Wells Fargo upgraded this oil refiner that could rally more than 20%

Published Thu, Mar 16 20231:13 PM EDT

HF Sinclair Corporation shares could have further upside in the case the petroleum refinery sells its lubricants and specialty products business, according to Wells Fargo. Analyst Roger D. Read upgraded shares to overweight from equal weight, saying HF Sinclair could unlock value through a sale much like peer Valvoline did when it agreed to sell its global products business to Saudi Aramco last year. Read expects a similar deal could raise HF Sinclair shareholders' returns by more than 30%. To be sure, there have been no reports of HF Sinclair selling its lubricants business. HF Sinclair did not respond immediately to a request for comment. "We estimate selling the Lubricants and Specialty Products (LSP) segment could generate net after tax proceeds equivalent to 28% to 33% of DINO's equity mkt cap," Read wrote to clients. "We base this on estimated market multiples and EBITDA ranges for Rack Back/Rack Forward. Based on the most recent market transaction we estimate 18% to 35% upside. Assuming 100% of net proceeds were directed towards share repurchases, our DINO PT could rise to $65 to $69, well above our $55 PT," Read continued. The analyst's $55 price target, which remains unchanged, implies upside of more than 20% for the stock from Wednesday's close. HF Sinclair shares are down 12% this year, after jumping 61% in 2022. DINO 1Y mountain DINO shares 1-year The analyst further noted HF Sinclair is about to enter a seasonally strong period for the Western refining region, with gasoline demand set to ramp up as well. What's more, the analyst expects a CEO transition at the firm will go smooth, and said the firm will continue to retain investor confidence with its dividend and share buyback programs. "We estimate the sale of the Lubes segment with 100% of net proceeds directed to share repurchases would be accretive to 2024E earnings, CFFO and FCF per share," Read wrote. "Post-sale the dividend as a percentage of total CFFO would be 3% lower in 2024—implying the ability to raise the dividend. The Debt-to -EBITDA multiple would increase slightly to 1.3x from 1.2x, a minimal shift in our analysis," he added. —CNBC's Michael Bloom contributed to this report.