I think analysts are mispricing this stock.
I may be missing something here and I hope you’ll help me out if I am.
But if I’m right in my calculations, and barring catastrophe or any other extreme unforeseen
events, I don’t see how this stock is not up at least 50% over the next 6 months as
earnings unfold.
In the meantime, they’re paying a nice dividend.
Here, let me run through the numbers real quick with you and you can tell me what I’m
missing… let’s do it!
— Welcome back to the brightest 18,000 investment
minds in the YouTube subscriber-sphere!
That’s a big part of why I wanted to share this with you real quick: either you can spot
some mistake I’m making with my investment math here or… it actually is a great opportunity—
worth a deeper dive, of course—you shouldn’t invest in anything without fully understanding
it yourself first.
That brings up an important point.
I have to say: I am a practicing financial advisor and this is absolutely not investment
advice for you.
I have no idea whether or not this stock would make sense in your portfolio.
At the time of publishing this, I do own some shares in my own personal portfolio as well
as in SOME client portfolios.
So please, do your own due diligence before taking any action yourself.
Alright, if we’re on the same page then, let’s get into it…
Now, I’m not going to go into all the gorey details like I have in past deep dives.
I’m just going to go into the numbers that I believe make this stock “mispriced.”
I actually went into all those details during a 90 minute live stream I did with our small
group of Insiders.
And actually, just as a heads up, because of the amount of value we’re starting to
see in there, I realized I have that priced way too cheap!
So… that’s gonna change real soon (but anyone who’s already in there will get locked
in, of course).
But anyway, here’s the company…
it’s a vertically integrated refiner.
You might recognize their dinosaur logo as they just finished their acquisition of Sinclair.
The new company is called HF Sinclair and their ticker is DINO (D-I-N-O).
So, as promised, we’re just going to jump straight to the numbers that are throwing
me off a bit.
Again, the detailed buildup to what all these numbers mean and so much more about this company
were in that Insider deep dive, but here’s the number that’s throwing me off: it’s
the analysts’ expectation for the full year 2022 EBITDA.
Here it is, roughly $3.9B:
So as you know, a stock's price today has much to do with how everyone is expecting
it to perform in the future.
And if it turns out that a company ends up grossly outperforming these expectations,
the stock price tends to rise on that news.
Right?
If everyone is expecting $4B but the actual full year figure comes in at $6B, for example,
what would you expect to happen to the stock’s price.
You’d expect it to jump up, right?
To adjust to this revelation that the actual figure was so much higher than the expected
figure—to adjust to reality.
Right?
Okay, so if we’re on the same page there, my problem is, I struggle to even back into
these EBITDA estimates.
So here’s what you need to know—the formula—to be on the same page with me.
We can split their final EBITDA figure into 2 parts: what they get from refining and everything
else.
Now here’s their breakdown for that:
They show $1.35B coming from refining and $1.225B coming from everything else.
I’m going to give them the $1.225B EBITDA across those other markets.
They are less variable, less volatile markets …easier to project, so I’ll use that figure
for now across all my scenarios (the bull, base, and bear case).
Okay, so that leaves the $1.35B from refining.
Management breaks down how they get to that figure here:
Now this formula is made up of a lot of variables.
And management is (as they should be in such a volatile market) erring on the side of conservatism.
You see, the biggest variable here is the Gulf Coast 3-2-1 Crack Spread.
That’s effectively the profit (the spread) one can get by refining a barrel of crude
oil.
Now, historically that spread has fluctuated between 10 and 20 dollars.
So management is using the low end of normal to demonstrate DINO’s refining capacity.
Great.
That’s what they should do.
And analysts, at least to some degree, see that, in that they are using an EBITDA figure
higher than this.
Right?
$3.9B versus the $2.6B of EBITDA Sinclair is showing in their slides.
So what are the variables that could cause this EBITDA figure to come in higher?
Well, there are several.
The Brent/WTI Spread right now is higher than this, by a couple of dollars, which makes
a difference.
Their target throughput could be less if a refinery or two has to be shut down for some
period for maintenance or something like that.
In fact, they just got their most recent refinery addition online during Q2 of this year, so
Q1’s throughput was less than what they’re showing here (so we’ll need to factor that
into our averages for our different scenarios).
But the biggest difference, as I pointed to already, is going to come from that average
crack spread Sinclair realizes over the year.
At this point, $10 (for the full year 2022) is not even possible.
Here’s what I mean: DINO posts on their investor relations site the average spread
they realize each month.
And here’s the year-to-date on that:
It’s this line right here, check it out: $17 in January, $17.67 in February, $25.19,
$26.68, $42.05, $54.63, and $40.49 in July.
You see?
Even if you threw in zeros for the last five months (which obviously wouldn’t happen),
the average spread they realized would still be $19.48!
Okay.
You with me?
You ready for this?
