RBC Upgrades HollyFrontier, Notes Improving Operational Execution

In a report published Thursday, RBC Capital Markets analyst Brad Heffern upgraded shares of HollyFrontier Corp (NYSE: HFC) to Outperform from Sector Perform with a price target raised to $49 from a previous $40 given improving operation execution, a new drop strategy and a large new buyback program.

Heffern noted that he initiated coverage of HollyFrontier in October 2014 with a Sector Perform rating (and $48 price target) given the company's "great leverage" to WTI-Brent. His concerns, at the time, were poor operational execution, little MLP drop potential, a likely cut in the special dividend, no regular share repurchase program and a degradation of the company's peer-leading margins.

"HollyFrontier has now addressed the first four concerns, and the fifth has come in better than expected," Heffern wrote.

In terms of operation execution, the company recognized its poor performance and addressed it through increased staffing and additional investments. The improvements were as the company reported a "strong" operational first quarter, and multiple units have reached record rates in the second quarter. The company has a "light" turnaround slate for the rest of 2015 which will allow improved operations to "shine."

Heffern said the company's new drop strategy in which it will build out new refining projects, and then drop a portion to Holly Energy Partners, L.P. (NYSE: HEP) to cover the costs. This new drop strategy of using its MLP to fund new refining capital projects will prove to be accretive going forward.

HollyFrontier also approved a new $1 billion share buyback program, replacing the existing program with $462 million remaining. Heffern stated that this move shows the company's commitment to the repurchase program, which has faced prior investor skepticism.

Finally, the analyst noted that HollyFrontier has the best leverage of any refiner to the Brent-WTI spread, so a widening of that spread would prove to be a "nice" catalyst.