Is HollyFrontier's Plan for Growth, Shareholder Returns Good Enough?
Shares of refiner HollyFrontier Corp. (NYSE: HFC) traded up about 3% Monday morning following the company’s announcement that it plans to build a new biodiesel plant, boost its dividend and buy back another $1 billion in stock.
The company raised its quarterly dividend by 6%, from $0.33 to $0.35, payable for the first time next month to shareholders of record on November 27. HollyFrontier said it plans to review its dividend annually and is targeting an annual growth rate of about 5%. At this morning’s share price and the higher payout, the dividend yield on the stock is 2.6%.
The company’s board also authorized a new $1 billion share buyback plan to replace an existing repurchase plan. The existing plan had about $281 million remaining. Over the past 15 months, HollyFrontier has reduced its outstanding share count by 8%.
Most interesting, however, is the company’s plan to spend $350 million to construct a renewable diesel (biodiesel) unit at its Artesia, New Mexico refinery. The new biodiesel unit will have the capacity to produce about 125 million gallons annually (nearly 3 million barrels) of biodiesel from soybean oil and other renewable feedstocks. The company plans to fund the unit from cash on hand and has forecast an internal rate of return of 20% to 30%.
According to the most recent report from the U.S. Energy Information Administration (EIA), the nation’s annual biodiesel production capacity as of August was 2.55 billion gallons a year. Through the first eight months of the year, U.S. biodiesel refineries had produced 1.18 billion gallons. In the last four months of 2018, U.S. biodiesel production totaled about 660 million gallons, and production for the full year totaled 1.86 billion gallons from a capacity of 2.51 billion gallons.
Actual production at existing U.S. biodiesel plants remains well short of capacity already, so why is HollyFrontier building more capacity? The answer is renewable energy credits, known as RINs. In Monday’s announcement, the company had this to say about its plan to build a new biodiesel unit: “This investment will provide HollyFrontier the opportunity to meet the demand for low-carbon fuels while covering the cost of our annual RIN purchase obligation under current market conditions.”
In its third-quarter earnings report, HollyFrontier noted a $36.6 million benefit resulting from two small refineries being exempted from the U.S. EPA’s Renewable Fuel Standard requirements to purchase RINs to offset the amount of gasoline and other hydrocarbon fuels the company produces. Meeting the requirements by producing biodiesel improves HollyFrontier’s net income and cash flow.
HollyFrontier stock traded up about 3% in the late morning Monday, at $54.14 in a 52-week range of $37.73 to $64.90. The consensus 12-month price target on the stock is $59.21.