Refining Our Virtual Put Selling Portfolio

Refining Our Virtual Put Selling Portfolio

We opened a new put position late Wednesday afternoon. We sold a HollyFrontier (HFC, $40.06) September 2013, $40 strike price put for $2.65 per share. HFC shares had already retreated from a March high of $58.70.

HFC 1-year (daily)

Our break-even price becomes $40 – $2.65 = $37.35 per share. It takes us down to a level that has shown solid support since last summer.

HFC put price with HFC @ $40.06

Maximum profit is 100% of the $265 per contract we received upon sale of the put. We will keep this full amount if HFC closes at $40 or higher on Friday Sep. 20, 2013.

If HollyFrontier closes below $40 on expiration date we will be forced to buy 100 shares at a net cost of $37.35 /share.

See full details on all open and closed option positions here.

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  1. Barron’s Jul. 26, 2013…
    SATURDAY, JULY 27, 2013
    A Well-Refined Opportunity

    By ANDREW BARY

    HollyFrontier’s refineries have a geographical advantage over those of its competitors. That could aid its profit margins and help support its 7.3% dividend yield.

    HollyFrontier probably has been the biggest beneficiary among refiners of the boom in North American oil production, thanks in part to its access to cheaply priced crude produced in North Dakota, West Texas, and the Rocky Mountain region.

    The Dallas company has shared that windfall with shareholders through a generous dividend policy that now results in a 7.3% yield at the current stock price of $44. The company’s $3.20 annual dividend consists of a 30-cent regular quarterly payout, as well as a 50-cent special quarterly payout that has been in place for two years. The lush yield reflects the shareholder-friendly approach of the management team led by CEO Mike Jennings.

    Jennings recognizes the refining industry is mature, thanks to flat-to-declining U.S. gasoline demand. With only modest capital expenditures needed to maintain its refineries and expand capacity at one facility, the company (ticker: HFC) has used its ample profits to reward shareholders with a high dividend and bolster its balance sheet.

    Wall Street worries that HollyFrontier’s outsize profits—and its dividend—are threatened by narrowing refining profit margins in recent months, spurred by a rise in domestic crude prices. Profit estimates for 2013 and 2014 have come down by about a $1 per share. So have HollyFrontier shares, which are off 25% from their record high of $58 set in March.

    HollyFrontier now looks appealing because its profits may prove more durable than the Street now fears. The company owns a lucrative group of refineries and probably has the industry’s best balance sheet. And the stock at $44 fetches just eight times estimated 2013 earnings of $5.32 a share and nine times estimated 2014 profit of $4.65 a share.

    “THERE HAS BEEN a structural change in oil production with the growth in the middle of the country,” says Matt Murphy, an analyst at Stelliam Investment Management in New York. “Refineries like HollyFrontier that are near those sources of crude production will continue to have an advantage because of access to cheaper crude supplies.” Murphy values the company at $55 to $60 a share.

    Formed from the merger of Holly and Frontier in 2011, the company operates six refineries with a total capacity of 443,000 barrels per day in Oklahoma, Kansas, Wyoming, New Mexico, and Utah.

    It has net cash of $2 billion, or nearly $10 a share; that excludes debt at Holly Energy Partners (HEP), a master limited partnership established in 2004 to hold pipeline, terminal, and other transportation-related assets. HollyFrontier holds 39% of Holly Energy Partners units worth nearly $900 million, plus the general partnership interest in the MLP that could be worth another $300 million to $500 million.

    The big investor focus in the past few months has been on the collapse in the price spread of Brent crude, an international oil benchmark, above West Texas Intermediate (WTI), the key U.S. crude grade.

    That spread, which averaged nearly $20 last year, moved to zero recently and now stands at around $2. Marathon Petroleum (MPC) and Valero Energy (VLO) have pre-announced second-quarter profit shortfalls, which has prompted concerns ahead of HollyFrontier’s earnings release due on Aug. 7. HollyFrontier is expected to have earned about $1.40 a share, down from $2.39 a year earlier.

    The WTI/Brent spread has been viewed as a proxy for U.S. refining spreads because HollyFrontier and several of its peers have been able to purchase crude at prices linked to WTI and sell their products, mainly gasoline and diesel fuel, at prices tied to Brent. As that spread has narrowed, refining stocks have come down.

    The Bottom Line

    With a lush 7.3% dividend yield, HollyFrontier’s shares are attractive at $44—down from a March high of $58. They could rebound to $55 to $60.

    .
    There have been many explanations for the tighter spread, including increased pipeline capacity out of the middle of the country, additional refining capacity in the Midwest, and temporarily reduced oil output at a Canadian oil-sands facility. Murphy says that even if the WTI/Brent spread stays tight, HollyFrontier should still possess an advantage from low-priced crude since its refineries are near oil production and therefore benefit from a transportation advantage.

    HollyFrontier’s 30-cent regular dividend looks safe, but there’s concern about the sustainability of the 50-cent quarterly, given lower profits. The company easily covered both the regular and special dividend in 2012 when profits were more than $8 a share.

    “We view our regular dividend as sustainable through the cycle, and we’d like to grow it steadily over time,” says CFO Doug Aron. The regular dividend provides a 2.7% yield. What about the special dividend? “We would expect to continue the special dividend program until our earnings stream or balance sheet wouldn’t support that distribution.”

    Given HollyFrontier’s current earnings power and balance sheet, the special dividend could be around for a while.

    Sharing the Profits

    HollyFrontier’s generous dividend reflects its high profitability and strong balance sheet.
    Recent YTD EPS P/E Div Market
    Refiner/Ticker Price Chg 2013E 2014E 2013E 2014E Yld Val (bil)

    HollyFrontier / HFC $44.15 -5.2% $5.32 $4.65 8.3 9.5 7.3% $9.0
    Marathon Petroleum / MPC 72.05 14.4 8.11 9.40 8.9 7.7 1.9 23.4
    Phillips 66 / PSX 59.42 11.9 7.35 7.06 8.1 8.4 2.1 36.8
    Tesoro / TSO 54.55 23.8 5.14 6.66 10.6 8.2 1.5 7.4
    Valero Energy / VLO 35.67 14.5 4.41 5.09 8.1 7.0 2.5 19.5
    E=Estimate.

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