Buoyed by favorable trends in the refining industry along with
the company's initiatives to improve reliability and reduce
operating costs, we remain optimistic on independent oil refiner
Western Refining Inc's
) near term prospects.
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%).
Catalysts: Sourcing Advantage and Impressive
Cost/Balance Sheet Management
An uptick in economic activity overseas (mainly in China and
India) along with prospects for higher fuel demand in the U.S. are
likely to push 2012 industry margins higher. Against this backdrop,
we expect income from Western Refining's operations to improve.
In particular, Western Refining's easy access to the
lower-priced WTI crude gives them a cost advantage that is
reflected in the company's high gross margins vis-à-vis peers like
Valero Energy Corp.
Additionally, we believe Western Refining's strategic actions -
to improve its performance and competitiveness in a cost-effective
manner - will drive the company's profitable growth and boost its
stock valuation. As part of this effort, Western Refining has
consolidated the operations of its Four Corners refineries
(Bloomfield and Gallup) into one at the Gallup refinery and has
shutdown its Yorktown refining operations.
The company recently sold its Yorktown, Virginia refinery, which
not only helped the firm to monetize the assets but also exit the
volatile East Coast refining market.
Western Refining has also identified and implemented other cost
saving initiatives that include the reduction of contractor
services at the company's refineries, changes in its "Wholesale"
operations in response to market conditions, closure of the
underperforming retail outlets, and restriction of its executive
compensation and other employee-related costs. Western Refining
plans to save $50 million annually through this streamlining.
Further, we believe that the downstream operator has done a very
impressive job at reducing its leverage. Having made debt reduction
a priority in 2011 - which reflects a supportive financial policy -
Western Refining management was able to trim net debt from $1
billion at the beginning of the year to just about $400 million by
the end of 2011.
In the near term, the company stands to benefit from its
exposure to the profitable Southwest refining assets. Western
Refining's strong retail and wholesale operations strengthen the
One of the largest publicly-traded independent refiner and
marketer of crude oil in the U.S., we believe Western Refining is
well positioned going forward and view it as an attractive
investment. Our bullish stance is supported by a Zacks #1 Rank
(short-term Strong Buy rating).
All in all, we believe Western Refining is favorably positioned
to continue accelerating revenue/earnings growth over the next few
quarters. Considering its fairly cheap valuation, we believe
Western Refining is in bargain territory, at least in the
TESORO CORP (TSO): Free Stock Analysis Report
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WESTERN REFING (WNR): Free Stock Analysis
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