HollyFrontier Earnings Call Insights: Rockies Margin Capture, Drop Down Opportunities

On Monday, HollyFrontier Corp (NYSE:HFC) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Rockies Margin Capture

Jeff Dietert – Simmons and Company: Dave, you mentioned the hydrotreater downturn at Cheyenne, and it looked as if Cheyenne gross margins were or at least Rockies stress margins were weaker than we expected and what the indicators looked like. Could you talk about margin capture in the Rockies and what the opportunity cost was in 1Q and if there’s any impact on 2Q?

David L. Lamp – EVP and COO: It was all in 1Q, Jeff. We just basically cleaned some exchangers just to get throughput back up to full rates. It’s about a seven-day outage. The lost opportunity was about $5 million, somewhere in that neighborhood.

Jeff Dietert – Simmons and Company: Was that the only negative influence in the Rockies?

David L. Lamp – EVP and COO: Yes. We did have some minor at Woods Cross. We had hydrogen plant outage which affected capture rates slightly, but that was about it.

Jeff Dietert – Simmons and Company: Secondly, you talked about savings on benzene at Navajo and Woods Cross. How significant are those savings? What are you paying for benzene credits and what’s the savings likely to be?

David L. Lamp – EVP and COO: The most recent benzene credits we’ve bought are about $1.75 of a gallon, and these two projects knocked our requirement down. You’re thinking gasoline from about 0.12, somewhere in that neighborhood to about 0.08, so I don’t have an exact gallon, but the impact as you can see is pretty dramatic when you multiply the tons with number of barrels.

Jeff Dietert – Simmons and Company: On UNEV could you talk about current throughput you talked about 11,000 barrels a day in the first quarter. What are you running currently?

David L. Lamp – EVP and COO: We’re over 20,000 barrels as of today and it’s still going up. So, we anticipate we’ll get closer to 25 but I imagine that’s what the average is going to be for the second quarter. That’s total line rate so some of that isn’t clear as well.

Drop Down Opportunities

Doug Leggate – Bank of America Merrill Lynch: Just staying with you now for a second and I guess HEP generally sell us can you just give us an update as to where things stand with you now and what the drop down visibility is on a go forward basis not just for the outline but also if you’re seeing additional drop down opportunities as you’ve identified since the merger from the legacy Frontier assets?

Michael C. Jennings – CEO and President: Doug, the one that we’re focused on right now as you know obviously we’ve got about just in excess of $300 million invested in that line. We think it’s strategic to both how we Frontier in terms of our being able to access that Las Vegas market and obviously to HEP for their growth. We’d expect that within the first half of this current year, we’ll have something going out on that. It’s just important to get it right. It’s a line that will grow through time from current utilization levels and so we’re working closely with HEP to get that drop down negotiated and done. In terms of additional opportunities for HFC drop downs to HEP I think they are going to follow the refining company’s external growth as much as anything. I don’t think that we have immediate drop down opportunities that we have identified since the merger apart from the obvious those being the Cheyenne and El Dorado logistics assets and then UNEV right here in front of us. Obviously, as we execute our project in Woods Cross to expand that refinery, there will be logistics associated with that whether there is an opportunity there, we’re evaluating.

Doug Leggate – Bank of America Merrill Lynch: So you’re confident UNEV is still going to move down basically in the first half, is that a takeaway?

Michael C. Jennings – CEO and President: Yeah, that’s the objective of both HFC and HEP, whether there is a closing in the first half, I’m not going to guarantee, but I think we’re moving on a pace to get there or close.

Doug Leggate – Bank of America Merrill Lynch: I just have two quick follow-ups, you gave some indications there is obviously how cracks are going so far in the second quarter. Quite honestly, they look a little stronger than perhaps we’ve seen it, is there anything that you could observe specific to your regions or maybe just give a prognosis just to how you see – I don’t know if you’re prepare to give a sort of year-over-year comparison, but how do you see the dynamics in your markets right now relative to what you see second quarter last year?

Michael C. Jennings – CEO and President: Second quarter last year, the demand figures that we’ve been hearing on other calls and what we’re noting in the Magellan system in particular are encouraging. I’m not sure that we’re in the demand decline mode that sort of everybody has assumed. Magellan got off with full on product in the Mid-Con there in the month of February, but has come down pretty aggressively in the month of April down now to in the low 6 million barrel range, which is a very comfortable range for that system. Mid-Con cracks have responded well. Obviously, there is a lot of noise in terms of the NYMEX crack, but we consider our markets to be healthy right now, the Southwest probably leading the pack.

Doug Leggate – Bank of America Merrill Lynch: Just to be clear the wide distance we saw in the middle of the first quarter, you’ll get those mostly in second-quarter, is that fair?

Michael C. Jennings – CEO and President: The white discount?

Doug Leggate – Bank of America Merrill Lynch: Sorry, wide.

Michael C. Jennings – CEO and President: Wide discounts on crude? Yes, that’s how it works. There is some trans of ton.

Doug Leggate – Bank of America Merrill Lynch: Last one from me is, just an update on your philosophy as to why special dividends as opposed to more aggressive buybacks and I’ll leave it at that?

Michael C. Jennings – CEO and President: It’s a $64,000 question. Look buybacks to us are an investment at a price, When we see a price that we like we tend to pile on aggressively, but at the same time we don’t consider an automatic routable equation. Our goal at the specials is to payout a continuous stream to shareholders when we are earning at high levels, and we see that as continuing for quite some time. We’ve obviously got a balance sheet that supports it. At present prices we’re doing both, so I don’t think it’s an either/or we see our share prices very attractive for a purchase, but we also think the cash returns to shareholders help to differentiate the stock and nobody has yet sent back a check.

Doug Leggate – Bank of America Merrill Lynch: Do you think it’s fair, it’s a good point. Is it fair to say that – if I say seasonally your share price had come, show some normal pull back, would you skew to buy – it’s more towards buybacks a bad time or is that really not an issue?

Michael C. Jennings – CEO and President: We are pretty dynamic and pretty opportunistic in both of our programs and we think we can execute both in parallel.