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Rating Action:

Moody's changes HollyFrontier's outlook to negative from stable

11 Jun 2020

New York, June 11, 2020 -- Moody's Investors Service, ("Moody's") changed HollyFrontier Corp.'s (HFC) outlook to negative from stable and affirmed it's Baa3 senior unsecured and long-term issuer ratings.

"HollyFrontier's renewable diesel projects will modestly diversify its business profile and improve its ESG profile," said Arvinder Saluja, Moody's Vice President. "However, the change in the rating outlook reflects that this will also reduce its crude distillation capacity and that the anticipated increase in debt will weaken its leverage profile amidst a weak refining industry backdrop."

Affirmations:

..Issuer: HollyFrontier Corp.

.... Issuer Rating, Affirmed Baa3

....Senior Unsecured Notes, Affirmed Baa3

Outlook Actions:

..Issuer: HollyFrontier Corp.

....Outlook, Changed To Negative From Stable

RATINGS RATIONALE

In early June, HFC announced its updated plan to expand into renewable diesel generation. After completion of the planned construction projects by year-end 2021, HFC will have renewable diesel units at its Artesia and Cheyenne refinery locations, and a pre-treatment unit (PTU) at Artesia (collectively, the renewable projects). HFC expects the related capital spending to be between $650 million and $750 million, financed with a mix of balance sheet cash and capital markets activity in the second half of 2020. These projects will improve HFC's business diversity modestly and offset adverse Renewable Fuel Standard (RFS) mandated credits (RINs) obligations. However, these projects involve both execution and integration risk as well as exposure to a potentially changing regulatory environment.

Moody's is assuming that post-completion, the renewable projects will produce enough renewable diesel to substantially mitigate HFC's RIN exposure which has been volatile for merchant refiners over the past few years. The projects will allow some diversification from traditional fuels refining, although they will further reduce HFC's already modest refining footprint by over 50,000 bpd (>10%) of crude distillation capacity as it re-purposes its Cheyenne asset to only produce renewable diesel. In addition, HFC's renewable diesel will also be transported to California, where a state-specific program, LCFS (Low Carbon Fuel Standard) Program, will allow it to enhance its projects' returns by receiving LCFS credit value. LCFS credits could fluctuate in value overtime, especially as the industry-wide supply of renewable diesel increases. Even though the contemplated PTU will give HFC some feedstock flexibility for renewable diesel production, the majority of the feedstock is expected to be soybean oil, which has a higher carbon intensity than other non-agricultural feedstocks such as used cooking oil.

Despite their still potentially solid IRRs, we view these projects to be a step-out transaction due to HFC's history as a traditional fuels refiner. As such, there is some execution and integration risk associated with them, along with HFC's dependence on regional regulatory regimes for lowering carbon intensity in the transportation fuels pool. In addition, with these projects, HFC's consolidated leverage metrics including Holly Energy Partners L.P. (HEP, Ba2 stable), HFC's midstream subsidiary, will get stretched in the near term due to the severe down-cycle in its primary refining business.

HFC's Baa3 rating reflects the company's long track record of conservative financial policies with historically low leverage, financial performance that has been one of the strongest in the refining industry and its complementary logistics capability. The rating is also supported by the strategic location of HFC's refining assets, which allows for access to advantaged crudes in the current commodity price environment. Its specialty lubricants segment, largely built through acquisitions, produces higher margin products for diverse industrial and consumer end-markets. In addition, it enhances HFC's scale, and business and geographic diversity modestly, but is not sizeable enough to move the ratings up.

HFC's rating is restrained by its limited scale. The rating considers the challenges facing the refining industry over the longer term, including potential changes in market dynamics, and risk associated with regulatory capital expenditures that may not produce any additional cash flow. We expect HFC to maintain supportive consolidated leverage metrics, including HEP, over the cycle despite potential EBITDA volatility, manage its share buybacks in a conservative and measured manner, and use its sizeable balance sheet cash prudently.

We expect HFC to have excellent liquidity with a March 31, 2020 cash balance of $890 million (standalone) and a $1.35 billion undrawn senior unsecured revolving credit facility (with $4.9 million of letters of credit outstanding). We expect that HFC will manage its non-discretionary capital spending and share repurchases from internally generated cash flow. In November 2019, HFC's Board approved a $1 billion share repurchase program, replacing the previous existing $1 billion share repurchase program in September 2018 which had $281 million outstanding at the time. At March 31, HFC had not repurchased common stock under its share repurchase authorization. HFC's revolver matures in February 2022, and we anticipate it will remain undrawn absent any further acquisitions. HFC's nearest debt maturity is for its revolver in 2022.

The negative outlook reflects Moody's expectation of higher debt levels which will worsen credit metrics amidst challenging refining industry conditions, and the possible execution risk regarding the development of the renewable projects.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's expects that improving refining margins after 2020 and earnings contributions from the renewable projects starting in 2022 will allow HFC to maintain supportive over-the-cycle consolidated leverage metrics for its Baa3 ratings. A downgrade could result if refining margins do not look likely to improve meaningfully beyond 2020, if HFC's strategy and financial policies were to become less conservative, or if HFC were to experience material operational issues or construction issues for the projects.

An upgrade for HFC is unlikely in the near term due to HFC's modest scale. If the company grows through acquisitions and meaningfully increases its asset diversity, while maintaining its conservative financial profile, then an upgrade may be considered.

The principal methodology used in these ratings was Refining and Marketing Industry published in November 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1040610. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Dallas, Texas, HollyFrontier Corporation is an independent US refining company with five refineries and 457,000 bpd of total throughput capacity.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Arvinder Saluja, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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