Add Refinement to Your Portfolio with HollyFrontier

NEW YORK ( TheStreet) -- Many income investors want to invest in companies that treat shareholders with special consideration and have the earnings to back up its intentions.

HollyFrontier ( HFC) fits that description and can deliver the "goods" for both its customers and shareholders.

After the merger of Holly and Frontier two years ago, the Dallas-based company now operates six refineries in Kansas, New Mexico, Oklahoma and Wyoming. It has the capacity to refine 443,000 barrels of crude per day.

Its refineries are well-situated to buy the lowest priced oil produced in the rich energy fields of North Dakota, the Rocky Mountain region and West Texas, the home of West Texas sweet light crude (WTI).

Although the oil refining business increases profitability by buying WTI at lower prices than the Brent International (BI) price-per-barrel, the spread between WTI and BI has narrowed to just a few dollars.

That's put the profit squeeze on big refiners like Marathon Petroleum ( MPC) and Phillips 66 ( PSX) causing the stocks prices to pull back in recent months.

Profit estimates for HFC have also shrunk and the share price has retreated from the 52-week high of $59.20 to as low as $39.11 on July 3. Some have wondered if HFC can continue to offer its surprisingly high dividend yield.

Its dividend yield consists of a quarterly regular dividend of 30 cents per share. But to boost the "octane" HFC also has been giving shareholders a special quarterly bonus of 50 cents per share.

Add those up and you have an annual dividend of $3.20. At a $45 share price that gives HFC a total annual dividend yield of 7.11%. This seems incredible when one considers that MPC's annual dividend offers only a 1.95% dividend and PSX's is 2.13%.

All three refiners will report quarterly earnings soon. PSX reports on Wednesday, MPC on Thursday and HFC reports before the markets open on Aug. 7. All three companies have lowered revenue and sales profit guidance in light of the enormous narrowing of the spread between WTI and BI.

Here's a one-year chart showing how the disappearing spread between WTI and BI has depressed the shares of these three refiners beginning with HFC.

HFC Chart HFC data by YCharts

Why I Prefer HollyFrontier Over the Other Two

CEO Michael Jennings is one of the big reasons. He not only understands the challenges facing the oil refining business today but he's in touch with the needs of investors.

He and his team are doing a good job of holding down the expenses associated with maintaining HFC's refineries as well as doing what is possible to expand capacity. Looking at HFC's balance sheet compared to its peers also tells me that HFC is one the best-managed refiners in the industry.

The net cash at HFC is around $2 billion which translates close to $10 a share. It owns close to 40% of the units of Holly Energy Partners ( HEP), an MLP created in 2004.

HEP consists of petroleum product and crude pipelines, storage tanks, distribution terminals, and loading rack facilities. Its pipeline assets include approximately 810 miles of refined product pipelines that transport gasoline, diesel, and jet fuel throughout the SW U.S. and Northern Mexico.

HFC's stake in HEP units is worth close to $900 million. In addition its general partnership activities in HEP may be worth up to another half-a-billion dollars. You can learn more about HFC by perusing its thorough Web site.

Even if the oil spread remains very tight HFC has a definitive advantage in obtaining lower-priced crude. That's because its refineries are near some enormous oil production areas like the Bakken Shale. This also saves on transportation costs since proximity again works in HFC's favor.

When it comes to the sustainability of its generous dividend policies, CFO Doug Aron recently commented on this concern. His words reflect an emphasis on Wall Street's worries on the issue.

"We view our regular dividend as sustainable through the cycle, and we'd like to grow it steadily over time," he said. When asked about the special quarterly dividend investors are used to receiving, he said, "We would expect to continue the special dividend program until our earnings stream or balance sheet wouldn't support that distribution."

Last year HFC easily covered both kinds of dividends when EPS was more than $8 per share.

Estimated EPS for 2013 is projected to decrease to around $5.32 per share and even if HFC were to reduce the special dividend by 50% the yield would still be 4% based on a share price of $45.

In a message to shareholders on May 16 CEO Jennings said, "Our board of directors continues their commitment to deliver shareholder value through both regular and special dividends.

He commented further by saying, "Today's announcement represents our ninth special dividend paid since our merger. Including today's announced dividends, our last 12-month cash dividend yield stands at 7.1% relative to yesterday's closing price of $48.43."

Since then the oil spread almost disappeared and profit margins have been pinched. Yet, given HFC's good proximity to its sources of oil it will continue to enjoy access to less expensive supplies of crude. This should help drive profits and support the share price.

A recent assessment of the company by analyst Matt Murphy at Stelliam Investment Management in New York City would value its shares at somewhere between $55 and $60. This helps explain the recent 15% pop in the stock price.

With less than 10 days till its next earnings report, those who're interested in investing in HFC may want to do it incrementally. The earnings conference call on August 7th at 8 am EST will discuss the company's latest financial results and is likely to lead to more clues about its industry-leading dividend policies.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Marc Courtenay is the founder and owner of Advanced Investor Technologies, LLC, as well as the publisher and editor of

Courtenay holds a Master's of Science degree in Psychology from California Polytechnic State University, and is a former senior vice-president of Investments for two major brokerage firms. He's been a fiercely independent investment "investigator" and a consulting contributor to the investment publishing world for over 30 years. In addition to his role as an investment publisher and analyst, he serves as a marketing consultant to the investment media industries.

In his role as a financial editor, he specializes in unique investment strategies, overlooked stock investments, energy and resource companies, precious metals, emerging growth companies, the prudent use of option strategies,real estate related opportunities,wealth preservation, money-saving offers, risk management, tax issues, as well as "the psychology of investing". Because of his training and background in Clinical Counseling and Psychology, he enjoys writing about investor behavior, the ¿herd mentality, how to turn investment mistakes into investment breakthroughs and the stock market's behavioral trends and patterns.

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