Upgrade After Underperformance and Debt Reduction; UPGRADING to OUTPERFORM (from Neutral); Revising Estimates.
Shares up nearly 6% today to around $13.46.
Bottom-line: "WNR has sold off noticeably since the Seaway pipeline reversal announcement and on seasonally weak Q4 West Coast/Gulf Coast margins. Despite Q4 seasonal earnings risk, the sell-off is overdone. The company is paying down debt having sold its Yorktown terminal/other non-producing assets for $220m while cash flows in 2012/13 are relatively better protected from Euro debt crises given the crack spread hedging program in place. We increase EBITDA by 6% (2012-15), reflecting avoidance of losses at the Yorktown terminal and capturing Permian crude discounts. Following WNR's sector underperformance, we raise our rating to Outperform from Neutral."
Asset sales accretive to multiples: "WNR announced yesterday that it had entered into agreements with subsidiaries of Plains All American Pipeline, L.P. for the sale of its Yorktown facilities (terminal + refinery) and an under-utilized segment of a crude oil pipeline (82 mile segment of a 424 mile crude oil pipeline) in S. East New Mexico for $220mn. We believe the announced sale will be immediately accretive to WNR's multiples."
FCF Generation Strong; Debt Reduction Soon: "WNR's cashflows in 2012 and 2013 are relatively protected given the crack spread hedging program that the company has in place. WNR has an average FCF yield of 22% over 2012-15, above the sector average of 18%. This free cash flow will help achieve managements no.1 priority - to pay down debt (target total debt is $500-600mn - As of 3Q11, total debt stood at $1.06bn)."
Organic growth coming: "Small investments to increase local crudes into the El Paso refinery and maybe expanding Gallup next year should pay good dividends. An expansion of the El Paso refinery is a medium-term possibility. That said - the fastest route to a higher multiple would be resumption of a meaningful dividend."
Estimate Revisions: "We are revising our 2011/2012/2013 EPS estimates to $3.39/$2.42/$1.54 (from $3.60/$2.21/$1.38) respectively."
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
