hollyfrontier corp -- fade the seaway pipeline news

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J. Stephen Castellano Ascendere Associates LL

[email protected] www.ascenderellc.co

Ascendere Associates LLC

November 17, 2011

HollyFrontier Corp (HFC) -- Fade the Seaway Pipeline News

I bought HFC near the close on November 17 for a speculative short-term trade.

I've been looking for a high-beta, high-quality, out-of-favor name to play a potential bounce following a market sell-o

Being out of favor was important to me because in this quickly in this market sentiment can change quickly and driveshort-term gains, and buying a refiner in this current market seems like one of the worst things to do right now. In

addition, I think HFC may have a better risk-reward profile than trading a leveraged ETF at this point.

The stock of HollyFrontier Corp, a 440,000 bpd petroleum refiner is a case in point -- HFC is currently down 37% perce

from its 52-week high of $38.20 set on August 1. HFC is currently trading at 3.8x the NTM consensus EPS estimate of

$6.47x. This is in line with its 2008-low PE of 3.9x and slightly above a YTD low of 3.6x reached on October 4.

The stock's decline is likely due to a combination of general negative sentiment plus smaller refining margins as the

spread between Brent and WTI oil prices have narrowed recently.

CommodityOnline has a good of overview of recent pipeline news impacting the Brent-WTI spread, citing a Barclays

analyst that expects spreads to range $0 to $15 and average $5 in 2012. According to this chart on Bloomberg, using

first month futures contracts, the spread has narrowed from a recent high of $26 on October 13 to $9.

WTI prices have moved up with news of pipeline capacity being added from Cushing, OK to the Gulf of Mexico, and

Brent prices have declined a bit due to macro fears, which has drastically narrowed the Brent-WTI spread. Refiners li

HFC have been able to purchase oil at WTI prices and refine it into petroleum-based products that are priced off of

Brent.

NYSE:HFC LTM FY+1 FY+2 LTM

Insiders

Stock Price $23.93 EPS: 6.11$ EPS: $7.50 EPS: $5.45 ROE: 24.5% Own 1.9%

EBITDA/ Number of

Market Cap $5.0b P/E: 3.9 P/E: 3.2 P/E: 4.4 Capital 38.8% Analysts 12

EBIT Debt to

Enterprise Val $5.1b P/CF 3.2 P/CF 2.2 P/CF 2.3 Margin 11.2% Captial 17.9%

NI Dividend

Beta 0.90 P/S: 0.4 P/S: 0.3 P/S: 0.3 Margin 6.4% Yield 1.4%

Source: Capital IQ consensus and financial data.

http://hollyfrontier.com/corporate-profile/



http://www.commodityonline.com/futures-trading/market-report/Barclays:-Seaway-reversal-leads-to-a-sharp-contraction-in-WTI-Brent-spread-25972.html


http://www.bloomberg.com/quote/CLCO1:IND



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In my opinion, I think there is a good chance the market may be overly discounting the impact of the Seaway pipeline

immediately following its announcement. The pipeline has not been re-engineered yet to reverse the flow of oil, and

projects have a way of getting delayed. A new 150,000 bpd pipeline by the second quarter of 2012 is a long way off in

market that has recently been defined moment to moment by sovereign debt yields in Europe. I could be wrong of

course, but it's been my experience that at times the market overreact in the short-term to announcements of capaci

additions.

If I'm right about the market overly discounting the negative impact of narrowed Brent-WTI spread, then HFC andperhaps other oil refiners look good as a short-term trading idea. HFC looks particularly attractive to me because it is

well-managed company with strong-backward looking operating momentum trading at a historically low multiple.

Ranking Data as of November 11, 2011

HollyFrontier Corporation

NYSE:HFC

Energy

Oil and Gas Refining and Marketing

Ascendere Ranking Price 11/17/11 23.93 Cash (1,716) EV/LTM EBITDA 3.3

Shares 208 Debt 1,232 Price/Book 1.2

Market Cap 4,978 Other 606

5 = Best Rank Enterprise Value 5,100

Relative Value 5

Operating Momentum 5 CY1 Consensus EPS Est. 7.53$ CY1 PE 3.2 Total Capital 6,893$

Analyst Revisions Mom 5 CY2 Consensus EPS Est. 5.59$ CY2 PE 4.3 Debt/Capital -7%

Fundamental Quality 5 Latest Annualized Dividend 0.35$ Div Yield 1.1% Debt/Enterprise Value 24%

