Holly Corporation HOC W
July 27, 2004 - 4:54pm EST by
2004 2005
Price: 38.59 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 625 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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  • Stub
  • Refiner
  • MLP
  • Potential Acquisition Target


Holly Corporation (NYSE: HOC) stub refinery business has no debt and is trading at 3.9 times its mid-cycle EBITDA after its IPO of Holly Energy Partners (NYSE: HEP) and net of over $10 a share in cash. My analysis shows that HOC should trade at least at $50 a share, and could be acquired at $55.

Summary of Spin-off

Holly IPO’d HEP on July 7th at $22.25 a share, and basically received $135 million in IPO proceeds. The over-allotment was taken and HOC now owns 51% of HEP, or about 7.3 million shares.

The reason for the spin-off was to separate out the pipeline and terminal assets from the refining business and use the MLP structure as a way to lower the cost of capital in acquiring pipeline and terminal assets. I believe they are following the Valero(NYSE: VLO)/Valero Energy Partners(NYSE: VLI) model.

HEP has subsequently traded up to $26 a share, as it plans to pay a $2 a share dividend, and yield hungry investors bid down the yield on the stock.

What is Holly left over with?

Holly Corp is left over with three refineries. The biggest is the Navajo Refinery. It is the largest refinery in New Mexico, with crude oil capacity of 75,000 barrels per day. Holly also has a refinery in Utah with capacity of 25,000 bpd and another in Montana with 7,000 bpd.

Holly is guiding that their pro-forma mid-cycle EBITDA is $80 million for the refining business. Another way to verify this is the presentation to analysts on its website from last year shows that mid-cycle EBITDA is $120 million. The pipeline and terminal businesses they spun-off to HEP represented about $35 to $40 million in EBITDA, leaving you with about $80 million in refining EBITDA.

Balance Sheet

Holly had $26 million in cash, $35 million in credit borrowings and $17.1 million in long term debt on the balance sheet as of March 31st. Since that time they have received $135 million from the IPO of Holly and a $27.2 million cash settlement check. Below is the calculation of the net cash position:

Cash from settlement $ 27.20
Cash as of 3/31 $ 22.26
Cash from IPO $ 135.00
minus credit borrowings $ (35.00)
minus LT debt $ (17.10)
Net Cash $ 132.36


The following is my calculation for the valuation for Holly Corp is and an estimate for the valuation at six times mid cycle EBITDA.

Net Cash $ 132.36

51% of HEP @$26 $ 189.80

Sum $ 322.16

Market Cap of HOC $ 631.80

Stub Value of HOC $ 309.64

Mid cycle EBITDA $ 80.00

EBITDA multiple 3.87

Price at 6 times EBITDA $ 802.16
per share $ 49.54

What are they going to do with the Cash?

After conversations with the CFO, I don’t think that HOC knows what to do with the cash as of yet. They are looking for acquisitions, but refining assets are quite expensive these days. They may consider a special dividend or just an increase in its current 1.3% dividend. The best idea is a stock split followed by a big share repurchase. This way trading liquidity isn’t meaningfully hurt, and the value of the business is enhanced. A buyback in concert with a dividend would be very well received.


In summary, the market is simply mis-pricing the stub of Holly. If anything, the MLP should continue to trade higher as its current yield of 7.6% is still higher than comparables. If it traded at to $30, which would indicate a 6.6% yield, this would add another $2 a share to HOC.

Considering refining is a business of scale and size, HOC is ripe for the picking as an acquisition target. As an acquisition target, I seriously doubt its 3.8 multiple will last.

I expect it to trade to at least $50 a share by the end of the year, a 28% total return, but a 56% return annualized. Also, if HEP continues to trade higher and HOC becomes an acquisition target, HOC could go to $55, which would be a 41% return, and an 82% annualized gain.


1) Special Dividend or increase of current dividend
2) Share Split, then subsequent buyback
3) Earnings
4) Further consolidation in refining business
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