Holly Corporation (NYSE:HOC) is a petroleum refiner with a total capacity of 111,000BPD; it’s markets are western Texas, New Mexico, Arizona, and Utah. Its main input, crude oil, has historically had volatile prices, making the company's margins volatile as well. From the first half of the year through July 2008, oil prices more than doubled, to $147 a barrel, increasing operating costs and decreasing Holly’s profit margins. By the end of October, however, they fell once again below $70 a barrel.
Holly’s markets are geographically isolated from non-local refineries, making transportation costs too expensive for distant refiners to compete with local ones. However, once the Longhorn Pipeline is expanded from 72,000BPD to 125,000BPD, it will let larger refineries from the Gulf Coast pump more, cheaper petroleum products into the Southwest. In response, Holly is seeking to invest $650M to expand its capacity, but this expansion will require it to seek debt, and the financial crisis has made credit far more expensive and difficult to procure.
Holly is a petroleum refiner with a crude capacity of 111,000 bpd (barrels per day); it produces gasoline, diesel, and jet fuel. Additionally, Holly owns Holly Asphalt Company which manufactures asphalt products in Arizona and New Mexico; the company also owns a 45 percent stake in Holly Energy Partners which owns 1,700 miles of pipelines in Texas, New Mexico, and Oklahoma. 
During fiscal 2007, Holly’s net income increased 25% from $266 M in 2006 to a record $334 M.  Total revenue for 2007 reached $4.791 B, increasing 19 percent from 2006; primarily, this is a result of increased production levels and sales.
With a crude oil capacity of 85,000 BPD, the Navajo Refinery distributes its refined products to Arizona, New Mexico, and western Texas; it uses Holly Energy Pipeline's infrastructure to transport its products to these regions. Its largest markets are: El Paso, Texas, Albuquerque, Moriarty, and Bloomfield, New Mexico, Phoenix and Tucson, Arizona, and northern Mexico. Its location is naturally endowed with abundant supplies of crude oil, which it purchases from producers in the surrounding areas. Gasoline (59 percent) and diesel fuels (30 percent) are the Navajo refinery’s best selling products.
Woods has a crude oil capacity of 26,000 BPD; its products are sold in Utah, Idaho, Nevada, and Wyoming. Gasoline (63 percent) and diesel fuels (27) are Holly’s best selling products in this region.
The operation of Holly’s Asphalt Company is consolidated with its refineries. Asphalt products made up 2 percent of all sales for the Navajo Refinery and 1 percent for the Woods Cross Refinery in 2007.
Holly owns a 45 percent stake in HEP which operates pipelines and distribution terminals in Texas, New Mexico, Utah, Arizona, Idaho, Washington and Oklahoma. Its revenue comes from charging refineries to use its pipelines.
Holly will be installing a $245M hydrogen plant and a new 15,000BPD hydrocracker.  These improvements will increase the crude capacity of its Navajo Refinery to approximately 100,000BPD by 2009. The company is also improving its Woods Cross Refinery, adding a new 15,000BPD hydrocracker and purchasing sulfur recovery and desalting equipment totaled at $105M.  This will expand Woods Cross Refinery to 31,000 bpd. In addition, Holly has entered a joint venture with Sinclair Transportation Company to build a pipeline from Salt Lake City, Utah to Las Vergas, Nevada. This $300M pipeline will have an initial capacity of 62,000 bpd, with the ability to expand to 120,000 bpd.
Holly is planning on investing more than half a billion dollars in expanding its facilities. It is increasing its supply, a factor it controls, in hopes that demand will also follow, a factor out of its control. Another reason for the capacity expansion is to continue the use of the Longhorn Pipeline at capacity and keep out Gulf Coast competitors. By being able to produce more refined products, it will be able to occupy more space when the Longhorn Pipeline is expanded, leaving little to no room left for its competitors. However, these investments will require the company to take out debt, and with tightening credit markets, it will be difficult and expensive for Holly to obtain loans.
The series of bank and insurance company failures in 2008 halted global credit markets and has shrunk the capital supply available for institutional investors. The reluctance of banks to lend, even amongst each other, affects small companies such as Holly. Companies incur debt in order to invest, expand, and become more competitive, but with credit markets constricted, it is nearly impossible to take such actions.
The 2008 Financial Crisis is hurting the economy as a whole, creating an economic slowdown. A lack of liquidity and shrinking credit markets leads to slower economic growth, as well as a decrease in consumer spending. During the third quarter of fiscal 2008, consumption fell 3.1 percent at an annual rate according to gross domestic product figures. A weakening economy has led to predictions of falling demand in developed countries (including the U.S.). Holly is vulnerable to a decline in the demand for refined products as a result of an economic downturn. Domestic sales of refined petroleum products have fallen in 2008; motor gasoline sales have received the worst hit. Sales of refined products fell 3.4 percent in June, stayed relatively flat in July, fell 6.3 percent in August, and stayed the same in September when compared to the same months a year earlier.
Holly’s profit margin on refined products depends on crude oil prices. Its business is based on refining crude oil, and so the company must purchase this input from distributors; prices for crude oil vary from day to day, and can have exaggerated fluctuations. Oil prices are out of Holly’s control, as they are set on international commodities markets. In about a three month period, prices dropped 133 percent, from $147 in early July 2008 to $63 in late October, after more than doubling in the first half of the year. Lower oil prices benefit the company by lowering production costs, but exaggerated price fluctuations mean it's often difficult to predict margins. When prices rise, Holly's margins shrink, and could even go negative; the prices for refined products (also commodities) are influenced by the price of crude oil, but prices must remain affordable for consumers in order for demand not to decrease drastically.
One of Holly’s most valuable sources of income is through its Navajo Refinery which operates in the southwestern states. Holly is a small size refiner, and competes with other small-size refiners in the region. The construction of the Longhorn Pipeline means new, powerful competitors are have entered Holly's market. This pipeline transports refined products from the Texas Gulf Coast to El Paso, and through other interconnected pipelines it can carry on into Arizona.  This means that Holly’s consumers are able to obtain cheaper Gulf Coast products. The Longhorn pipeline is operating at capacity but there is a planned expansion from 72,000BPD to 125,000BPD, which will let larger refineries from the Gulf Coast pump more refined petroleum into Holly's market and lead to price competition and lower margins.
Holly competes against small size refineries in its western markets of Texas, Arizona, and New Mexico; Western Refining (WNR) and Valero Energy (VLO) are its biggest competitors in these regions. However, the Longhorn Pipeline makes it feasible for larger Gulf Coast companies such as Exxon Mobil to enter these markets, meaning the company will begin seeing competition from larger companies.
|Revenue ($ in M)||Net Income ($ in M)||Production Capacity (bpd)|
|Exxon Mobil (XOM)||$404,552||$40,610||5,700,000|
|Western Refining (WNR)||$7,305||$238.6||234,000|
|Valero Energy (VLO)||$98,327||$5,234||3,100,000|