UPDATE: JPMorgan Upgrades HollyFrontier (HFC) to Overweight on Expected Increase in Refining Margins (MPC) (VLO) (PSX) (TSO)

December 9, 2013 6:50 AM EST Send to a Friend
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Price: $44.79 +0.11%

Rating Summary:
    12 Buy, 11 Hold, 0 Sell

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    Up: 27 | Down: 26 | New: 17
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(Updated - December 9, 2013 10:01 AM EST)

JPMorgan upgraded HollyFrontier (NYSE: HFC) from Underweight to Overweight with a price target of $66 from $42. Marathon Petroleum Corporation (NYSE: MPC) and Valero Energy Corporation (NYSE: VLO) were raised to Neutral, and Phillips 66 (NYSE: PSX) and Tesoro Corporation (NYSE: TSO) were maintained at Overweight. The change follows revisions to the bank's long-term commodity price outlook.

"We have recently revised our in-house view on oil prices, with an updated per barrel Brent/WTI price forecast of $105.5/$91.5 and $100.3/$85.3 for 2014 and 2015, respectively, suggesting a Brent-WTI differential of $14/bbl and $15/bbl. Long-term, we forecast $90/bbl Brent and $80/bbl WTI, for a $10/bbl differential," said analyst Katherine Minyard.

"In our view, this Brent-WTI differential should increase US refining margins, as we believe US refined product prices will remain linked to world oil prices. We have raised our weighted average US refining margin by 15% in 2014E, 60% in 2015E, and 21% in 2016E+, mainly based on increases in our Mid-Continent and Gulf Coast margins," added the analyst. "Small changes in margins drive large changes in valuation. The refiners' earnings and cash flows are highly sensitive to seemingly modest changes in refining margins. Our benchmark margin increases result in a 12% average increase to the gross margins of the refiners under coverage, and a 20% uplift to long-term debtadjusted cash flows. Our DCF-based valuations change by 33%, on average."

Regarding HollyFrontier, Minyard said, "We believe HFC's inland refining system is well positioned to benefit from growth in production of disadvantaged inland North American crudes, and we expect HFC to capture Brent-WTI price differentials as higher gross margins across the majority of its throughput. In addition, we expect HFC will continue its practice of returning excess cash to shareholders via dividend increases and special dividends, and thus believe yield-oriented investors with a view on sustained wide Brent-WTI differentials will favor HFC among the independent refiners."

For an analyst ratings summary and ratings history on HollyFrontier click here. For more ratings news on HollyFrontier click here.

Shares of HollyFrontier closed at $45.63 yesterday.


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