reserves to meet their growing energy demand.
HollyFrontier Corp.'s shares rose today on news that the threat of 20,000 union employees walking out was averted. The workers' contracts expired at 12:01 a.m. today but successful negotiations led Mike Astin, HollyFrontier's Woods Cross spokesman, to state, "Everyone's back at work today." Last Friday I offered a bullish report on HollyFrontier and my sentiment has not changed.
To be more specific, a crucial macroeconomic indicator and relative valuations look good for shareholders of HollyFrontier. The company's operations are tilted toward the refining side and 4Q earnings reports from several integrated oil companies have shown weakness in that area. If one examines the crack spread -- a macroeconomic indicator that demonstrates the profitability of refining crude oil into other commodities such as gasoline (the higher the better for refiners) -- there is a pronounced dip during the fourth quarter. 
As can be gleaned, the spread is trending upward back toward more historically average valuations. An increasing crack spread is a boon to refiners, and HollyFrontier's 1Q 2012 earnings should reflect greater profits and better margins than its 4Q 2011 earnings, which are due Feb. 28.
Next, HollyFrontier's relative valuations are compelling. Compared to industry averages, HollyFrontier's gross margins (12.95%), operating margins (11.20%), P/E (5.12), and PEG (0.15) best industry averages. With the addition of solid ROE (24.49%) and a healthy balance sheet (1.72B in total cash to 1.23B in total debt), HollyFrontier looks to be a top-notch buy-and-hold candidate. In fact, I am adding HollyFrontier as a CAPS pick today -- staking my own reputation on my prediction that the company will outperform the broader market over the coming years. If you join the Motley Fool today you can make CAPS picks yourself and look at how institutional picks are performing as well.
Imperial Oil Ltd. saw its shares fall today even though it reported 4Q earnings on Jan. 31 of C$1.18 a share, which beat the C$0.91 Thompson Reuters consensus estimate for a positive earnings surprise of 29.67%. Along with these impressive earnings numbers, Canadian oil sands are rapidly increasing in profitability. Analysts project that Imperial Oil's assets in this region total 15B barrels of recoverable resources.
Taken together, it appears that today's sell-off was altogether unwarranted. Although Imperial Oil does not show relative undervaluation (its P/E and PEG are right at industry averages), it does not appear to be overvalued to the point of a correction either. Defensive and risk-adverse investors may want to take a second look at these shares.
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