Sales: $552 million
Stock Exchanges: American
SICs: 2911 Petroleum Refining
Holly Corporation is an independent oil refiner based in Dallas, Texas. Its chief product is gasoline. Through its two major subsidiaries, Navajo Refining Company and Montana Refining Company, it serves niche markets throughout the Southwest. Holly also produces jet fuel and operates an asphalt subsidiary. The company generated revenues of $552 million in 1994 and employed 530 workers. As Holly entered the mid 1990s, it had a refining capacity of approximately 70,000 barrels per day (bpd).
The United States had just embarked on its massive postwar economic expansion and demand for oil and energy products was booming when Holly was founded in 1947. Created to serve companies that were bringing the oil out of the ground, Holly took the raw crude and processed it into commercially useful material, particularly gasoline. As demand for gasoline and other refined products increased during the 1950s, Holly met with success.
During the 1960s, the oil industry suffered from flat prices, increased competition at home and abroad, and mismanaged federal energy policies. Between the early 1960s and the early 1970s, the number of companies in the U.S. oil and gas exploration business plummeted from about 30,000 to less than 13,000. Despite the turmoil, Holly kept its refineries profitable by following a relatively conservative course. While some other companies expanded rapidly, often incurring massive debt, Holly grew more slowly and focused its efforts on a few key, niche markets.
Holly’s success during the 1960s and 1970s was largely attributable to its Navajo Refining Company. Located in Artesia, New Mexico, Navajo Refining was fed in part by West Texas’s rich Permian basin. Because of its strategic location, the state-of-the art Navajo oil refinery enjoyed access to local crude supplies owned by other companies that were typically within 100 miles of the refinery. Holly developed a pipeline system to bring raw product in from southeast New Mexico and to ship refined product to east Texas. From Texas, the products could be piped to Holly’s core Arizona markets, Phoenix and Tucson.
The oil industry began to emerge from its doldrums in the early 1970s. The Organization of Petroleum Exporting Countries (OPEC) in the Middle East began limiting its oil production to boost profits. As oil prices rose past a record $30 per barrel, domestic production and industry profit margins increased. Encouraged by booming sales, many of Holly’s competitors launched aggressive growth programs. Leading competitors, including Tosco Corp. and Charter Oil Co., assumed large debt loads in an effort to expand capacity. Many developed large processing facilities that could quickly process large amounts of relatively inexpensive, low-quality heavy crude.
Holly resisted the temptation during the mid and late 1970s to take advantage of what it viewed as potentially short-term industry gains. Despite its access to outside capital, its directors elected to fund growth and improvements internally. Strong profit growth during the 1970s allowed it to make millions of dollars worth of internal improvements. Rather than developing its capacity to process low-grade crudes and oils, Holly focused on developing facilities that could deliver higher-grade, premium-priced light oils and less heavy crudes. In 1981, Holly installed a $25 million fluid catalytic “cracking” unit designed to boost output of higher-grade material.
In addition to improving its Navajo refinery, Holly steered its excess cash into other projects and assets during the late 1970s and early 1980s. It invested in reserves of oil and natural gas, land on which wells could be drilled in the future, and exploration and production operations. It also developed storage facilities for its products at pipeline termination points in Texas, Arizona, and New Mexico. Furthermore, Holly started manufacturing and supplying asphalt, mostly to contractors and government agencies for the purpose of constructing highways. Although it became slightly diversified in an effort to reduce its vulnerability to cyclical oil markets, Holly remained focused on its core refining business.
The oil industry slumped again in the early 1980s. Oil prices fell and domestic producers suffered. The wisdom of Holly’s strategy during the 1970s boom years was made apparent during the 1980s. As many other oil refiners staggered under massive debt loads, Holly boasted a balance sheet with a long-term debt that was less than two percent of annual revenues. In addition, Holly had access to nearly $40 million in untapped revolving credit. Furthermore, Holly was well positioned to take advantage of increased demand for higher-value products. As its competitors scrambled to convert their refineries in the face of mounting debt, Holly was able to increase its market share and overcome many of the negative effects of falling prices.
