Holly Energy Partners, L.P. (HEP) is a master limited partnership that owns and operates a diversified portfolio of midstream energy assets, including petroleum product and crude oil pipelines, terminals, tankage, and refinery processing units. With a strong focus on serving the refining and marketing operations of HF Sinclair Corporation (HF Sinclair) and other refineries in the Mid-Continent, Southwest, and Northwest regions of the United States, HEP has established itself as a reliable and essential player in the midstream energy industry.
Business Overview
HEP's operations are organized into two reportable segments: Pipelines and Terminals, and Refinery Processing Units. The Pipelines and Terminals segment includes HEP's petroleum product and crude oil pipelines, terminal, tankage, and loading rack facilities that support the refining and marketing operations of HF Sinclair and other refineries. The Refinery Processing Unit segment consists of five refinery processing units at two of HF Sinclair's refining facility locations.Through its subsidiaries and joint ventures, HEP owns and/or operates an extensive network of pipelines, terminals, and refinery processing units across several states, including Colorado, Idaho, Iowa, Kansas, Missouri, Nevada, New Mexico, Oklahoma, Texas, Utah, Washington, and Wyoming. This strategic geographic footprint allows HEP to serve a diverse customer base and capitalize on the growing demand for midstream services in the regions it operates.
Financial Performance
HEP has demonstrated a track record of consistent financial performance, with strong revenue and profitability metrics. In the latest fiscal year, the company reported annual revenue of $547.48 million and net income of $216.78 million. The company's annual operating cash flow and free cash flow were $331.05 million and $292.09 million, respectively.On a quarterly basis, HEP has also maintained a solid financial position. In the most recent quarter, the company reported revenue of $158.36 million and net income of $64.91 million. The company's quarterly operating cash flow and free cash flow were $258.52 million and $78.47 million, respectively.
Segment Performance
HEP's Pipelines and Terminals segment has been a consistent driver of the company's financial performance. In the latest fiscal year, this segment generated revenue of $367.0 million, representing a 10.2% increase compared to the prior year. The increase was primarily attributable to higher tariff rates and increased volumes on the company's crude oil and refined product pipelines, as well as higher revenues from its terminal and tankage facilities.The Refinery Processing Unit segment also contributed to HEP's overall performance, generating revenue of $74.43 million in the latest fiscal year, a 8.3% increase compared to the prior year. This increase was mainly due to higher revenues from the company's Woods Cross refinery processing units, which had been down for a scheduled turnaround in the prior year.
Liquidity and Capital Resources
HEP maintains a strong liquidity position, with $11.22 million in cash and cash equivalents as of the latest quarter. The company has a $1.2 billion senior secured revolving credit facility, which provides ample funding for capital expenditures, investments, acquisitions, and other general partnership purposes. As of the latest quarter, HEP had $578.5 million in outstanding borrowings under the credit facility, leaving $621.5 million in available capacity.In addition to its credit facility, HEP has $900 million in aggregate principal amount of senior unsecured notes outstanding, with maturities ranging from 2027 to 2028. The company's debt structure and liquidity position provide it with the financial flexibility to pursue growth opportunities and maintain its distribution to unitholders.
Growth Initiatives and Outlook
HEP's growth strategy focuses on organic projects around its existing asset base, as well as selective investments and acquisitions that enhance its service platform and create value for its unitholders. The company has a robust pipeline of capital projects, including maintenance and expansion initiatives, to support the growing demand for its midstream services.In its latest guidance, HEP expects to invest $25 million to $30 million in maintenance capital expenditures and $5 million to $10 million in expansion capital expenditures and its share of joint venture investments during the current fiscal year. These investments are aimed at maintaining the integrity and efficiency of HEP's existing assets, as well as expanding its service capabilities to meet the evolving needs of its customers.
Risks and Challenges
While HEP has demonstrated resilience and adaptability in the face of industry challenges, the company is not without its risks. Some of the key risks facing HEP include:1. Concentration of revenues from HF Sinclair: A significant portion of HEP's revenues are derived from long-term agreements with HF Sinclair, making the company's financial performance heavily dependent on the success and operations of its largest customer.
2. Regulatory and environmental compliance: HEP's operations are subject to stringent federal, state, and local environmental regulations, which could result in increased compliance costs and potential liabilities.
3. Commodity price volatility: Although HEP does not directly own the products it transports or processes, fluctuations in commodity prices could indirectly impact the company's customers and, in turn, affect HEP's financial performance.
4. Competition: HEP faces competition from other midstream service providers, which could put pressure on the company's pricing and market share.
Despite these risks, HEP's diversified asset base, long-term customer contracts, and strong financial position have enabled the company to navigate industry challenges and maintain its position as a leading midstream service provider.