Heavy Turnaround And Optimization Will Advance Refining And Renewables

Key Takeaways

• Strategic improvements in refinery and renewables enhance revenue potential and net margins through increased utilization and operational optimization.
  
• Record earnings in Marketing and Midstream, alongside share repurchases, signal strong earnings growth and improved shareholder value.
  
• Declining performance in refining and renewables segments highlights significant profitability concerns and potential cost management challenges amidst an unfavorable taxation environment.

Catalysts

Operates as an independent energy company in the United States.

• HF Sinclair's strategic focus on improving reliability and completing heavy turnaround workloads on schedule and on budget is expected to increase utilization and higher refinery throughput, which can positively impact their revenue.
  
• The company's optimization and integration efforts, particularly highlighted in achieving record EBITDA in their Marketing and Midstream businesses, suggest potential for stronger earnings growth from these segments.
  
• HF Sinclair's renewables segment has significantly reduced annual operating expenses per gallon and increased its utilization and sales volumes, indicating a future positive impact on net margins as they continue to improve reliability and optimize operations.
  
• The Marketing segment's record annual EBITDA and the expansion of their branded footprint demonstrates a strategic commitment to growing revenues through an increase in branded wholesale volumes, with expectations of a 10% growth in the number of branded sites annually.
  
• HF Sinclair's commitment to shareholder returns, with over $1 billion returned through dividends and share repurchases in 2024, coupled with maintaining a strong balance sheet, suggests future earnings per share (EPS) growth as share repurchase efforts continue to reduce the share count.

HF Sinclair Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on HF Sinclair compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming HF Sinclair's revenue will decrease by 5.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.6% today to 2.9% in 3 years time.
• The bearish analysts expect earnings to reach $696.0 million (and earnings per share of $3.71) by about April 2028, up from $175.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.8x on those 2028 earnings, down from 32.3x today. This future PE is lower than the current PE for the US Oil and Gas industry at 11.4x.
• Analysts expect the number of shares outstanding to decline by 1.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.51%, as per the Simply Wall St company report.

HF Sinclair Future Earnings Per Share Growth

Risks

• HF Sinclair reported a fourth quarter net loss of $214 million, significantly worse than the previous year's fourth quarter net income of $165 million, indicating challenges in maintaining profitability levels.
  
• Fourth quarter adjusted EBITDA decreased significantly to $28 million from $428 million in the fourth quarter of 2023, highlighting potential struggles in maintaining efficient profit margins.
  
• The Refining segment experienced a notable decline in adjusted EBITDA, primarily driven by lower refinery gross margins and reduced crude oil charge rates, which may impact future revenue generation in this segment.
  
• In the Renewables segment, high-priced inventory drawdown contributed to negative adjusted EBITDA, reflecting potential cost management issues that could impact earnings.
  
• HF Sinclair's unfavorable taxation environment led to unexpected financial adjustments, potentially affecting net income and overall profitability going forward.

Valuation

• The assumed bearish price target for HF Sinclair is $34.24, which represents one standard deviation below the consensus price target of $42.54. This valuation is based on what can be assumed as the expectations of HF Sinclair's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $55.0, and the most bearish reporting a price target of just $27.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $24.3 billion, earnings will come to $696.0 million, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $30.03, the bearish analyst price target of $34.24 is 12.3% 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.