HF Sinclair Shares Remain Undervalued as Shareholder Returns Ramp Up 

Director

Allen Good

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 mb/d 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 pretreatment project. Combined with HF’s existing projects (two RD units and a pre-treatment unit), it now can produce 380 million gallons annually and expects future growth.

Adding Sinclair’s marketing group of over 300 distributors, 1,500 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 Sinclair 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, MLP Holly Energy Partners, or HEP, acquired Sinclair’s midstream assets including 1,200 miles of pipelines, eight product terminals with 4.5 mm/b of storage, and interests in three pipeline joint ventures. The incremental EBITDA of $70 million-$80 million will increase HEP’s annual EBTIDA to about $450 million while opening up future organic and external transaction growth opportunities. HF Sinclair has announced plans to buy out and consolidate HEP by the end of 2023.

Business Strategy & Outlook

Given its cost advantaged integrated model, we think HF Sinclair earns a narrow economic moat. 

Perhaps more than any other refiner, HF’s refining segment benefited from wide inland light crude differentials during the last decade plus, thanks to the position of its refining assets. Prior to close of the Sinclair and Puget Sound acquisitions, all HF’s refining capacity was in the midcontinent, meaning its refineries could process either discount light or heavy crude, given the proximity to the source of production. After the acquisition, that is still largely the case with only 149 mb/d (Puget Sound refinery in Washington) of its 678 mb/d in capacity not in proximity to inland crude production (midcontinent, Rockies, Southwest). HF should continue to benefit, as we project the differentials to remain well above historical levels prior to 2010 even as new pipeline capacity comes on stream. Given the feedstock cost advantage, we think HF’s refining business earns a narrow moat.

The firm also has a crude advantage, thanks to the complexity of its refineries and their proximity to cost-advantaged feedstock from Canada. Its legacy refining system (excluding Puget Sound) has a complexity rating of 12.1, which allows it to process heavy crude and produce comparable yields of refined product more cheaply than refineries that use only the easier-to-refine, but more expensive, light crude. The two refineries acquired with Sinclair can also have access to Canadian heavy or inland discount sweet crude. 

The acquisition of the Puget Sound refinery is slightly moat dilutive, in our view. The refinery has a complexity of 9.3 but lacks the level of crude cost advantage of the firm’s other refineries. It can, however, process a variety of crudes and has access to cost advantaged Canadian crude. Refining on the West Coast, including the Pacific Northwest, has proven difficult and faces future demand challenges given high levels of EV penetration. That said, low carbon fuel standards in the region are ahead of the rest of the country and offer an opportunity for the firm to leverage its current expansion into renewable diesel. Also, the price paid was reasonable, suggesting the firm can avoid value destruction assuming margins are in line with historical levels. 

Prior to the Sinclair deal, HF lacked the downstream infrastructure and the retail segment that many peers have. As a result, it was unable to create renewable identification numbers, or RINs, to meet the renewable fuel standard and must purchase about half of its obligation on the open market. Recently, higher RIN prices have substantially increased this cost relative to a few years ago, which weighed on earnings. In this context, we view the addition of a marketing segment as moat enhancing even if we might not view retail marketing as moatworthy on its own. 

We view HF’s ownership of Holly Energy Partners as moat accretive, as well. In our framework, crude oil and petroleum pipeline assets are typically moaty as they benefit from an efficient scale moat source. 

HF’s lubricant and specialties business has delivered uneven performance since its first acquisition and has recorded impairments. As such, we are hesitant to award it a moat at this time as it is also largely a commodity business with few competitive advantages. However, we do not see it as moat dilutive or value destructive over the long term. 

We have incorporated ESG risk into our moat evaluation, but no risk is material or probable enough within the next 10 years to influence our narrow-moat rating. A carbon tax could be implemented, which would likely affect demand, but not in the near term. The firm discloses its GHG emissions and carbon intensity and targets a 25% reduction in 2020 Scope 1 and 2 emission levels by 2030. 

HF’s investment in renewable diesel addresses potential petroleum product demand destruction while reducing its carbon intensity. It also diversifies its output and protects against RIN purchase obligation costs. It can now produce 380 million gallons annually of renewable diesel after converting its Cheyenne petroleum refinery, installing a renewable diesel unit at the Artesia facility, and adding pretreatment units in Artesia and at the acquired Sinclair, Wyoming, refinery. With Sinclair, it also added a 10 mb/d unit in operation since 2018. With 50% lower GHG emissions, renewable diesel should reduce HollyFrontier’s carbon intensity while delivering IRRs of 20%-30%, suggesting it's moat enhancing as well.

Narrow

Economic Moat

HF Sinclair Corp

HF Sinclair Corp. is an independent energy company. It manufactures and sells products such as gasoline, diesel fuel, jet fuel, renewable diesel, specialty lubricant products, specialty chemicals, and specialty and modified asphalt. The company operates through five segments: Refining, Marketing, Renewables, Lubricants and Specialty Products, and Midstream. The company was founded on March 14, 2022 and is headquartered in Dallas, TX.

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HF Sinclair Corp. is an independent energy company. It manufactures and sells products such as gasoline, diesel fuel, jet fuel, renewable diesel, specialty lubricant products, specialty chemicals, and specialty and modified asphalt. The company operates through five segments: Refining, Marketing, Renewables, Lubricants and Specialty Products, and Midstream. The company was founded in 1947 and is headquartered in Dallas, TX.

