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HF Sinclair Launches a $1 Billion Share Repurchase Plan – Buyback Wednesdays

  • August 23, 2023

U.S. refiners, like Valero Energy (VLO), Phillips 66 (PSX) and HF Sinclair (DINO) significantly outperformed the broader market over the past couple of years with a very strong 2022. Things have slowed down a bit this year due to broader weakness in the energy sector.

Key Insights:

  • HF Sinclair Corporation (DINO) is a diversified refining and transportation company that has seen an increase in refining utilization rates in recent quarters.
  • The company recently consolidated its refining and midstream (transportation) segments through the acquisition of Holly Energy Partners (HEP) for $4.64 billion in a cash plus stock deal.
  • DINO provides a strong dividend paired with a very low payout ratio, in addition to consistent repurchasing of its shares.
  • The company’s growth in its renewable energy division holds promise.

On March 14, 2022, HF Sinclair Corporation (DINO) was established when HollyFrontier Corporation merged with Sinclair Oil. At the same time, the midstream oil & gas transportation company Holly Energy Partners, L.P. (HEP) merged with Sinclair Transportation. DINO owned a 47% limited partner interest and a non-economic general partner interest in Holly Energy Partners.  HEP operates substantially all of the refined product pipelines that support HF Sinclair’s refining and marketing operations in the MidContinent, Southwest and Northwest regions of the United States.

Based in Dallas, Texas, DINO is a diversified energy company that sells products such as gasoline, diesel fuel, jet fuel, renewable diesel, specialty lubricant products and chemicals. The company has also engaged in the growing renewables business, with three production facilities focused on renewable diesel. It operates seven oil refineries with a total crude oil processing capacity of 678,000 barrels per day.

It markets Elite Diesel and DINOCARE, DINO’s top tier gasoline, at more than 1,600 independent stations across 30 states in the U.S.

DINO-asset footprint

Source: HF Sinclair – Investor Presentation

Over the last few years we have seen oil production and refining companies buy out their associated transportation/pipeline companies. On August 16, 2023, DINO merged with Holly Energy Partners, L.P. (HEP) to acquire all of the outstanding common units of HEP not previously owned by it or its affiliates in exchange for a combination of common stock and cash. Under the terms of the agreement, shareholders of Holly Energy Partners received a combination of 0.315 shares of DINO and $4.00 in cash.

We added HEP as a potential deal to our “Deals in the Works” section on May 4, 2023, and the price after the news of the potential deal came out was $16.03.

DINO’s CEO and President, Tim Go, commented,

“We are pleased to announce this strategic transaction which we believe simplifies our corporate structure, reduces costs and further supports the integration and optimization of our portfolio. We expect the transaction to be accretive to earnings per share and available free cash flow within the first twelve months, further supporting our capital allocation strategy of returning excess cash to shareholders.”

On the same day, DINO also announced the authorization of a $1 billion share repurchase program which represents around 9.5% of its market cap at announcement.

Revenue:

After encountering a period of revenue challenges spanning multiple years, DINO successfully reversed this trend in 2021 and 2022. A combination of the Sinclair acquisition, rising oil prices and the Russian invasion of Ukraine all contributed to a big jump in revenue. This windfall of cash allowed them to make some important moves, including share buybacks.

More recently, earnings and revenue have declined but remain elevated compared to 2021 as you can see from the InsideArbitrage income statement chart below. The company has increased its revenue at a CAGR of 34.84% over the last 3 years, the highest growth rate for a 3-year period among its peers. Furthermore, a forward revenue growth rate of 18.87% suggests that the company’s growth momentum is expected to continue into the future.

DINO Quarterly Income Statement Graph
DINO Quarterly Income Statement Graph (source: InsideArbitrage)

DINO has surpassed revenue estimates in all 8 quarters over the last 2 years and EPS estimates in 7 out of the last 8 quarters.

Dividends & Share Repurchases:

DINO currently pays a quarterly dividend of $0.45/share, an increase of 12.5% from 2022. The company suspended its dividend for three quarters in 2021 before again paying a dividend in FQ1 2022. The forward dividend yield is 3.17%. With a payout ratio of 14%, there is room for further dividend increases in the future.

HF Sinclair - shares outstanding graph

Source: InsideArbitrage.com

The company announced a $1 billion share repurchase program in September 2022 and successfully managed to repurchase almost the entire amount leaving only $5 million. The recent $1 billion share repurchase authorization replaced the prior one. Since June 2022, DINO has repurchased over 13% of outstanding shares, reducing its share count from 222.95 million to 192.35 million in one year. The buybacks have helped offset some of the shareholder dilution resulting from the Sinclair acquisition in 2022.

Subsequent to quarter end, the company repurchased 8.2 million shares for an aggregate price of $411 million from REH Company. This puts the year-to-date total cash return, including dividends and share repurchases at over $834 million. On a trailing 12-month basis, the company returned over $2 billion in cash to shareholders as of August 2, 2023.

This clearly highlights the refiner’s commitment to buybacks and dividends as part of its capital allocation strategy.

Valuation:

DINO appears cheap on comparative valuation metrics but that seems almost par for the course at this point for energy companies. The company’s forward EV/EBITDA of 4.22 suggests undervaluation, possibly due to investor pessimism over high CapEx, a potential recession and mean reversion in a cyclical industry.