Source: Capital IQ data and estimates, and Ascendere Associates LLC data and estimates.

http://ftalphaville.ft.com/blog/2011/11/16/749851/bye-bye-wti-brent-spread-disconnect/







HollyFrontier Corporation 500 499 498 497 496

HFC 2000 1999 1998 1997 1996

Energy

Oil and Gas Refining and Marketing

500

9/30/2011 # Estimates Forecast Actual Variance LTM Margin

Gross Revenue 5 5,104$ 5,173$ 69$High 7,219$ (2,045)$

Low 4,241$ 933$

EBITDA 6 903$ 900$ (2)$ 12.3%

High 967$ (67)$

Low 841$ 60$

EBIT 8 855$ 853$ (2)$ 11.2%

High 906$ (53)$

Low 783$ 70$

EPS quarter 15 2.32$ 2.51$ 0.19$High 2.59$ (0.08)$

Low 1.77$ 0.75$

Shares Outsanding 208 106 (102)

Diluted Shares Outsanding 110

Source: consensus estimates via Capital IQ






NYSE:HFCData as of November 11, 2011 Relative Change in Estimates

Next Quarter 12/31/11

FQ42011 Current -1 Week -1 Month -3 Month FQ42011 -1 Week -1 Month -3 Mon

Revenue 4,466$ 4,085$ 4,058$ 4,371$ Revenue 9.34% 10.06% 2.17

EBIT 648$ 612$ 489$ 382$ EBIT 5.87% 32.70% 69.52

EPS 1.87$ 1.77$ 1.39$ 1.29$ EPS 5.59% 34.06% 44.43

FY2011 FY2011

Revenue 15,476$ 15,327$ 15,397$ 14,294$ Revenue 0.97% 0.51% 8.27

EBIT 2,070$ 2,041$ 1,895$ 1,553$ EBIT 1.41% 9.19% 33.23

EPS 7.53$ 6.91$ 6.80$ 5.61$ EPS 9.03% 10.82% 34.39

FY2012 FY2012

Revenue 17,557$ 17,254$ 17,556$ 18,737$ Revenue 1.76% 0.01% -6.30

EBIT 2,047$ 1,971$ 1,946$ 1,745$ EBIT 3.84% 5.20% 17.28EPS 5.59$ 5.46$ 5.21$ 4.58$ EPS 2.39% 7.33% 22.18

Source: Capital IQ consensus estimates.

Energy

FQ+1 -1 Week -1 Month -3 Mon

Revenue -0.50% -1.38% -2.41EBIT -1.17% -3.52% -5.82

EPS -0.28% -0.95% -3.34

FY+1

Revenue 0.00% 0.10% -0.46

EBIT -0.28% -0.95% -3.34

EPS -0.35% -2.20% -3.90

FY+2

Revenue -0.08% -0.48% -1.35

EBIT -1.14% -3.93% -7.16

EPS -1.54% -4.93% -8.57

Rating Changes -0.01% -0.43% 0.40

All stocks on major U.S. exchanges w ith a market cap above $750m

Source: Capital IQ consensus estimates and Ascendere Associates m





Historicals not pro-forma for Frontier acquisition. Note however, by my estimates that the combined company may

have a higher economic profit and ROIC compared to its history.

Forecasts are based in part on consensus estimates.

ECONOMIC PROFIT MODEL driven in part by Consensus Average estimates.


NYSE:HFC Estimate Estimate

Economic Profit Model 12/30/12 9/29/12 6/30/11 3/31/11 12/31/10 9/30/10 6/30/10 3/31/10 12/31/09 9/

Adjusted Working Capital 120 120 62 125 137 139 225 243 164

Net PP&E 3,199 3,160 1,860 1,802 1,757 1,697 1,670 1,639 1,630 1

Other fixed assets 2,279 2,279 2 (2) (34) 59 60 59 64

Operating Capital 5,598 5,559 1,924 1,924 1,860 1,895 1,954 1,941 1,858 1

Cost of Debt 8.2% 8.2% 8.1% 8.8% 9.3% 7.4% 7.2% 5.8% 4.7%

Cost of Equity 12.2% 12.2% 12.1% 12.8% 13.3% 11.4% 7.5% 8.3% 8.4%

WACC* (implied, or arbitrary override) 6.9% 6.9% 7.7% 8.1% 8.2% 7.1% 7.4% 7.5% 7.2%

