HF Sinclair: Valuation Case Remains Strong, Positive Momentum Into Earnings (NYSE:DINO)

Crude oil prices are in full-blown rally mode, and RBOB gasoline is not far from multi-month highs. The prompt contract of WTI is now up for five consecutive weeks – the best such stretch since the energy boom of early 2022. Not surprisingly, the Energy sector is likewise on a heater, and is among the top-performing market groups in the second half so far. The last major week of corporate earnings is now on tap, and many smaller oil & gas are set to report Q2 results after ExxonMobil and Chevron posted their numbers last week.

I am upgrading my hold rating to a buy on shares of HF Sinclair (NYSE:DINO). I remain keen on its valuation, but now I see much better price action to support the fundamental story.

Energy Prices On the Rebound

Earnings on Tap

According to Seeking Alpha, HF Sinclair Corporation operates as an independent energy company. It produces and markets gasoline, diesel fuel, jet fuel, renewable diesel, specialty lubricant products, specialty chemicals, specialty and modified asphalt, and others. The company has a refineries business and operates in other areas such as crude oil transportation, terminalling, storage, and throughput services to the petroleum industry.

The Dallas-based $9.8 billion market cap Oil and Gas Refining and Marketing industry company within the Energy sector trades at a low 3.5 trailing 12-month GAAP price-to-earnings ratio and pays a somewhat high 3.3% dividend yield. Ahead of earnings this week, the stock features a moderate 34% implied volatility percentage with a 5.2% earnings-related stock price move per the options, while carrying a material 5.4% short interest.

Back in May, DINO reported a solid EPS beat. $2.00 of operating EPS topped analysts’ estimates of just $1.52 while top-line results were also impressive. Q1 2023 revenue verified at $7.57 billion, up just 1.5% year-on-year, but that was good enough for a $600 upside surprise. keep in mind that the first half of last year was an extremely bullish stretch for energy companies, even the refiners.

What is also encouraging from a shareholder’s perspective is that the management team returned more than $330 million to its owners in the first quarter of the year, and it plans to continue paying a solid dividend while keeping up with its stock buyback plan. Key risks for the firm include refining margin compression (a lower crack spread), weaker demand for refined energy products leading to reduced margins, and any underperformance from Holly Energy Partners.

Also in early May, DINO submitted a non-binding agreement to buy all remaining HEP common shares that it did not already own, so any underperformance from HEP assets and operations would negatively impact HF Sinclair.

Capital Allocation Strategy

The stock’s low for 2023 took place around the earnings date and when the Gulf Coast 3-2-1 crack spread found a low.

3-2-1 Crack Spread

But after a rally of almost 40%, is the valuation case less compelling? Perhaps, but let’s dig into the numbers to see why it is still a buy.

On valuation, DINO has a volatile earnings history tied to swings in the cyclical nature of its industry. 2023 full-year operating EPS is expected to be just shy of $8, which would be a steep 47% decline from per-share profits earned in the same period a year ago. Earnings are expected to normalize just under $6 on a 12-month basis over the coming quarters while it continues to payout a good yield.

Seeking Alpha’s Quant Rankings and Dividend Grades look good in my estimation – the yield is graded with an A- Safety and A Growth. According to its latest statement of cash flows, free cash flow per share is very strong at $14.58 over the past 12 months, helping to buttress a strong profitability argument. While I expect that figure to dip as the strong first half of last year rolls off, the firm remains committed to cash flow strength.

HF Sinclair: Earnings Outlook & EPS Growth Rates

If we assume $5.50 of normalized non-GAAP EPS and assume an 11x earnings multiple, about in line with the sector, then shares should be near $60, putting the stock at a more than 10% discount to fair value today. Thus, I have a buy rating on valuation. I also am attracted to DINO’s exceptionally low EV/EBITDA ratio of just 4.5x – that is about 40% below the S&P 500 average and more than 20% to the cheap side versus the Energy sector median. Finally, HF Sinclair sells for just 0.33x on a forward price-to-sales basis – also a solid value.

DINO: Compelling Valuation Metrics

Peer Comparison

Looking ahead, corporate event data provided by Wall Street Horizon shows a confirmed Q2 2023 earnings date of Thursday, August 3 BMO with a conference call immediately after the numbers hit the tape. You can listen live here. The calendar is light on volatility catalysts aside from the reporting date.

Corporate Event Risk Calendar

The Technical Take

Last February, I initiated coverage of HF Sinclair with a hold rating. I appreciated the compelling valuation, but momentum and price action were quite weak. That turned out to be a decent call. The stock is up modestly on a total return basis, though I wish I had looked at DINO two months ago near the low when it encountered long-term support in the mid to high $30, as evidenced by high volume by price from 2020 and 2021.

After breaking below previously noted support at the $48 mark, shares went on to plunge another 20%-plus. Recently, however, DINO has come roaring back. Shares climbed above the long-term 200-day moving average while the RSI momentum indicator at the top of the chart suggests buying pressure is now the highest since Q2 last year. I would like to see the stock holds above the 200-day, but a pullback to $48 is possible given the importance of that spot.

Overall, I see resistance in the $58 to $60 range, so taking profits there would be a prudent play.

DINO: Share Rise Above the 200-DMA On Strong Momentum

The Bottom Line

I am upgrading DINO from a hold to a buy based on a continued strong valuation case along with an emerging positive technical setup ahead of earning results due out later this week.