Debt:

DINO saw a big jump in net debt to $3.2 billion in Q1 2022 on account of the Sinclair acquisition. The company has worked to pay its debt and gradually got it down to $1.9 billion by Q2 2023. Excluding capital leases, the company’s net debt last quarter was $1.55 billion.

Renewables:

The company is strategically positioned to capitalize on the rising demand for renewable diesel, which is anticipated to grow due to the ongoing progress of low-carbon fuel standards, notably in regions like California and Canada. The company’s renewables division posted EBITDA of $23 million in the second quarter of 2023, marking a significant improvement from the negative $63 million recorded in the same quarter of 2022.

Q2 2023 Results:

Considering 2022 was a peak year for the company, there has been a decline in results compared to the corresponding quarters of the previous year. However, the company still managed to exceed EPS and revenue estimates for the quarter.

  • Recorded revenue amounted to $7.83 billion, marking a year-over-year decrease of 29.8%. Remarkably, this figure surpassed estimates by $380 million.
  • Adjusted net income for the second quarter was $504 million or $2.60 per diluted share compared to adjusted net income of $1.3 billion or $5.59 per diluted share for the same period in 2022.
  • Adjusted EBITDA for the quarter was $868 million, a 53% decrease compared to the second quarter of 2022.
  • Operating expenses stood at $427 million, showing improvement from the $469 million registered in the equivalent period last year.
  • Net cash flows provided by operations for the second quarter of 2023 totaled $490 million
  • Cash and short term investments were $1.61 billion as of June 2023.

Outlook for Q3 and 2023:

DINO has a positive outlook for the rest of the year in terms of managing its capital expenditure and rebounding of few of its refineries.

DINO-expected capex allocation

Source: HF Sinclair – Investor Presentation

  • With respect to capital spending for the full year 2023, the company lowered its total capital guidance range from $940 million to $1.15 billion to a new range of $900 million to $1.06 billion.
  •  For the third quarter of 2023, the company expects to run between 585,000 to 615,000 barrels per day of crude oil in its refining segment and has planned a turnaround scheduled at their Castberg and Tulsa refineries during the period.

Bottom Line:

High utilization rates, decent valuation, a balanced capital allocation strategy and declining debt all look attractive for DINO. Further consolidation through the acquisition of Holly Energy Partners should also help going forward.

Nine analysts revised their earnings estimates upwards over the last 90 days reflecting the recent rebound in oil prices. The stock currently trades at a forward P/E of 6.27 and a forward EV/EBITDA of 4.22.

If I wasn’t already overweight the energy sector, I would have considered DINO as a potential candidate for my portfolio.

Welcome to edition 73 of Buyback Wednesdays, a weekly series that tracks the top stock buyback announcements during the prior week. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.

Buyback announcement activity started declining last week. The previous week had 14 announcements, while only 10 companies announced buyback plans last week.

Top 5 Stock Buyback Announcements 

1.  Skillz Inc.(SKLZ): $8.93

On August 21, 2023, the Board of Directors of this mobile game platform authorized a new $65 million share repurchase program, equal to around 36% of its market cap at announcement.

Market Cap: $189.07MAvg. Daily Volume (30 days): 568,709Revenue (TTM): $190.64M
Net Income Margin (TTM):-149.12%ROE (TTM): -75.57% Net Cash: $220.66M
P/E: N/AForward P/E: N/AEV/EBITDA (TTM): 0.35

2. Chegg, Inc. (CHGG): $9.74

On August 16, 2023, the Board of Directors of this student-first connected learning platform approved an additional $200 million share repurchase program, equal to around 17.5% of its market cap at announcement.

Market Cap: $1.12BAvg. Daily Volume (30 days): 3,818,344Revenue (TTM): $740.39M
Net Income Margin (TTM): 37.85%ROE (TTM): 30.23% Net Debt: $403.24M
P/E: 8.74Forward P/E: 155.24EV/EBITDA (TTM): 17.28

3. First United Corporation (FUNC): $16.21

 On August 21, 2023, the Board of Directors of this community bank authorized a share repurchase program to repurchase up to 825,000 shares, equal to around 12.3% of its market cap at announcement.

Market Cap: $108.79MAvg. Daily Volume (30 days): 4,450Revenue (TTM): $77.08M
Net Income Margin (TTM): 29.44%ROE (TTM): 15.76% Net Debt: $74.90M
P/E: 4.84Forward P/E: 6.41Price/Book (TTM): 0.71

4. Performance Shipping Inc. (PSHG): $1.48

 On August 21, 2023, the Board of Directors of this global shipping company authorized a new $2 million share repurchase program, equal to around 11.8% of its market cap at announcement.

Market Cap: $16.93MAvg. Daily Volume (30 days): 384,670Revenue (TTM): $110.88M
Net Income Margin (TTM): 39.95%ROE (TTM): 29.86% Net Debt: $49.70M
P/E: 0.58Forward P/E: N/AEV/EBITDA (TTM): 0.87

5. HF Sinclair Corporation  (DINO): $56.55

 On August 16, 2023, the Board of Directors of this energy company authorized a new $1 billion share repurchase program, equal to around 9.5% of its market cap at announcement.

Market Cap: $10.41BAvg. Daily Volume (30 days): 2,294,029Revenue (TTM): $34.98B
Net Income Margin (TTM): 6.87%ROE (TTM): 24.77% Net Debt: $1.94B
P/E: 4.78Forward P/E: 6.27EV/EBITDA (TTM): 3.43

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