If the current refining environment in the U.S. wasn't tough enough right now, HollyFrontier (NYSE: HFC) made it even harder for itself this past quarter by electing to shut down a significant portion of its capacity for maintenance work. That decision resulted in a loss this past quarter.
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Taking a loss today isn't necessarily a bad thing, though. Let's take a look at the company's most recent results, why management decided to do so much maintenance right now, and how that could potentially set the refiner up well for the rest of the year.
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By the numbers
*IN MILLIONS EXCEPT PER-SHARE DATA. DATA SOURCE: HOLLYFRONTIER.
This quarter was a tough one, especially for the refining business. Refining margins alone were lower for the quarter as product costs increased, and HollyFrontier didn't help itssituation by running a less-than-ideal feedstock and product mix. It used more light, sweet crude oil than normal -- light, sweet crude is typically more expensive than more sour or heavier crude varieties.Also, the product mix was a little disadvantageous as it produced more low-margin products-- think jet fuel and asphalt -- than higher-margin gasoline and diesel.
There was a pretty good reason for this, though. Management elected to do a lot of turnaround and maintenance work in the quarter. That included its Navajo refinery complex and its Tulsa facility. Furthermore, there was an issue with a supply pipeline for its Woods Cross facility, so utilization rates were lower than normal.
The other business units at HollyFrontier performed reasonably well this past quarter, though. Its Petro-Canada Lubricants business, which HollyFrontier purchased from Suncor Energy late last year, more or less met expectations for the quarter. Its equity investment in subsidiary partnership Holly Energy Partners maintained a steady pace aside from an early debt extinguishment charge.
What management had to say
CEO Goerge Damiriscommented on the significant amount of maintenance activity this past quarter and how it should set the company up well:
Damiris also noted on the performance of its most recent acquisition:
What a Fool believes
Oil refining has been a tough business in the U.S. lately, and the only real way to turn a profit in a low-marginenvironment is to run at a high utilization rate. Unfortunately, refiners also have to shut down facilities for routine maintenance. These factors can leave HollyFrontier's management in a pickle as to what to do. This past quarter, the company elected to shut down and do maintenance.
Making that decision in today's refining environment might be a good idea. Margins have been depressed lately because of high inventory levels of refined products suppressing prices. By electing to shut down some refining units, that lowers total productioncapacity and should force a drawdown of inventories. Couple lower inventories with freshly maintained and upgraded facilities, and it wouldn't be surprising if we see a nice turnaround over the next few quarters.
HollyFrontier's management has a reputation for running efficient operations and being good stewards of capital. There is nothing in this earnings report that should change that view. The most important factor for investors to watch now is to see how well managementprogresses with the integration of Petro-Canada.
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