Is Management Bullish on The Future of ConocoPhillips (COP) and HollyFrontier Corp (HFC)

The project will be online in 2016. Currently, only about 55 KBD (thousand barrels per day) of black wax production is being carried out in Uinta. However, the reserve potential out of Uinta operations is about 1 billion boe (barrel of oil equivalent). HFC also noted that there were new E&P entrants as well so the supply out of the Uinta is expected to grow in near future. If there is more supply available, then further expansions could be possible.

–  Tulsa expansion: HFC is still waiting for permit approvals to run the Tulsa facilities at 160 KBD vs the 125 KBD today. This would also require some capital investments.

–  Since five of the company’s facilities are situated very close to the shale plays like the Uinta, Niobrara and Permian, the company is looking into doing small logistics projects that will address items such as crude gathering. Dave also mentioned that the LPG market was quite attractive and there could possibly be investments made in this segment. This type of project has the potential to be dropped down into an MLP structure (HFC already owns 44 % of the pure play MLP known as Holly Energy Partners).

Valuations Highlights

–  M&A: Valuations are too rich for the assets they have seen. Their targeted assets on average are 2x of their cost of capital and meet rates of return between 23-30%.

–  Cash:  Once the company completes the projects highlighted above, it really has no big capital commitments at the moment. HFC currently has $2.3 billion of cash on hand and wants to keep at least $1 billion on the balance sheet at all times. The company wants to continue to grow the dividend, and it feels like the company will also have sufficient cash on hand to continue paying out specials. It also has $500 million left on their $700 million buyback program.

Holistically speaking, the management seems to carry a positive sentiment for the company’s future. I have a special liking for the stock given that it is one of the cheapest in this space. One of its peers, Baker Hughes Incorporated (NYSE:BHI) is trading at a forward P/E multiple of 11x and a forward EV/EBITDA multiple of 5x. This company has a broad international presence. In fact, political conditions in South America, Africa and Russia are a big source of risk to the company’s valuations and estimates. However, HFC is trading at a cheap multiple of 8x only. Also, it’s trading at an EV/EBITDA multiple of 3.6x, which is well below most of its peers, including Baker Hughes.

Foolish Bottom Line

Both of these companies are set to grow on the basis of their expansion plans and solid valuations.

The article Is Management Bullish on These Oil & Gas Companies’ Future originally appeared on Fool.com and is written by Masam Abbas.

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