Fundamental Analysis of Holly Energy Partners, L.P. (HEP) Stock

 

Fundamental Analysis of Holly Energy Partners, L.P. (HEP) Stock

NOTE: As of December 1, 2023, Holly Energy Partners, L.P. (HEP) ceased to be a publicly traded entity following its merger with and acquisition by its parent company, HF Sinclair Corporation (DINO). HEP is now a wholly-owned subsidiary of HF Sinclair, operating as HF Sinclair Midstream. Therefore, any current or future fundamental analysis for investment purposes must be directed at HF Sinclair Corporation (DINO) stock, as HEP units are no longer traded on a major exchange.

Fundamental Analysis of Holly Energy Partners, L.P. (HEP) Stock

The following analysis details the fundamental characteristics of HEP leading up to the acquisition, as this context is crucial for understanding its past valuation and current operating role within HF Sinclair.

---

1. Business Model and Strategic Position

Holly Energy Partners, L.P. (HEP) was a master limited partnership (MLP) primarily engaged in the transportation, terminalling, and storage of petroleum products and crude oil. Its assets were strategically located across the U.S. Mountain West, Southwest, and Pacific Northwest regions.

Core Business & Competitive Advantage

• Midstream Assets: HEP owned and operated an essential system of pipelines, storage tanks, and terminal facilities serving refineries and the broader petroleum industry.

• Sponsor Relationship (HF Sinclair): Its key competitive advantage was the relationship with its parent, HF Sinclair Corporation (formerly HollyFrontier). A significant portion of HEP's revenue was backed by long-term, fee-based contracts with HF Sinclair, often including minimum volume commitments (MVCs). This structure provided stable, predictable cash flow, insulating the business from volatile crude oil and refined product prices.

• Stable Revenue: This fee-based model, typical of midstream MLPs, made HEP a classic defensive energy play focused on infrastructure rather than commodity price risk.

The HF Sinclair Merger (Post-2023)

The key structural change was the merger in late 2023, where HF Sinclair acquired all outstanding HEP common units it didn't already own. This transaction was driven by HF Sinclair's desire to simplify its corporate structure, eliminate intercompany complexities, and fully integrate the midstream logistics assets to enhance capital allocation flexibility.

---

2. Financial Health and Profitability (Pre-Merger Context)

Prior to its acquisition, HEP demonstrated the financial stability characteristic of a mature, well-contracted MLP.

Revenue and Earnings Stability

• Steady Revenue Growth: HEP consistently generated steady annual revenue, growing from $494 million in 2021 to $547 million in 2022 and maintaining a strong TTM (Trailing Twelve Months) revenue of approximately $580 million heading into 2024. This growth reflected organic expansion projects and the integration of acquired assets, such as those from the Sinclair acquisition.

• Operating Efficiency: The highly contract-based nature of the business allowed HEP to maintain robust profitability metrics.

  • Gross Margin (Pre-Merger): Typically very high (often over 60%) due to low operating costs relative to transportation fees.

  • Net Income: Consistently strong, with net income before taxes often exceeding $200 million annually, translating to stable diluted EPS.

Key Valuation Ratios (Historical)

Metric	Value (Prior to Acquisition)	Significance
P/E Ratio	$\approx 10.80x$	Historically low for midstream sector, suggesting a value-oriented stock, often driven by the MLP structure.
Dividend Yield	$\approx 6.85\%$	A defining characteristic of MLPs, offering a high-yield investment to unitholders.
Debt/Equity	High (Typical for MLPs)	MLPs traditionally utilize a high degree of leverage (debt) to fund capital-intensive infrastructure projects and maximize distributable cash flow.

---

3. Focus on Cash Flow and Distribution

As an MLP, the most critical fundamental metric for HEP was Distributable Cash Flow (DCF), not necessarily net income (due to high depreciation from infrastructure assets).

• Distributable Cash Flow: DCF measures the actual cash generated and available for distribution to unitholders. HEP's DCF historically provided a healthy Distribution Coverage Ratio (DCF divided by total distributions), ensuring the sustainability of its high quarterly distributions.

• High Yield: The high dividend yield (distributions for an MLP) was the primary draw for investors, positioning HEP as an income-focused investment. The stability of the cash flow, backed by HF Sinclair's MVCs, supported this high payout.

---

4. Current Status: Now Part of HF Sinclair (DINO)

For investors interested in the former HEP business, the analysis now shifts to its new parent entity: HF Sinclair Corporation (DINO).

• Full Integration: The former HEP assets are now fully integrated into HF Sinclair’s "Midstream" segment. This integration is expected to result in operational synergies and a more streamlined financial profile for DINO.

• Investment Thesis Shift: An investment in DINO offers exposure to the former HEP logistics business, but it's now coupled with the volatility and growth of refining (the primary business of HF Sinclair) and renewables.

• Capital Allocation: The cash flow generated by the stable midstream assets (formerly HEP) now contributes to HF Sinclair's overall capital allocation strategy, which includes supporting its corporate dividend, funding refining and renewables growth projects, and executing share repurchases.

In summary, the fundamental strengths of HEP—stable, fee-based revenue, high DCF, and a critical infrastructure network—remain intact, but they are now components of the much larger, diversified energy company, HF Sinclair. The HEP unit symbol (HEP) is retired, and all future performance is reflected in the DINO common stock.