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Will Low Refining Margin Ail HollyFrontier (HFC) Q4 Earnings?

Zacks Equity Research

HollyFrontier Corporation HFC is set to report fourth-quarter 2018 results on Feb 20, before the opening bell. 


In the preceding three-month period, the U.S. refiner and marketer delivered better-than-expected earnings on the back of higher refining margins. Coming to earnings surprise history, HollyFrontier has a mixed record. The company managed to beat estimates twice in the trailing four quarters, delivering average positive earnings surprise of 25.98%.

HollyFrontier Corporation Price and EPS Surprise

HollyFrontier Corporation Price and EPS Surprise | HollyFrontier Corporation Quote


Investors are keeping their fingers crossed and hoping that HollyFrontier surpasses earnings estimates this time as well. While the firm’s refining competitors including Valero Energy Corporation VLO, Marathon Petroleum Corporation MPC and Phillips 66 PSX topped earnings estimates in their latest quarterly releases, our model indicates that HollyFrontier might not come up with a positive surprise in the to-be-reported quarter.


Which Way are Estimates Treading?


The Zacks Consensus Estimate for the quarter to be reported has moved up 3 cents in the past 30 days to a profit of $1.99 per share. The consensus mark for revenues is pegged at $5.9 billion. The anticipated revenues reflect an increase of 51% from the year-ago level. The company’s earnings estimates also compares favorably with the year-ago profit of 70 cents per share.


Let’s delve deeper to find out the factors that are likely to shape HollyFrontier’s fourth-quarter results.


Factors at Play


HollyFrontier’s refining segment, which is a major contributor to the company’s earnings, is likely to bear the brunt of declining refining margins and lower throughput levels in the fourth quarter of 2018.


The downstream player’s refining index displayed a mixed trend in the to-be-reported quarter. The index values for the company’s largest refining region — Mid-Continent (which comprises El Dorado and Tulsa refineries) — have fallen to $14.78 a barrel from $18.67 in the year-ago quarter.


While refining index values for Rockies and Southwest region are likely to increase, it is not likely to offset the falling margins from the Mid-Continent region that accounts for a bulk of the company’s total throughput. In fact, in the last reported quarter, 59% of HollyFrontier’s throughput volumes came from this region. Hence, overall refining margin is likely to witness a year-over-year decline. 


Turnaround activities in the El Dorado refinery in the month of October are likely to impact throughput levels of the company. In fact, HollyFrontier had already notified in its last earnings call that it expects fourth-quarter throughput to decline to 410,000-420,000 barrels per day (bpd) from 497,450 bpd in the prior-year period.


The company’s Lubricants and Specialty Products segment may also be impacted by planned turnaround at the Mississauga base oil plant. These turnaround activities, apart from hurting throughputs of the company, will also escalate spending levels. As it is, HollyFrontier is bearing the brunt of increasing operating costs and expenses over the last few quarters, which might dent fourth-quarter earnings. 


What Does Our Model Say?


Our proven model shows that HollyFrontier is unlikely to beat estimates in the upcoming quarterly report. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat estimates. That is not the case here as you will see below.


You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.


Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, stands at -0.44%. This is because the Zacks Consensus Estimate is pegged at $1.99, a penny above the Most Accurate Estimate.


Zacks Rank: HollyFrontier currently carries a Zacks Rank #5 (Strong Sell). We caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.


You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


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