Morningstar

HF Sinclair Earnings: HEP Buyout Announcement Overshadows Earnings and Weighs on Shares

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Securities In This Article
HF Sinclair Corp
(DINO)

HF Sinclair’s DINO first-quarter adjusted earnings increased to $394.1 million from $175.6 million a year ago, exceeding expectations. The increase was largely attributable to higher refining earnings but also improvement in the renewables segment, which offsets lower lubricant results.

HF Sinclair also announced a proposal to purchase outstanding units of its MLP HollyEnergy Partners for 0.3714 of newly issued shares. Based on the exchange rate and current value of HF Sinclair, the deal will cost about $940 million at current prices to purchase the outstanding 53% of HEP it does not own. However, this implied exchange value is also below the current trading price for HEP, suggesting the offer might need to be increased. HF Sinclair shares have fallen about 15% more than HEP during the last month when the deal was priced.

While the deal makes sense strategically and simplifies the structure of HF Sinclair, the timing is relatively poor compared with last year when its shares were trading at a much greater relative value to HEP. We also see HF Sinclair shares as materially undervalued, suggesting it could have made more sense to wait until the market recognized that value again as it improves its operational issues.

We plan to update our model with the latest market margins, financial results, and HEP transactions, which should result in a modest decrease to our fair value estimate. However, shares would remain undervalued and the cheapest among our coverage. Our narrow moat is unchanged.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Allen Good, CFA

Director
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Allen Good, CFA, is a director, Europe, for Morningstar*. Based in Amsterdam, he covers the oil and gas industries as well as manages a team of multi-industry analysts. He is also chair of the Morningstar Research Services Economic Moat Committee, a group of senior members of the equity research team responsible for reviewing all Economic Moat ratings issued by Morningstar. In this role, he is responsible for ensuring consistent application of Morningstar’s Economic Moat methodology across sectors and regions as well as updating and revising the methodology. His specialty is global integrated oils such as Exxon, Chevron and Shell and US independent refiners such as Valero and Marathon Petroleum. He also contributes to developing hydrocarbon price and petroleum product margin forecasts used in valuation models.

Before joining Morningstar in 2008, He performed merger and acquisition advisory work for a middle-market investment bank. Before that, he spent several years at Black & Decker in various operational roles, primarily focused on manufacturing and distribution.

Good holds a bachelor’s degree in business from the University of Tennessee and a master’s degree in business administration from Kenan-Flagler Business School at the University of North Carolina. He also holds the Chartered Financial Analyst® designation.

* Morningstar Holland BV (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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