Strong Oil Market Fuels Rebound At Western Refining

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A few years agoWestern Refining ( WNR ) seemed like a prime candidate for bankruptcy.

The independent crude oil refiner was sagging under a heavy debt load, watching sales go south and losing money by the barrelful. Its stock price fell to around $4 a share in February 2010 after trading near 66 less than two years earlier.

Today, Western looks like an entirely different company. It posted robust profits last year and is expected to earn even more in 2012. Its stock price recently hit an 11-month high of 21.49.

Thanks to favorable market conditions, which have allowed Western to increase its production and improve margins, the company has run off four straight quarters of double-digit revenue gains and grown EPS nearly sixfold over the same period.

Meanwhile, Western has improved its balance sheet and slashed its debt load.

"They've seen a substantial increase in cash flow that has allowed them to repay debt," said Allen Good, senior analyst at Morningstar. "They were on the brink of bankruptcy in late '09 when oil prices sunk to low levels. But they've been able to rebound by capitalizing on higher price and improving their leverage."

Crude Oil Boom

Financially, Western has benefited on a couple of fronts.

First, there has been a boom in North American crude production thanks to high oil prices and the emergence of new and better production techniques, such as shale fracking.

Western also has capitalized on favorable spreads on West Texas Intermediate, or WTI, crude. WTI is primarily produced in North America. A large amount of it comes from the Permian Basin, which is located in western Texas and southeastern New Mexico.

As the supply of WTI has increased, its price has dropped. WTI sells for anywhere from $10 to $20 cheaper than other types of crude.

Refiners can buy WTI at a discount, then sell their refined products at a considerable profit. Refiners with facilities close to where WTI is produced have benefited the most. Western is one of them, thanks to its refineries in its hometown of El Paso as well as Gallup, N.M.

"They've really benefited from the inland crude discount," Good said.

That's reflected in the company's recent financial returns. Western earned 81 cents a share during its first quarter. That was up from 27 cents in the prior year and in line with views. Revenue gained 27% to $2.3 billion, topping estimates.

Adjusted EBITDA for the quarter was $183 million vs. $111.7 million the prior year.

In a note, Zacks Equity Research said Western's total refining throughput averaged 144,831 barrels per day (Bbl/d) during the quarter. That was up from 121,549 Bbl/d the prior year. Throughput volumes in the El Paso refinery increased 24.6% year-over-year, while those at the Gallup facility remained flat.

The company's gross refining margin, excluding unrealized losses on hedging, rose to $20.34 a barrel from $17.13 a barrel the prior year.

"The higher profitability could be attributed to the company's use of the less expensive West Texas crude oil as refinery inputs," Zacks said.

In a statement following Western's Q1 report, Chief Executive Jeff Stevens said one of his company's priorities this year is to keep strengthening its balance sheet.

"We have accelerated our targeted debt reduction for the year to $150 million to $175 million," he said. "On March 1, we made a $30 million prepayment on our term loan and on April 30, we made an additional $75 million prepayment on our term loan for a total year-to-date debt prepayment of $105 million."

Western's total debt as of March 31 stood at $777 million, down from $1.05 billion the prior year. Four years ago, the total debt stood at more than $1.3 billion.

Many of the company's debt problems stemmed from its 2007 buyout of Giant Industries. That deal nearly doubled Western's refining capacity, but also left it with a heavy debt load just as the refining industry began to falter.

Record Revenue

Western posted record revenue of $10.7 billion in 2008 and also logged net income of $64.2 million. The next year, revenue plunged 37% to $6.8 billion and the company posted more than $350 million in net losses.

Rather than seek bankruptcy protection, Western took steps to improve its balance sheet.

In November 2009, it suspended refining operations at a facility in Bloomfield, N.M., and converted it to a terminal. Less than a year later it did the same thing to its Yorktown, Va., refinery. The Yorktown operation was finally sold this past December for $220 million.

"They've really streamlined their business at the same time they've lowered their debt," analyst Good said.

Western Refining still has a lot of debt to pay down. And it faces the same potential head winds as any other oil or gas firm -- mainly, the inevitable down cycles and price slumps.

But Good figures the company has put its biggest problems behind it and is in a good position to remain profitable.

"Absent some unforeseen economic turmoil they should be in relatively good shape," he said. "Even as the ( WTI ) crude discount dissipates in 2013 and 2014, they should still benefit from better margins."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: WNR , WTI

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