Economic Charge 384 381 149 156 152 135 144 147 134

EBIT 2,026 2,234 643 445 263 167 114 20 80

Interest on Operating Leases 7 7 7 8 8 6 6 4 3

R&D Expenditure - - - - - - - - - R&D Amortization - - - - - - - - -

Goodwill Amortization 2 2 2 2 2 - - - -

Adjustment for Provisions, Nonrecurring and Nonop (11) (14) (3) (1) 2 1 1 (1) (1)

Adjusted EBITA 2,024 2,229 648 453 276 174 121 23 82

Effective Tax Rate 35.7% 35.7% 34.4% 33.6% 30.8% 27.2% 17.5% 0.0% 17.0% 3

Operating tax rate 17.3% 17.3% 23.3% 13.7% 22.5% 26.6% 7.0% 69.2% 23.6%

Taxes on EBITA (350) (386) (151) (62) (62) (46) (8) (16) (19)

Increase in deferred taxes (smoothed) - - - - - - - - -

NOPLAT 1,674 1,843 497 391 214 128 112 7 63

Estimate Estimate

NYSE:HFC 12/30/12 9/29/12 6/30/11 3/31/11 12/31/10 9/30/10 6/30/10 3/31/10 12/31/09 9/

NOPLAT 1,674 1,843 497 391 214 128 112 7 63

Economic Charge 384 381 149 156 152 135 144 147 134

Economic Profit 1,290 1,462 348 235 61 (8) (32) (139) (71)

Sequential growth -12% -13% 48% 283% -916% -76% -77% 97% -187%

NOPLAT 1,674 1,843 497 391 214 128 112 7 63


ROIC (NOPLAT / Operating Capital) 29.4% 32.3% 26.0% 20.4% 11.2% 6.8% 6.2% 0.4% 3.9% 1

Sequential growth -9% -23% 27% 82% 65% 11% 1408% -89% -72%

Source: Capital IQ data and estimates, and Ascendere Ass ociates data and estimates.





Economic Profit model driven in part by consensus low estimates.

ECONOMIC PROFIT MODEL driven in part by Consensus Low estimates.


NYSE:HFC Estimate Estimate

Economic Profit Model 12/30/12 9/29/12 6/30/11 3/31/11 12/31/10 9/30/10 6/30/10 3/31/10 12/31/09 9/

Adjusted Working Capital 98 98 62 125 137 139 225 243 164

Net PP&E 3,225 3,177 1,860 1,802 1,757 1,697 1,670 1,639 1,630 1

Other fixed assets 2,279 2,279 2 (2) (34) 59 60 59 64


Cost of Debt 8.2% 8.2% 8.1% 8.8% 9.3% 7.4% 7.2% 5.8% 4.7%

Cost of Equity 12.2% 12.2% 12.1% 12.8% 13.3% 11.4% 7.5% 8.3% 8.4%

WACC* (implied, or arbitrary override) 6.9% 6.9% 7.7% 8.1% 8.2% 7.1% 7.4% 7.5% 7.2%

Economic Charge 384 381 149 156 152 135 144 147 134

EBIT 1,414 1,693 643 445 263 167 114 20 80

Interest on Operating Leases 7 7 7 8 8 6 6 4 3

R&D Expenditure - - - - - - - - -

R&D Amortization - - - - - - - - -

Goodwill Amortization 2 2 2 2 2 - - - -

Adjustment for Provisions, Nonrecurring and Nonop (11) (14) (3) (1) 2 1 1 (1) (1)

Adjusted EBITA 1,411 1,688 648 453 276 174 121 23 82

Effective Tax Rate 35.7% 35.7% 34.4% 33.6% 30.8% 27.2% 17.5% 0.0% 17.0% 3

Operating tax rate 17.3% 17.3% 23.3% 13.7% 22.5% 26.6% 7.0% 69.2% 23.6%

Taxes on EBITA (244) (292) (151) (62) (62) (46) (8) (16) (19)

Increase in deferred taxes (smoothed) - - - - - - - - -

NOPLAT 1,168 1,396 497 391 214 128 112 7 63

Estimate Estimate

NYSE:HFC 12/30/12 9/29/12 6/30/11 3/31/11 12/31/10 9/30/10 6/30/10 3/31/10 12/31/09 9/

NOPLAT 1,168 1,396 497 391 214 128 112 7 63

Economic Charge 384 381 149 156 152 135 144 147 134

Economic Profit 783 1,015 348 235 61 (8) (32) (139) (71)

Sequential growth -23% -29% 48% 283% -916% -76% -77% 97% -187%

NOPLAT 1,168 1,396 497 391 214 128 112 7 63


ROIC (NOPLAT / Operating Capital) 20.7% 24.7% 26.0% 20.4% 11.2% 6.8% 6.2% 0.4% 3.9% 1

Sequential growth -16% -33% 27% 82% 65% 11% 1408% -89% -72%

Source: Capital IQ data and estimates, and Ascendere Ass ociates data and estimates.





