Optimizing Operations And Expanding Markets Brighten Prospects, Despite Analysts Predicting A Squeeze On Margins And Earnings

Key Takeaways

• Efforts in refining and renewable segments aim to boost revenue, with a focus on enhanced reliability and efficient feedstock usage.
  
• Strategic expansions and optimizations across Marketing, Lubricants & Specialties, and Midstream sectors are set to elevate margins and EBITDA.
  
• HF Sinclair faces challenges like reduced margins, profitability pressures due to RINs/LCFS credit prices, and impacts from maintenance and high feedstock costs.

Catalysts

Operates as an independent energy company.

• Increased utilization rates and sales volumes in the Refining segment, due to improved reliability efforts, are expected to enhance revenue and gross margins.
  
• Continued positive EBITDA in the Renewables segment, alongside efforts to reduce high-cost inventories and optimize the low CI feedstock mix, suggest stronger future performance in renewable diesel, impacting earnings positively.
  
• Expansion in the branded site count for Marketing, along with expected growth from new contracts, indicates potential revenue growth from higher margin sales in the near term.
  
• In the Lubricants & Specialties segment, optimization in sales mix and operational efficiencies, coupled with base oil integration efforts, are poised to bolster margins and EBITDA contribution.
  
• Record volumes in the Midstream business, driven by fully integrated assets post-acquisition, point towards continued revenue growth and EBITDA improvement from increased sales volumes and tariffs.

Assumptions

• Analysts are assuming HF Sinclair's revenue will decrease by -2.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 3.8% today to 3.3% in 3 years time.
• Analysts expect earnings to reach $937.9 million (and earnings per share of $5.27) by about October 2027, down from $1.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.2 billion in earnings, and the most bearish expecting $684 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.7x on those 2027 earnings, up from 7.0x today. This future PE is greater than the current PE for the US Oil and Gas industry at 10.5x.
• Analysts expect the number of shares outstanding to decline by 2.27% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.71%, as per the Simply Wall St company report.

Risks

• Reduced margins due to higher refining utilization rates across the industry could negatively impact net margins and earnings for HF Sinclair.
  
• A decline in RINs and LCFS credit prices, despite positive EBITDA in renewables, might lead to challenges in sustaining profitability, affecting overall revenue.
  
• The announcement of planned maintenance at key refineries could result in reduced crude oil throughput, impacting revenue and net income in the short term.
  
• The FIFO charge from consumption of higher-priced feedstock inventory in the Lubricants & Specialties segment could pressure margins and earnings, despite efforts to optimize sales mix and operational efficiencies.
  
• High product supply in HF Sinclair's regions, driven by competitors' refinery outputs, might limit the company's ability to maintain or increase refined product sales volumes, affecting revenue growth.

Valuation

• The analysts have a consensus price target of $53.42 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 $66.94, and the most bearish reporting a price target of just $43.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $28.8 billion, earnings will come to $937.9 million, and it would be trading on a PE ratio of 12.7x, assuming you use a discount rate of 7.7%.
• Given the current share price of $43.27, the analyst's price target of $53.42 is 19.0% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.