We have downgraded
Western Refining Inc.
) shares to Neutral from Outperform following the independent oil
refiner's weaker-than-expected operating results.
Incorporated in 2005, El Paso, Texas-headquartered Western
Refining's operations are concentrated in the Southwestern and
Mid-Atlantic regions of the U.S. The company operates in three
segments: Refining (accounted for 93% of the company's total 2011
operating income), Wholesale (6%) and Retail (1%).
On November 1, Western Refining came out with weak third quarter
profits due to higher operating expenses and lower refining
margins. The company reported earnings per share (excluding
special items) of $0.99, much lower than prior-year quarter
earnings of $1.37. Earnings also fell well short of the Zacks
Consensus Estimate of $1.46 per share.
Additionally, in terms of geographic diversification, Western
Refining's lack of exposure to the other refining regions in the
country weakens its competitive positioning. In our view, the
company's Southwest-centric operating footprint acts as a major
Western Refining is also faced with volatile industry
fundamentals, which may further limit its ability to generate
positive earnings surprises.
However, all is not bleak with the company, which has achieved
considerable success in reducing debt and in its initiatives to
improve reliability/reduce operating costs.
Most importantly, Western Refining's easy access to the
lower-priced West Texas Intermediate (WTI) crude gives a cost
advantage that is reflected in the company's high gross margins
vis-à-vis its peers like
Valero Energy Corp.
Overall, we think the current valuation is fair and adequately
reflects the company's future growth prospects. As a result, our
long-term total return expectation for Western refining remains
We do not see any significant price upside for the shares in
the next few quarters and expect the partnership to grow at a
somewhat more conservative and sustainable pace. Our new
long-term Neutral recommendation is supported by a Zacks #3 Rank
(short-term Hold rating).
TESORO CORP (TSO): Free Stock Analysis Report
VALERO ENERGY (VLO): Free Stock Analysis
WESTERN REFING (WNR): Free Stock Analysis
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