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Will Higher Margins Drive HollyFrontier's (HFC) Q2 Earnings?

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Petroleum refiner and marketer HollyFrontier Corporation (HFC - Free Report) is expected to release second-quarter 2018 results before the opening bell onThursday, Aug 2. The current Zacks Consensus Estimate for the quarter under review is a profit of $1.63 on revenues of $4,270 million.

In the preceding three-month period, the company beat the consensus mark by a massive 108.1% on higher-than-expected refining margins and refined product sales.

As far as earnings surprises are concerned, the Dallas, TX-based downstream operator is on a firm footing, having gone past the Zacks Consensus Estimate thrice in the last four reports. This is depicted in the graph below:

Investors are keeping their fingers crossed and hoping that HollyFrontier surpasses earnings estimate this time too. However, our model indicates that the company might not beat on earnings this time around.

Let’s delve deep to find out the factors likely to impact HollyFrontier’s second-quarter results.

Factors to Consider This Quarter

We expect a bullish refining outlook to buoy the company’s bottom line in the second quarter of 2018. With crack spreads remaining elevated compared to where they were around a year ago, margin estimates have gone up. This is expected to improve financial and operational performance of the Refining segment – the main contributor to HollyFrontier earnings. The Zacks Consensus Estimate for refining margin in second quarter 2018 is $16.67 a barrel, up from $11.47 a year earlier and $12.83 in the first quarter.

HollyFrontier is bearing the brunt of increasing operating costs and expenses, which might put a dent in its earnings. In 2017, the company's total costs rose 25% year-over-year. Even in the first quarter, the costs increased more than 19% when compared with the year-ago-quarter.

Increased turnaround activities in certain projects might also hamper the company's revenues in the coming quarters. As such the company has also increased its maintenance capex budget to account for the planned turnaround work as well as the unplanned ones, which might put pressure in its cash flows and earnings.

What Does Our Model Say?

Our proven model too does not conclusively show that HollyFrontier will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat consensus estimates. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, for HollyFrontier stands at 0.00%. This is because the Most Accurate Estimate and the Zacks Consensus Estimate both stand at $1.63.

Zacks Rank: HollyFrontier is #2 Ranked. Though a Zacks Rank of 2 increases the predictive power of ESP, the company’s ESP of 0.00% makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

While earnings beat looks uncertain for HollyFrontier, here are some firms from the energy space you may want to consider on the basis of our model, which shows that they have the right combination of elements to post earnings beat this quarter:

Penn Virginia Corporation (PVAC - Free Report) has an Earnings ESP of +6.72% and a Zacks Rank #1. The company is anticipated to release earnings on Aug 7. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Murphy Oil Corporation (MUR - Free Report) has an Earnings ESP of +5.99% and a Zacks Rank #2. The company is anticipated to release earnings on Aug 8.

Sanchez Energy Corporation (SN - Free Report) has an Earnings ESP of +3.41% and a Zacks Rank #3. The firm is expected to release earnings on Aug 7.

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