UPDATE: Holly Beats Street With Help Of Pipeline Partnership

Holly Corp. (HOC) posted better-than-expected results on Monday, showing that some oil refineries, though small, are poised to survive the industry downturn because of their profitable niches.

"I just think the markets we serve, (the margins) actually, generally trade higher then the bigger merchants on the Gulf Coast and East Coast," Matt Clifton, chairman and chief executive of Holly said during a conference call with analysts.

The Dallas-based company owns three refineries, two of which are located in what is known as the Rocky Mountain region, which generally supports better profit margins on fuel products than the East and Gulf Coasts.

There are fewer refineries in the Rockies region, which has seen explosive population growth over the past few decades. In addition, plants located there have better access to Canadian crude oil, which trades at a discount to other types of petroleum.

Analysts and company executives predict that the economic downturn, which has sapped fuel demand, will lead to shuttering of refinery units and whole plants accounting for up to 10% of the nation's capacity to produce fuel. The closures are expected to happen on the East Coast and Gulf Coast. Holly's results underscore how certain niches are likely to remain profitable.

Holly Corp. reported a higher second-quarter profit, earning $14.6 million or 29 cents a share compared with $11.5 million or 23 cents a basic share for the same period last year.

Several independent oil refiners, including the largest by volume, Valero Energy Corp. (VLO), posted losses because of lower fuel margins, especially on diesel, and an increase in prices of heavy and sour oil blends, which normally trade at a discount versus light and sweet blends. The third quarter isn't expected to be any better for refiners.

Holly wasn't the only stand-out this quarter. Marathon Oil Corp. (MRO) also reported a profitable quarter in refining, besting larger competitors like Exxon Mobil (XOM), ConocoPhillips (COP) and Chevron Corp. (CVX).

Holly outperformed its peers by running higher volumes at its Navajo refinery in Artesia, N.M. The company also reported record earnings from Holly Energy Partners (HEP), its master limited partnership, which operates crude oil and products pipelines and terminals.

However, margins at the company's newly acquired Tulsa, Okla., refinery were dismal, coming in under operating costs.

Holly executives said they expect better results in the next quarter at the Tulsa plant. The company completed the $65 million purchase of the 85,000 barrel-a-day plant on June 1.

-By Susan Daker, Dow Jones Newswires; [phone]; [e-mail]