HollyFrontier looks west with refinery deal

HollyFrontier plans to enter a US west coast market that is short for gasoline the US independent refiner can supply from a premium perch, the company said today.

The company's planned purchase of Shell's 145,000 b/d Puget Sound Refinery in Anacortes, Washington, will spread its roughly 420,000 b/d refining footprint from the midcontinent and Rocky Mountains to a tricky coastal market. HollyFrontier sees a lucrative chance to tap new hydrocarbon and renewable fuels markets at lower operating cost than expanding directly into California. Both companies hope to close the deal by the end of the year.

Puget Sound offers a toehold into a region that HollyFrontier wants to supply with renewable diesel from a converted former 52,000 b/d refinery in Cheyenne, Wyoming. But it also offers companies able to endure the tougher regulatory climate a market where gasoline demand is outstripping supply, chief executive Mike Jennings said.

"Right now, the shiny new object is clearly renewables, but I think we have to take a step back and say what is powering this economy through the next ten years," Jennings said. "Other fuels are making inroads and we are participating in some of those — we think at high returns — but we see a pretty bright future for petroleum here in the foreseeable future."

Investors have pressed US refiners to defend or extend their assets through expansion into renewable fuel markets. Such projects, now undertaken by almost every US independent refiner, brush up environmental, social and governance bona fides and tap products with high margins almost entirely dependent upon regulatory requirements.

The Pacific Northwest offers new crude supply and product export opportunities, executives said on a quarterly earnings call. The refinery receives Canadian crude off of the Trans Mountain pipeline and Alaskan North Slope crude through a pair of marine docks with drafts able to accept Aframax or the smallest size of Suezmax tankers.

HollyFrontier would plan to continue Puget Sound's current strategy of exporting about 15pc of its transportation fuel production to markets less accessible to the refiner's current inland positions. The refinery produces a relatively small share of diesel, and between 2015 and 2019 averaged about 49pc gasoline output.

The strategy means adding conventional refining capacity that many parts of the world are trimming. The US last year cut refining capacity by about 1mn b/d as the low-demand pandemic environment pushed costly operations over the edge. HollyFrontier also elected to suspend its dividend for a year to fund the purchase through a period that also includes spending in renewable diesel expansions and major refining maintenance. The decision quickly drew questions from investors that have stuck with refiners because of their payments to shareholders.

"This is about driving cash returns on our business that can ultimately be provided to our shareholders, and we feel like it is the right decision, given the high return on the investment," Jennings said.

HollyFrontier plans to run its current system at 400,000-420,000 b/d in the second quarter.

Renewable diesel costs rise

A combination of Covid-19 and severe winter storm effects have increased costs for HollyFrontier's renewable diesel spending. The company now expects to spend $800mn-900mn, increasing by more than roughly half from a range of $520mn-550mn earlier this year. The company will upgrade the metals used in its project to support a wider range of feedstocks. It encountered supply chain disruptions as it works toward a startup next year.

HollyFrontier has no immediate plans for renewable diesel production at the Puget Sound refinery. Washington recently approved its own low carbon fuel standard (LCFS) program, contingent upon certain other conditions. But it is also a difficult state for emissions regulations and other considerations when modifying or adding to a refinery, Jennings said.

"That impacts both our ability at Anacortes to do something with renewable diesel but also the ability for this LCFS to roll forward in the envisioned manner," Jennings said. "I think we will play that out through time as to what the state really intends with respect to local production opportunities versus emissions."

By Elliott Blackburn