HollyFrontier's first quarter results took the backseat to an earlier announcement it was buying Shell's Puget Sound refinery, as analysts peppered management with questions about purchase on May 5 call.
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HollyFrontier paid $350 million for the 145,000 b/d refinery, adding its first US West Coast asset to its four Midcontinent-based refineries, and raising total crude system throughput to 611,630 b/d, based on US Energy Information Administration numbers.
Some analysts were looking for the rationale of buying a hydrocarbon refinery as momentum in the refining space shifts toward renewable fuels in the current low-carbon environment, particularly in a state which just passed a low carbon fuel standard.
"Right now, the new shiny object is clearly renewables. But I think we have to take a step back and say is powering this economy over the next ten years ... the fact is the gasoline, diesel and jet fuel are the major mover of people and equipment around this economy," said Rich Voliva, HollyFrontier's CFO on the call.
"And we think that despite the headlines, the numbers would argue that a lot of money can be made in petroleum responsibly operated for a good period of time," he added.
In order to fund the purchase, which includes between $150 million and $180 million of inventory, HollyFrontier suspended its dividend for a year, much to the consternation of some analysts on the call who felt it went against the current push to return capital to shareholders.
The company's rationale took the longer-term view that rather than add more debt to that earmarked for existing obligations including renewable fuels projects in Cheyenne, Wyoming, and Artesia, New Mexico, it was more prudent to suspend the dividend.
"Suspending the dividend certainly helped and that particular refinery remained profitable even last year," said S&P Global Ratings analyst Michael Grande, who has an BBB- rating on the company -- the lowest investment-grade rating -- with a negative outlook. That means the company could lose its investment grade rating if the scenario on which the rating is based does not occur.
High gasoline yield
Besides showing profitability in 2020, a year when the coronavirus pandemic lockdowns destroyed demand for refined products, the refinery has a high gasoline yield -- over 50% in recent years over diesel -- which HollyFrontier considers a boon going forward.
"We're going to benefit from relative advantages of operations in Washington versus California with a refinery with a heavy gasoline yield," said Voliva.
Puget Sound also has the ability to blend gasoline to meet specifications in Alaska and in Canada, where a national low carbon fuel standard goes into effect in 2022
The Puget Sound acquisition also helps HollyFrontier diversify its crude supply, adding in Canadian and Alaskan crude to its current slate of Midcontinent crudes. The plant runs about 43% Canadian medium crude from the Trans Mountain pipeline and 57% Alaskan crude.
And there is also some synergy with HollyFrontier's push into the renewables market.
"We're engaging a commercial foothold in another LCFS [Low Carbon Fuel Standard] state, which adds opportunity for our renewables business," Voliva added.
The state of Washington recently passed a low-carbon fuel standard bill and cap-and-trade system, which will go into effect January 2023. They are the second state after California to create a market of low carbon fuel credits for renewable fuels like diesel and sustainable aviation fuel, which increases the value of renewable fuels.
"Now recognize this legislation has just passed. But trying to link to California ... the consumer is effectively taking 100% of the burden of the LCSF," said CEO Mike Jennings.
Initially, HollyFrontier expects the renewable synergies from the Puget Sound refinery acquisition to be small "because our commercial relationships are directed towards California," Jennings said, referring to the renewable diesel projects underway in Cheyenne and Artesia. .
"But there is clearly going to be a knock-on benefit in terms of renewable diesel," he added.
"When we get up to speed in marketing, light oils, liquid products in Washington, we'll have the opportunity to arbitrage between those two markets," he said.