HollyFrontier Corporatio Price 24$

HFC NTM EPS 6.47$

Energy NTM PE 3.70

Oil and Gas Refining and Marketi R/R 20.5 to 1

Max up to ten years Three years One year One year historically implied target ra

11/15/01 to 11/17/11 11/20/08 to 11/17/11 11/18/10 to 11/17/11 NTM EPS Target 2$

Max PE 18.6 04/29/10 Max PE 18.6 04/29/10 Max PE 16.3 02/10/11 Max EPS 8.92$ 145$

Average PE 11.1 Average PE 10.3 Average PE 9.8 Average EPS 6.47$ 63$

Min PE 3.8 11/17/11 Min PE 3.8 11/17/11 Min PE 3.8 11/17/11 Min EPS 4.69$ 18$

Source: Capital IQ consensus estimates, As cendere Ass ociates models.

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Price / Earnings (NTM) vs. Stock Price

P/E Average +1 St. Dev. -1 St. Dev. Stock Price


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.

Ticker: HFC

Company: HollyFrontier Corporation

HFC 12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010 11/17/2011 Last 5 years

TEV / NTM Total Revenue Average 0.7x 0.8x 0.4x 0.4x 0.3x 0.3x 0.4x

High 1.1x 1.2x 0.7x 0.5x 0.4x 0.5x 1.2x

Low 0.4x 0.6x 0.2x 0.3x 0.3x 0.2x 0.2x

Close 0.8x 0.6x 0.4x 0.3x 0.4x 0.3x 0.3x

TEV / NTM EBITDA Average 6.4x 7.4x 6.2x 6.2x 7.4x 4.4x 6.4x

High 8.7x 9.7x 9.2x 8.1x 9.8x 7.9x 9.8x

Low 4.4x 5.1x 3.7x 4.9x 5.1x 1.5x 1.5x

Close 7.2x 5.6x 5.4x 5.1x 7.8x 2.3x 2.3x

TEV / NTM EBIT Average 7.7x 8.4x 7.5x 8.1x 10.4x 5.3x 8.0x

High 10.9x 11.3x 13.9x 12.1x 16.0x 10.9x 16.0x

Low 5.3x 5.7x 4.3x 6.4x 7.8x 1.6x 1.6x

Close 8.3x 6.5x 6.4x 8.1x 10.6x 2.4x 2.4x

Price / NTM EPS Average 11.9x 13.4x 9.6x 9.0x 13.1x 9.3x 10.9x

High 14.4x 15.4x 13.0x 14.4x 19.4x 16.3x 19.4xLow 8.9x 10.1x 3.9x 7.1x 9.9x 3.6x 3.6x

Close 13.0x 11.1x 7.1x 9.9x 14.7x 3.8x 3.8x

Source: Capit al IQ


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DISCLOSURES

Ascendere is in the business of providing equity research and related consulting services to investors and their advisors. The equity research it

provides includes basic quantitative model portfolios and more detailed fundamental research with respect to individual stocks. In addition, th

firm manages stock portfolios for itself and clients. Ascendere currently sources financial data from Capital IQ.

Ascendere does not rate stocks on any scale, but does offer individual stock commentary and valuation opinions. With regard to Ascendere's

portfolio strategies, "long" or "high-quality" baskets should generally be considered buys, unless otherwise noted. Stocks in our "short" or "low

quality" baskets should generally be considered sells, unless otherwise noted. While exceptions may occasionally occur, typically stocks in the h

quality basket are expected to outperform the S&P 500 over a month's time and stocks in the low-quality basket are expected to underperform

more relevant benchmark would comprise of all stocks and ADRs that trade on major U.S. stock exchanges with a market cap above $2 billion.

Ascendere adheres to professional standards and abides by codes of ethics that put the interests of clients ahead of its own. The following are

specific disclosures made by Ascendere:

1) Ascendere may have a financial interest in the companies referred to in this report ("the Companies"). The research analyst coveri

the Companies and members of the analyst's immediate family have a financial interest in one or more of the Companies.