Holly also managed to overcome another obstacle to success during the early 1980s. Historically, Holly had relied on the Tucson and Phoenix markets to supply about 30 percent of its total revenue. However, increased competition during the downturn of the early 1980s forced Holly to reduce its emphasis on those markets. Instead, it chose to turn its attention to less competitive niche markets in which it had a geographic advantage, including El Paso, Texas, and Albuquerque, New Mexico. Holly was also able to tap into the pipelines of major crude carriers, thus expanding its access to selected oil-producing regions that had little refining capacity and represented fast-growing markets.
Because of its savvy maneuvering, in 1982 Holly achieved record net income of $10.5 million from sales of $452 million. Its revenues dropped to about $445 million as net income plummeted to about $6.5 million in the wake of falling oil and fuel prices in 1983. Nevertheless, Holly’s performance going into the mid 1980s was considered exemplary in comparison to most of its industry peers. Its refinery operated at 92 percent capacity in 1983, which compared to a 70 percent industry average, and had never posted an annual loss. Furthermore, by late 1984 Holly had virtually cleared itself of all long-term debt and was extremely well-positioned to take advantage of expected price recoveries in the mid and late 1980s.
By the mid 1980s, Holly had established itself as a major independent oil refining business in the Southwest. Its major products, which accounted for about 85 percent of production, included various grades of gasoline, diesel fuel, and jet fuel. Most of its diesel fuel was marketed to wholesalers, independent dealers, and railroads. Its jet fuel was sold to both military and commercial customers. In addition, it continued to increase asphalt sales as well as profits from the sale of carbon black oil and liquid petroleum gas (LPG) to petrochemical plants that processed the by-products. Nevertheless, its oil refinery operations still comprised more than 95 percent of Holly’s revenues.
Although it was also still active in exploration and production through a subsidiary company in the early 1980s, Holly planned to jettison those operations so that it could focus on its more profitable refinery segments. Holly sold its exploration and production company in 1984 for $55.5 million in cash. The subsidiary included 1.4 million barrels of crude oil and 15.9 million cubic feet of natural gas reserves, as well as about 50,000 acres of land for potential drilling.
The sale, combined with improved operating results from its refinery business in fiscal 1985, resulted in a large influx of cash. Typical of the company’s penchant for fiscal conservatism, Holly’s directors chose to return the cash to its shareholders. “These people are to be commended,” said securities analyst William Ainsworth in Dallas-Fort Worth Business Journal. “They don’t want to buy some marginal refinery or something, so they’re returning the cash they’ve accumulated to the shareholders. I think its refreshing.”
Holly’s very deliberate and profitable course during the 1970s and 1980s was the result of an acute management team. By the mid 1980s, the company was still primarily owned by the Norsworthy and Simmons families, who had purchased the operation in 1960. In fact, Lamar Norsworthy, who had become an executive officer in the company in 1971 at the age of 24, had played an influential role during the 1970s and 1980s and would remain president, CEO, and chairman of the board through the mid-1990s. Other executives that would help Norsworthy at the helm during the 1970s through the mid-1990s included Jack P. Reid, head of refining, and William J. Gray, who oversaw marketing and supply operations.
Although Holly was financially and managerially poised to take advantage of an oil price upturn in the late 1980s, it never had the opportunity. In fact, the oil market became glutted in 1986 and oil prices dropped. Prices remained suppressed throughout the end of the decade. Many of Holly’s competitors suffered during the late 1980s as they scrambled to increase cash flow to meet burdensome debt obligations. In contrast, Holly managed to sustain its dominance of it niche markets despite increased competition. Although revenue growth stagnated, the company managed to post consecutive annual profits every year between 1985 and 1994.