DALLAS--(BUSINESS WIRE)--HF Sinclair Corporation (NYSE: DINO) (“HF Sinclair”) today announced the completion of the transactions contemplated by the previously announced Agreement and Plan of Merger, pursuant to which HF Sinclair acquired all of the outstanding common units (“HEP Common Units”) representing limited partner interests in Holly Energy Partners, L.P. (“HEP”) not already owned by HF Sinclair and its subsidiaries, for a combination of 0.3150 of a share of HF Sinclair common stock and.

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OVERLAND PARK, KS / ACCESSWIRE / November 30, 2023 / TortoiseEcofin today announced that Holly Energy Partners LP (NYSE:HEP) will be removed from the Tortoise MLP Index ® (TMLP) and the Tortoise North American Pipeline IndexSM (TNAP) as a result of the approved acquisition by HF Sinclair Corp (NYSE:DINO). Due to the acquisition, HEP will be removed from indices at market open on Friday, December 1, 2023.

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DALLAS--(BUSINESS WIRE)--HF Sinclair Corporation (NYSE: DINO) (“HF Sinclair”) and Holly Energy Partners, L.P. (NYSE: HEP) (“HEP”) today announced the expiration and final results of the previously announced (i) private offers to exchange (each an “Exchange Offer” and, collectively, the “Exchange Offers”) any and all outstanding (a) 6.375% Senior Notes due 2027 (the “2027 Notes”) and (b) 5.000% Senior Notes due 2028 (the “2028 Notes” and, together with the 2027 Notes, the “HEP Notes”) previously.

HF Sinclair Corporation and Holly Energy Partners, L.P. Announce Expiration and Final Results of Exchange Offers and Consent Solicitations for Outstanding Notes of the HEP Issuers

DALLAS--(BUSINESS WIRE)--HF Sinclair Corporation (NYSE: DINO) (“HF Sinclair”) and Holly Energy Partners, L.P. (“HEP”) (NYSE: HEP) announced that at a special meeting of HEP unitholders (the “HEP Special Meeting”) and a special meeting of HF Sinclair stockholders (the “HF Sinclair Special Meeting”), each held today, (i) HEP unitholders voted to approve the previously announced Agreement and Plan of Merger (as the same may be amended or supplemented from time to time, the “Merger Agreement”), dat.

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DALLAS--(BUSINESS WIRE)--HF Sinclair Corporation (NYSE: DINO) (“HF Sinclair”) and Holly Energy Partners, L.P. (NYSE: HEP) (“HEP”) today announced that as of 5:00 p.m., New York City time, on November 13, 2023 (the “Early Participation Date”), that $880,229,000 in aggregate principal amount of outstanding HEP Notes (as defined below) previously issued by HEP and Holly Energy Finance Corp. (“Finance Corp.” and, together with HEP, the “HEP Issuers”), representing approximately 97.80% of the total.

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DALLAS--(BUSINESS WIRE)--HF Sinclair Corporation (NYSE: DINO) (“HF Sinclair” or the “Company”) today reported third quarter net income attributable to HF Sinclair stockholders of $790.9 million, or $4.23 per diluted share, for the quarter ended September 30, 2023, compared to $954.4 million, or $4.45 per diluted share, for the quarter ended September 30, 2022. Excluding the adjustments shown in the accompanying earnings release table, adjusted net income attributable to HF Sinclair stockholders.

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NEW ORLEANS--(BUSINESS WIRE)--Former Attorney General of Louisiana Charles C. Foti, Jr., Esq. and the law firm of Kahn Swick & Foti, LLC (“KSF”) are investigating the proposed sale of Holly Energy Partners, L.P. (NYSE: HEP) to HF Sinclair Corporation (NYSE: DINO). Under the terms of the proposed transaction, common unitholders of Holly Energy will receive 0.315 shares of HF Sinclair common stock and $4.00 in cash, without interest, for each publicly held common unit of Holly Energy that the.

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DALLAS--(BUSINESS WIRE)--HF Sinclair Corporation (NYSE: DINO) (“HF Sinclair”) and Holly Energy Partners, L.P. (NYSE: HEP) (“HEP”) today announced the commencement of private offers by HF Sinclair to all Eligible Holders (as defined herein) to exchange (each an “Exchange Offer” and, collectively, the “Exchange Offers”) notes previously issued by HEP and Holly Energy Finance Corp. (“Finance Corp.” and together with HEP, the “HEP Issuers”) listed in the table below (the “HEP Notes”), pursuant to t.

HF Sinclair Corporation and Holly Energy Partners, L.P. Announce Commencement of Private Exchange Offers and Consent Solicitations by HF Sinclair Corporation for Outstanding Notes of Holly Energy Partners, L.P.

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DALLAS--(BUSINESS WIRE)--HF Sinclair Corporation (NYSE: DINO) (“HF Sinclair”) and Holly Energy Partners, L.P. (NYSE: HEP) (“HEP”), plan to announce results for the quarter ending September 30, 2023 on November 2, 2023, before the opening of trading on the NYSE. HF Sinclair and HEP have scheduled a joint webcast conference on November 2, 2023 at 9:30 a.m. Eastern time to discuss financial results. This webcast may be accessed at: https://events.q4inc.com/attendee/172908001. An audio archive of t.

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