Jill: HollyFrontier(HFC) operates as an independent petroleum refiner and marketer in the United States. The company operates five refineries with a combined crude oil processing capacity of 443,000 barrels per day...And it is also one of Jim Cramer's favorite refining plays. Let's take a look why he likes the space and HFC in particular.
US based refineries are in the sweet spot, here and now, largely because there has been an explosion in domestic oil production due to recent discoveries in places such as the Bakken and the Eagle Ford. That's helped moderate the price of US crude oil, also known as WTI, to about $93.
Brent, which is the benchmark, is about $15 higher (The difference is known as the spread). Currently refiners are benefiting from that spread because they're able to buy US crude oil at the lower prices, refine it and then sell their products at levels based on the higher priced Brent.
Despite the recent run up, Cramer thinks HFC is still cheap at just over 6x trailing earnings and operating cash flow. The company sports a solid balance sheet with approximately $1 billion in net cash on the books and shares also yield 2.3%. Consensus earnings estimates for both FY2013 and FY2014 have gone up more than 15% and 10%, respectfully, over the past three months.
Skip: As Jill mentioned Cramer likes HFC fundamentals and so do we. According to Yahoo! Finance HFC analysts' average earnings per share projected for this quarter about to end is $1.77 which is a $0.61 per share increase year over year. That would be a headline increase of 52% -- and will only increase HFC's net cash position. HFC already has over $5 per share in net cash which offers compelling evidence that management should be considered as excellent.
Technically, HFC is trying to find a bottom after making its all-time high at the beginning of this month. That high was just under $60 per share. The one caveat to any technically driven trade in HFC is that there is basically zero support until the mid $40s. Should HFC break through the $50 level that lack of any price support is not an ally for the bulls. With a beta of 1.43 and options trading in the mid 30s vols, HFC options trades should be hedged trades that completely control the risk factor.
The options tactic I prefer for HFC is a bullishly-biased vertical call spread, expiring in June.
Trades: Buy to open HFC 3 June 50 calls for $3.60 and sell to open 3 HFC June 55 calls at $1.60.
The total risk for the trade is $2.00. As always, we will monitor the trade on this site in the comments section below.