If you plug that $19.48 crack spread figure into their equation here.
And drop their daily average throughput for the year from 640,000 to 590,000—and remember,
I’m just trying to back into analysts’ EBITDA number here—you get a number that
is almost in line with analyst expectations.
Is that fair?
That throughput is low.
Their Q1 average was 525,000 …because they didn’t have their newly acquired facility
online yet.
But now, they say Q2 is going to land between 630,000 and 650,000.
Extrapolating management’s expectations there over the rest of the year, would mean
a full year 2022 average of roughly 600,000 to 620,000 of average barrel per day throughput.
Okay.
Not crazy to imagine a scenario where a refinery has some unexpected problem, has to go offline
for a bit, and the final figures drop to below that 600,000 level.
If that’s what the expectation really is… fine.
It’s definitely possible.
But you know what’s not possible, that $19.48 crack spread.
That was assuming the spread went to $0 for these last five months of the year—which
won’t happen, that was just the only way I could back into the analysts’ EBITDA expectations.
For example, we’re already halfway through August and the spread has been hovering around
that same mark it averaged in July: $40 to $41.
Anway, do you see my issue here?
What am I missing for why analysts are expecting that low an EBITDA for the full year 2022?
And I mean, if you look at what they’re projecting for the full year 2023, it looks
like they must be expecting that crack spread to come down 75% and average that low $10
figure for that full year… that just doesn’t seem likely to me at all.
But I’m getting too in the weeds here, let me show you the figures that I think would
make more sense…
And again, if you are interested in “the weeds” and learning more about my process
and hearing about all the opportunities I’m finding and having more direct access to me,
including Q&A on stuff like this, check out that Insider link in the description and lock
in your price before it goes up!
Alright, so what do you think would be a better estimate for DINO’s full year 2022 EBITDA?
Well let’s play with the most impactful variables.
We know the average crack spread experienced by the company for the first 7 months of the
year.
So what’s a reasonable conservative expectation for the rest of 2022?
Well, in the Insider deep dive we did, I outline my case for why I think this market is more
likely to stay tight—if not tighten even more—than it is to loosen back to 2021 levels.
That’s why with my bull case, I think I’d be very conservative by only projecting out
an average spread of $35 for each of those 5 remaining months.
Honestly, I think the odds are greater that it ends up higher than that, but hey, I like
being conservative even in my bull scenarios—extra margin of safety!
For our base case here, I drop it down quickly to the historical high end of $20.
And for the bear case—and honestly, I think this is too extreme, too pessimistic … I
mean, to the point of not even being realistic … but whatever, we’re just playing with
numbers here—for the bear case, I’m showing that spread drop almost immediately back down
to that historical low end of $10.
Even then, in that extreme bear case scenario, I’m coming up with an EBITDA that’s more
than $1B—25%—higher than what analysts are projecting.
And now, to get these EBITDA figures back to what that would mean for their share price
whenever we have this as real data (not just my estimations versus analysts’ projections),
you know, after they’ve reported everything for the full year 2022… what would this
mean for their price per share?
Well, we’ll need a multiple to get ourselves back there.
That’s gonna require an assumption.
Here are the EV/EBITDA multiples of DINO and its peer group today:
–
DINO is at about 5.7.
The average of the rest of the peer group is just a hair over 5.
So I’ll give it a 5, a 4, and a 3 (lower than all but the ugliest here…) for my bull,
base, and bear cases respectively.
Now, after converting from enterprise value to market capitalization (again, that was
all in the deep dive) and then dividing by the current shares outstanding, we’re left
with a conservative (even the bull case in this example and in my opinion) fair value
price at the time all this data would be processed (so roughly, early next year) of $49, $82,
and $130.
Today, it’s trading around $50 (and it was less than that when we first started covering
it in the community).
And a quick (additionally conservative) note on that last conversion from EV to share price,
they will have earned money between now and then and have deployed it in some way.
They have been buying back shares, for example.
In other words, either the debt will be lower, the cash position will be higher, or the share
count will be lower—or more likely, some combination of all three—which would result
in an even higher price per share after running through that EV to share price conversion.
But I’m fine leaving those assumptions out as they yet again build me an even greater
margin of safety.
Icing on the cake!
Speaking of icing, DINO just reinstated their dividend as well, which I believe works out
to be greater than 3% at the time of this recording.
So what do you think?
Am I missing something in this calculation somewhere?
I don’t want to lead anyone astray.
Heck, I’ve got my own money in there—so yeah, if you see a reason EBITDA should be
lower than what I’m thinking it will be, let me know!
I’d prefer that to eating crow 6 months from now when the numbers are all in.
I could be wrong… it happens.
Thanks for hanging out with me.
Check out the insider community if you’re at all interested.
I’d love to see you inside!
Regardless I hope this was helpful.
I wish you all the best.
Take care.