Collect Special Dividends from the Gasoline Price Spike – A Perfect Storm

Accelerating Dividends, Dividend Investing, Energy Investing

Flood waters from Hurricane/tropical storm Harvey have forced Texas and Louisiana refineries to suspend operations. These include the two largest refineries in the U.S. and in total up to 30% of the country’s refining capacity is offline. The result is a large spike in fuel prices. Refineries not located on the Gulf Coast stand to generate windfall profits until the shuttered refiners can get back on line. One mid-sized refiner has a history of paying a special dividend when quarterly profits spike.

Refining companies generate gross profits based on the gross refining margin between the cost of crude oil and wholesale prices for gasoline, diesel, and other refined fuels. A refining company will report gross margins per barrel, a good metric for tracking the company’s overall profitability. These companies also report a refining cost per barrel. Refining cost stay relatively level, so an increase in the gross margin can leverage net profits. For example, if a refiner realizes a gross margin of $12 per barrel and has refining costs of $5 per barrel then the gross profit is $7 per barrel. If the margin increases by 25% to $15 per barrel, the gross profit ($15 minus $5 equals $10) jumps by 43%.

Even before the storm, refiners were on their way to a very good third quarter compared to the 2017 second quarter. I track a crack spread (a market prices based refining margin) using NYMEX spot prices for WTI crude oil, conventional gasoline, and ultra-low sulfur diesel fuel. For the full second quarter, the spread averaged $15.57 per barrel. In the third quarter through August 25th, the average spread had increased to $19.16. Those higher refining margins were in place before Harvey hit Texas. Since the storm’s landfall, crude price has dropped and gasoline has spiked. The crack spread based on current prices is close to $35 per barrel. For at least a short period of time, refineries that continue to operate are going to be generating windfall profits. Each individual refinery will realize its own refining margin based on its sources and prices for crude oil and the fuels markets into which it sells product.

HollyFrontier Corp (NYSE: HFC) is a mid-cap, pure play refining company that owns five refineries located in the Midwest and Mountain West. For the second quarter, HFC reported a gross refining margin of $11.47 per barrel. Refinery operating expense was $5.54 per barrel. These numbers provide a net gross profit of $5.93 per barrel. Adjusted EBITDA was $306 million for the quarter. The regular $0.33 quarterly dividend results in $58 million in payment to shareholders, or about a 4% yield.

Based on the third quarter crack spread up to the day before Harvey made landfall, HFC should generate a refining margin at least $5 per barrel higher than in the second quarter. That produces a 100% gain in the net gross profit per barrel, which will also close to double EBITDA for the quarter. Excess profits from the Harvey related gasoline and other fuels price spikes will go on top of the double profits compared to the previous quarter. Even though the market has realized that refiners are going to do well this quarter, the magnitude of the profit gains is not yet factored into the share prices.

In past years, when HollyFrontier had great quarters, the company rewarded investors with special dividend payments. From 2013 through 2015 the company paid a $0.50 per share extra dividend almost every quarter. These payments were on top of the regular $0.33 per share dividend. It is very possible that HFC will declare a special dividend for the third quarter. The investment strategy now is to buy HFC and take profits when third quarter earnings and the dividend is announced.

Finding unique dividend opportunities like HFC is something I’ve done for decades with my own portfolio and in the past several years for other dividend investors. One thing they do is use them to build a reliable and consistent income stream from high-yield dividend stocks. They use my Monthly Dividend Paycheck Calendar to make sure they’re getting extra income every month.