At the same time that it jettisoned its non-refinery operations in 1984, Holly became active in another refinery operation, the Montana Refining Company (MRC). Initially a partner in the MRC, Holly eventually purchased the entire operation. MRC consisted of an oil refinery in Black Eagle, Montana, that had a related crude oil pipeline adjoining Great Falls. The operation represented approximately ten percent of Holly’s total refining capacity by the early 1990s. The refinery complemented Holly’s strategy of serving growing regions with little competition. Like Navajo, MRC supplied regional customers with gasoline, jet fuel, diesel, and asphalt.
Oil prices remained low through 1991 but began to recover in 1992 and 1993. Holly’s 1990 sales were about $440 million, roughly equal to early 1980s levels. However, the company posted a net income of $24 million in 1990. Economic recovery bolstered demand during the early 1990s, causing Holly’s total refinery output to increase from about 45,000 bpd in 1990 to nearly 65,000 bpd in 1993. Sales climbed as well, reaching about $630 million in 1993. Holly’s 1993 gains, however, were largely the result of the temporary suspension of production by one of Holly’s key competitors. But Holly also benefitted from the completion of a major $50 million expansion of its Navajo refinery from about 40,000 bpd to 60,000 bpd, which was completed in 1992.
By the early 1990s, Holly was operating two refineries and related pipelines, and eight storage terminals. It had expanded its core markets to include customers in Arizona, New Mexico, west Texas, northern Mexico, and Montana. In addition, it continued to run its asphalt operations and was also operating a jet fuel terminal in Mountain Home, Idaho, which supplied jet fuel to a nearby Air Force base. Gasolines accounted for about 55 percent of its total revenues in 1994 (up from 48 percent in 1990) and diesel fuels made up about 20 percent. Jet fuel represented approximately 15 percent of sales and the remainder of revenues were garnered from shipments of asphalt, LPG, and carbon black oil.
Despite industry improvements and additional production capacity in 1992, Holly suffered its worst year in a decade from a profit standpoint. Net income dropped to $2.8 million. Some investors voiced concern over the company’s performance. However, management viewed the financial results as a necessary evil in accomplishing its long-term goals. The company still had little outstanding debt. It had completed its major capital improvements and had budgeted for major maintenance overhauls for both of its refineries in 1993 and 1994. Moreover, profitability recovered as net income surged into the $20 million range in both fiscal 1993 and 1994.
One of the company’s chief long-term concerns going into the mid-1990s was increasing environmental regulation. Holly and its competitors had been forced to spend large sums of money trying to bring their facilities in line with stringent federal and state regulations governing output of wastes during the refining process. In addition, Holly, like many of its peers, had been served with charges of noncompliance by the Environmental Protection Agency that could potentially cost Holly millions of dollars. Holly quickly tried to conform with initiatives such as the Resource Conservation and Recovery Act and amendments to the Clean Air Act.
Although mounting environmental regulation was expected to have a detrimental effect on the industry as a whole, analysts expected Holly to benefit in the long-term in comparison to its peers. Indeed, the Clean Air Act was expected to result in the closure or slowdown of many West Coast refineries, which would likely reduce competition and open new markets to more remote companies like Holly. “The bottom line is the market is tough now,” said securities analyst John Turo in the Dallas Business Journal “But they have top quality management and the market will eventually turn.” Industry gains, reflected in Holly’s 1993 and 1994 balance sheets, corroborated Turo’s appraisal.
Montana Refining Company; Navajo Refining Company.
Fraser, Bruce W., “Waiting for the Price War to End,” Financial World, June 13, 1984, p. 32.
Golightly, Glen, “Oil Refiner Is Waiting Out Industry’s Storm,” Dallas Business Journal, March 27, 1992, sec. 1, p. 23.
Hughes, Ted, “Refining Firm to Share Big Cash Surplus,” Dallas-Fort Worth Business Journal, September 23, 1985, p. 1A.
Teichholz, Henry A., “Holy Corp. Reports Fourth Quarter and Year End Results,” Business Wire, September 25, 1992.