2) Ascendere generates revenue from research subscription revenue and portfolio management fees. At any given time it may be lon

short any of the Companies.

3) Ascendere does not make a market in the securities of any of the Companies.

4) Ascendere has not received compensation from the Companies.

5) Ascendere has not managed or co-managed a public offering for any of the Companies.

6) Neither Ascendere nor any of its officers or any family member of the covering analyst serve as an officer, director or advisory boar

member of any of the Companies.

7) Neither Ascendere nor any of its officers or any family member of the covering analyst beneficially own 1% or more of any class of securities of any of the Companies.

DISCLAIMERS

This report is intended for informational purposes only and does not constitute a recommendation, or an offer, to buy or sell any securit ies or

related financial instruments. The report is not intended to be in furtherance of the specific investment objectives, financial situation, or partic

needs of any individual recipient. Investment decisions should be based on an individual's own goals, time horizon and tolerance for risk. The

information contained herein accurately reflects the opinion of Ascendere at the time the report was released. The opinions of Ascendere are

subject to change at any time without notice and without obligation or notification. The officers, affiliates or family members of Ascendere

Associates may hold positions in the securities of the Companies. No warranty is made as to the accuracy of the information contained herein.

views and opinions expressed in the market commentary reflect the opinions of the author and may be based upon information obtained from

third-party sources believed to be reliable but not guaranteed. These opinions are subject to change at any time based upon market or other

conditions. Ascendere disclaims any responsibility to update such views. This information is intended for the sole use of clients of Ascendere.

other use, distribution or reproduction is strictly prohibited. Investing in stocks includes a high degree of risk, including the risk of total loss. Th

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solicitation of an offer to buy or sell any securities or investment services. All information, opinions and estimates are current as of original

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predictions, forecasts, projections and other outcomes we may describe or imply. A number of important factors could cause results to differ

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DISCLOSURES

Ascendere is in the business of providing equity research and related consulting services to investors and their adviso

The equity research it provides includes basic quantitative model portfolios and more detailed fundamental research

with respect to individual stocks. In addition, the firm manages stock portfolios for itself and clients. Ascendere

currently sources financial data from Capital IQ.

Ascendere does not rate stocks on any scale, but does offer individual stock commentary and valuation opinions. Wit

regard to Ascendere's portfolio strategies, "long" or "high-quality" baskets should generally be considered buys, unlesotherwise noted. Stocks in our "short" or "low-quality" baskets should generally be considered sells, unless otherwise

noted. While exceptions may occasionally occur, typically stocks in the high-quality basket are expected to outperfor

the S&P 500 over a month's time and stocks in the low-quality basket are expected to underperform. A more relevan

benchmark would comprise of all stocks and ADRs that trade on major U.S. stock exchanges with a market cap above

billion.

Ascendere adheres to professional standards and abides by codes of ethics that put the interests of clients ahead of it

own. The following are specific disclosures made by Ascendere:

1) Ascendere may have a financial interest in the companies referred to in this report ("the Companies"). The researc

analyst covering the Companies and members of the analyst's immediate family have a financial interest in one or mo

of the Companies.

2) Ascendere generates revenue from research subscription revenue and portfolio management fees. At any given tim

it may be long or short any of the Companies.

3) Ascendere does not make a market in the securities of any of the Companies.

4) Ascendere has not received compensation from the Companies.

5) Ascendere has not managed or co-managed a public offering for any of the Companies.

6) Neither Ascendere nor any of its officers or any family member of the covering analyst serve as an officer, director advisory board member of any of the Companies.

7) Neither Ascendere nor any of its officers or any family member of the covering analyst beneficially own 1% or more

any class of securities of any of the Companies.

8) The covering analyst certifies that this report accurately reflects such analyst's personal views.


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DISCLAIMERS

This report is intended for informational purposes only and does not constitute a recommendation, or an offer, to buy

sell any securities or related financial instruments. The report is not intended to be in furtherance of the specific

investment objectives, financial situation, or particular needs of any individual recipient. The information contained

herein accurately reflects the opinion of Ascendere at the time the report was released. The opinions of Ascendere a

subject to change at any time without notice and without obligation or notification. The officers, affiliates or family

members of Ascendere Associates may hold positions in the securities of the Companies. No warranty is made as to t

accuracy of the information contained herein. This information is intended for the sole use of clients of Ascendere. Aother use, distribution or reproduction is strictly prohibited. Investing in stocks includes a high degree of risk, includin

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