Frontier Oil Finally Falls

by Mike Pienciak - November 7, 2009 - 0 comments

Back in the spring, I suggested that pint-sized
Frontier Oil (NYSE: FTO) was the

best bet among risky refiners. Later, commenting on
first-quarter results, I cautioned investors

not to get burnedby chasing then-hot shares. Two things
have since changed my last writing: The stock is down roughly
15%, and the company's swung to a third-quarter loss.

<p>Back in the spring, I suggested that pint-sized
<strong>Frontier Oil</strong> (NYSE: FTO) was the

best bet among risky refiners. Later, commenting on
first-quarter results, I cautioned investors

not to get burnedby chasing then-hot shares. Two things
have since changed my last writing: The stock is down roughly
15%, and the company's swung to a third-quarter loss.</p>

Despite all that, I continue to view Frontier as a top-tier independent refiner. Unlike with industry giant Valero (NYSE: VLO), Frontier's investors haven't been scalded by common-share dilution. Compared with names that include Sunoco (NYSE: SUN), there's been no dividend cut. And unlike fellow regional player Holly (NYSE: HOC),
management hasn't tapped the debt market in more than a year. In fact,
Frontier ended the quarter with $487 million in cash, an untouched
credit line, and an exceedingly conservative debt-to-capitalization
ratio of 23%.

Now for the bad news. The company posted a loss of $0.15 per share,
versus earnings per share of $0.70 in the year-ago period.
Sequentially, the earnings spill compares to second-quarter EPS of
$0.47. Of course, Valero and Sunoco shareholders recently saw EPS dip
even further into the red.
Also, investors will be glad to know that Frontier remained cash-flow
positive, even if at a fraction of the second-quarter figure.

Crude differentials, although still down dramatically year over
year, moved in the company's favor from the prior quarter. Refining
margins were also down on an annual basis, owing to weak demand and
high inventories. Sequential margin change, however, was mixed: The
diesel crack spread widened while the gasoline spread narrowed. With
company yield and sales skewed toward gasoline, that wasn't the most
favorable development.

Finally, to better understand the yawning earnings gap from quarter
to quarter, investors should note that in the second quarter there was
an inventory gain of $0.75 per share, compared to a far smaller
$0.08-per-share benefit in the recently completed period. Put simply,
when crude prices rise substantially during a reporting period,
Frontier recognizes a large gain, reflecting the difference between
prices paid and the quarter-ending market value of finished and
unfinished product. In the third quarter, crude rose less than it did
in the second -- hence the difference in per-share benefit.

Going forward, management is looking to improve profitability
through efficiency upgrades at its Cheyenne refinery, which are
targeted to lift refining margins by $3-$4 per barrel by mid-2011.
Also, the company is keen to make an acquisition, although it isn't
hopeful that a "high-quality asset" opportunity will be available
anytime soon.

Finally, management doesn't see refining fundamentals recovering
until "well into 2010." And that thesis rests partially on the
assumption that larger competitors will keep recently closed refineries
shuttered. In addition, I'll remind investors that integrated giant BP (NYSE: BP) also sees weak fundamentals ahead, and that fellow Fool Toby Shute has profiled ExxonMobil's (NYSE: XOM) peak gasoline perspective.

Bolstered by a rock-solid balance sheet and historically strong
pricing power, Frontier should hold up better than most. Furthermore,
barring consecutive quarterly losses into 2010, developing an interest
in shares at a current price-to-book of 1.2 is probably not tantamount
to trying to catch a falling knife. Still, be aware that you could get
cut.

Companies in this news:

Frontier Oil

Valero Energy

Sunoco

Last edited by Rakhi Kaptiyal on Sat, 11/07/2009 - 08:25 | Write to author: Mike Pienciak |