Western Refining Is In Oil Market's Sweet Spot

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Texas-basedWestern Refining ( WNR ), which went public in January 2006, struggled through the last recession but now is in a much stronger position.

The company operates refineries, a pipeline system, an asphalt plant, lubricant and bulk petroleum plants and 222 gas station-convenience stores. Right now, Western has several factors working for it.

One advantage is its location near the Permian Basin, an area rich in oil. As CEO Jeff Stevens said at the Aug. 2 earnings call, "we sit right in the middle of it, and we're going to be a major beneficiary of this."

A second advantage is the current strong spreads between Brent and West Texas Intermediate crude oil. In July, the spread averaged $15.09 per barrel. This is boosting Western Refining's margins.

In the second quarter, after-tax margin was 8.3% -- the best in at least 18 quarters.

Intraday Monday, West Texas Intermediate was just under $92, while Brent crude was just under $110. The higher price for the North Sea's Brent is the reversal of normal expectations. West Texas Intermediate is a higher quality of crude than Brent.

A huge supply of West Texas oil, however, is depressing U.S. prices even as Asian demand for Brent is boosting Brent prices.

Western's earnings jumped 95% in Q2 vs. the year-ago period, easily topping views. The Street expected a 73% increase.

Revenue fell 3%, which also beat the Street's estimate. Analysts expected a 14% decline in the quarter. According to the company's 10-Q report, sales volume rose about 4% during the quarter, but the average sales price per barrel of refined products fell about 6%.

The improvement in earnings was tied to a reduction in costs and increased refinery production.

Reuters recently reported that the company is negotiating to process more shale crude oil at its refineries in Texas and New Mexico.

Finally, Western Refining is enjoying one more benefit. The company has cut total debt by $566 million in the past 12 months ended in June, lowering cash interest expenses.

The company recently increased its quarterly dividend to 8 cents a share. The annualized yield is 1.3%.



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: Personal Finance , Investing Ideas

Referenced Stocks: WNR

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