The impact of the global pandemic sometimes seems to have no end in sight – even though economic activity has been picking up enough this year to start raising a lot of questions about inflationary pressures, their impact on interest rates, and more. One of the sectors that has rallied strongly since November of last year is the Energy sector. Stocks in this sector marked some of the biggest values in the market for most of 2020. An increase in travel, vacations, cruises and other leisure activities generally bodes well not only for industries that provide those services, but also for the Energy sector, as demand for oil, along with supply constraints still associated with the pandemic have pushed raw crude prices higher. That means that many of the companies in the Energy sector could still provide attractive investing opportunities for cautious, value-oriented investors.
When it comes to value, the question becomes whether or not a stock that is trading at a major discount has the resources it needs to ride through continuing economic and business turmoil, and still be standing in a favorable position once those concerns eventually fade. That means recognizing the impact current conditions have had, and may continue to have in the near term, while balancing them against the company’s balance sheet. Does the company possess a healthy combination of cash and liquid assets to provide near-term stability relative to its debt? And is their current debt load manageable enough that the company might be able to prudently take on more debt to further extend its financial stability and flexibility? Those are questions that can help to delineate between the stocks that offer the best long-term opportunities at nice prices versus those that are just plain cheap. While energy prices have moved higher, the increase hasn’t necessarily translated to an increase in prices for all of the stocks in the sector. For those that have diverged from the broader sector pattern, the question becomes whether their current price, compared against their fundamental profile and the associated value of their overall business translates to a useful bargain opportunity.
HollyFrontier Corporation (HFC) is a case in point. The company’s earnings reports throughout the pandemic have shown expected significant declines in their operating margins, which is consistent given the collapse in crude prices that began at the beginning of 2020 resulting from a price war between Russia and Saudi Arabia, and then exacerbated by the vaporization of demand that came from global shutdowns to limit the spread of COVID-19. The stock cratered in the meantime, plunging from a November 2019 high at around $59 to a March 2020 low below $19 per share. The stock rebounded from that point, pushing to a high in June of that year at around $38 before dropping back to a new low at around $16 amid concern about oil demand in November. From that point, the stock surged again to a peak at around $42 in March of this year along with rising oil prices, but fell back again to around $28 in mid-August. The stock rallied along with increasing crude prices moving into the fall and hit a temporary peak at around $37 in October, but has fallen back again to start November. Do the company’s fundamentals provide an argument for the stock as a useful value-based investment? Let’s find out.
Fundamental and Value Profile
HollyFrontier Corporation is an independent petroleum refiner. The Company produces various light products, such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. It segments include Refining and Holly Energy Partners, L.P. (HEP). The Refining segment includes the operations of the Company’s El Dorado, Kansas (the El Dorado Refinery); refinery facilities located in Tulsa, Oklahoma (collectively, the Tulsa Refineries); a refinery in Artesia, New Mexico that is operated in conjunction with crude oil distillation and vacuum distillation and other facilities situated 65 miles away in Lovington, New Mexico (collectively, the Navajo Refinery); refinery located in Cheyenne, Wyoming (the Cheyenne Refinery); a refinery in Woods Cross, Utah (the Woods Cross Refinery), and HollyFrontier Asphalt Company (HFC Asphalt). The HEP segment involves all of the operations of HEP. HEP is a limited partnership, which owns and operates logistic assets. HFC has a current market cap of about $5.6 billion.
Earnings and Sales Growth: Over the last twelve months, earnings decreased by 412%, while revenues improved 66%. in the last quarter, earnings grew by 47% while sales improved 2.36%. The company’s margin profile turned negative during the pandemic but appears to have turned the corner; over the last twelve months, Net Income was 3.06% of Revenues but improved to 6.82% in the last quarter.
Free Cash Flow: HFC’s free cash flow declined in 2020, but has been recovering over the last three quarters from -$64.66 million to $248.78 million as of the last quarter. The current number also translates to a modest, but still useful Free Cash Flow Yield of 4.64%.
Debt to Equity: HFC’s debt to equity is .49, a generally conservative number. The company’s balance sheet indicates liquidity and debt management remains healthy despite the current negative Net Income and Free Cash Flow pattern, with almost $1.48 million in cash and liquid assets in the last quarter versus about $3.07 billion of long-term debt. It’s worth noting that at the beginning of 2019, HFC reported just $496 million in cash, and $909 at the beginning of 2020, which strengthens the usefulness of the current number, and also puts it roughly inline with the $1.5 billion in cash and liquid assets marked in September of 2020.
Dividend: HFC suspended their dividend earlier this year, until 2022 in an effort to preserve cash and bolster their balance sheet.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to worth with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term target at almost $39.50 per share. That means that HFC is currently undervalued by about 20%.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above covers the last year of price activity. The red line traces the stock’s upward trend from its mid-November 2020 low at around $19 to its March peak at about $42.50. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. After starting a new upward trend in August, the stock peaked last month at around $37. Since then, the stock has dropped back to its current price at around $33, a little below the 38.2% retracement line. Current support is around $32, based on pivot activity seen in late August as well as during the spring of this year, with immediate resistance at $33.55. A push above $33.55 should have near-term upside to about $37, with additional room to about $39 if buying activity remains strong. A drop below $32, on the other hand should see limited downside, with the 50% retracement line acting as next support around $31.
Near-term Keys: HFC’s value proposition is attractive, with a balance sheet that has held together throughout the past two years, and fundamentals that show useful strengths are in place. If you prefer to work with short-term trading strategies, the stock’s limited technical downside means that a bearish trade, either by shorting the stock or buying put options, is a very speculative, unusually low-probability trade right now. A push above $33.50, however could provide a good signal to buy the stock or work with call options with an eye on $37 as an attractive bullish profit target.