Retail Expansion And Renewable Diesel Strategies Will Shape Future Success

Key Takeaways

• Expansion and contracts for branded sites aim to boost revenue and brand value through increased market presence.
  
• Renewable diesel production strategies and midstream optimization are positioned to enhance future earnings despite market challenges.
  
• HF Sinclair faces declining earnings due to reduced refinery margins, over-supply, volatile commodity prices, weak credit prices, and macroeconomic challenges.

Catalysts

Operates as an independent energy company.

• HF Sinclair is expanding its retail presence with the addition of new branded sites and has signed contracts to convert additional stores to branded wholesale, which should increase future revenue streams and enhance brand value.
  
• Cost reduction and operational efficiency improvements in refining, through initiatives such as technology-driven efficiency, are expected to lower operating expenses and improve net margins.
  
• In the Lubricants & Specialties segment, optimization of the sales mix and new product introductions are anticipated to grow revenue and stabilize earnings amidst volatile commodity prices.
  
• The company's strategy to increase its renewable diesel production with cost optimization and low-CI feedstock could bolster future earnings despite current market headwinds.
  
• HF Sinclair's integration and optimization of its midstream assets is expected to increase third-party and affiliate transportation volumes, thereby potentially enhancing revenue and EBITDA margins.

HF Sinclair Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HF Sinclair's revenue will decrease by -1.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.1% today to 3.2% in 3 years time.
• Analysts expect earnings to reach $908.4 million (and earnings per share of $5.17) by about December 2027, up from $326.4 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $553.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.9x on those 2027 earnings, down from 19.8x today. This future PE is greater than the current PE for the US Oil and Gas industry at 10.9x.
• Analysts expect the number of shares outstanding to decline by 2.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.98%, as per the Simply Wall St company report.

HF Sinclair Future Earnings Per Share Growth

Risks

• Despite effective cost reduction strategies, HF Sinclair's financial results show a significant decline in adjusted net income and EBITDA in the third quarter of 2024 compared to 2023, primarily due to lower adjusted refinery gross margins, reflecting pressure on revenues and earnings.
  
• The refining segment faces challenges with reduced operating cash flow and potentially lower throughput due to industry over-supply, impacting profitability and gross margins.
  
• The renewable diesel segment struggles with weak RINs and LCFS credit prices, leading to reduced margins despite improved sales volumes, posing a risk to earnings in a low credit price environment.
  
• Lubricants & Specialties reported a decline in EBITDA due to FIFO headwinds combined with lower oil prices, potentially threatening ongoing earnings stability if commodity prices remain volatile.
  
• The business faces macroeconomic concerns like global refining margin weakness and heavy reliance on successful cost management for improved financial performance, potentially impacting net margins and earnings if these strategies do not yield desired results.

Valuation

• The analysts have a consensus price target of $49.23 for HF Sinclair based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $58.0, and the most bearish reporting a price target of just $35.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $28.3 billion, earnings will come to $908.4 million, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 8.0%.
• Given the current share price of $34.4, the analyst's price target of $49.23 is 30.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.