HollyFrontier increases renewable fuel capacity with purchase of Sinclair Oil

HollyFrontier will buy fellow Rockies refiner Sinclair, a deal which will add two refineries, a renewable diesel plant and access to a branded marketing network, thus increasing RIN generation, CEO Mike Jennings said on Aug. 3.

Increased RINs generation -- both through increased RD production and through Sinclair's marketing business -- will lessen the onerous burden of the US Environmental Protection Agency's Renewable Fuel Standard on the combined company.

"The marketing business provides a significant RIN generation through Sinclair's integrated product distribution network," Jennings said on an Aug. 3 call to discuss the transaction as well as HollyFrontier's second-quarter results.

The new company will be known as HF Frontier and the deal is expected to close in the middle of 2022. Also included in the $1.8 billion all stock deal is Sinclair's crude pipelines and terminal assets, which will be acquired by HollyFrontier's master limited partnership, Holly Energy Partners.

Jennings noted on the call that the deal "will increase the scale of the renewable diesel business" adding this was "a critical step forward as we diversify our business for a low carbon future."

Jennings noted that the addition of Sinclair's wholesale distribution and marketing retail outlets will give it a "significant base business to grow an iconic brand," noting that Sinclair's Dino the Dinosaur will continue to "represent the brand."

Mitigating RINs impact

The price of RINs -- credits used by obligated parties to satisfy their RFS mandate if they are unable blend enough fuel -- have set new highs 46 times so far in 2020, according to the American Fuel and Petrochemical Manufacturers, creating economic hardship for small refiners like HollyFrontier.

HollyFrontier on June 27 won a key ruling after the US Supreme Court decided to support the RFS's small refinery exemption. But the decision does not automatically guarantee the company the exemption it requested to waive the RFS compliance on grounds of economic hardship.

HollyFrontier, like other refiners, is repurposing existing plants to meet growing demand for RD and low carbon fuels as governments shift toward a lower carbon footprint.

US renewable diesel production is expected to reach 751 million gallons/year by 2021, rising over 40% to 1.355 billion gallons/y in 2022, according to S&P Global Platts Analytics. In 2020, renewable diesel production was 538 million gallons.

Prior to the Sinclair purchase, HollyFrontier had already two projects underway to increase renewable diesel production and cut its RFS compliance costs while taking advantage of higher demand from Low Carbon Fuel Standard pathways in California and British Columbia.

Last August, it began repurposing its Cheyenne, Wyoming, refinery into a renewable diesel plant capable of making 90 million gallons/y of renewable diesel and sustainable aviation fuel. The plant is due online mid-2022.

In New Mexico, HollyFrontier has underway a 120 million gallons/y plant at its Artesia, New Mexico, refinery also due online in 2022.

With the addition of Sinclair's RD facility, HF Sinclair will become one of the leading US RD producers with renewable production expected to reach 380 million gallons/y of RD.

Sinclair's status as a first mover in the renewable diesel space allows it to share its knowledge on the transformation of HollyFrontier's hydrocarbon plants into RD facilities.

Its Wyoming Renewable Diesel Company -- co-located at the Sinclair, Wyoming, refinery -- has been producing RD since 2018.

The plant's capacity was recently expanded to 10,000 b/d and a pretreatment plant already under construction is expected to be operational by mid-2022, increasing feedstock advantage and flexibility.

"Feedstock flexibility generates higher lower carbon fuel standard values through lower carbon intensity and also mitigating single feedstock risks," Jennings said.

"The combined renewable diesel will have the combined scale and size to support logistical procurement feedstock and operational synergies and will enhance our ESG profile as we help to facilitate a clean energy transition," he added.

Two new Rockies refineries

Sinclair brings two Wyoming refineries to the combined company, bringing the combined company's Rockies refinery count to three.

HollyFrontier has a 39,330 b/d refinery in Woods Cross, Utah. Sinclair Wyoming has a 75,000 b/d refinery in Sinclair, Wyoming, which can process both heavy Canadian crude and light, sweet Rockies crudes. Sinclair Casper Wyoming has a 29,850 b/d refinery known as the Little America Refining in Evansville, Wyoming, which runs primarily sweet Rockies crude.

Both refineries distribute gasoline and diesel via pipeline to the Rocky Mountain region, South Dakota and Denver.

Earlier this year, HollyFrontier bought Shell's Puget Sound refinery in Washington. The deal is expected to close in the fourth quarter of 2021.

With the addition of Sinclair plants, HollyFrontier's total refining capacity will almost double over the next year, according to Credit-Suisse analyst Manav Gupta.