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Energy downstream operator Western Refining Inc. (WNR - Analyst Report) raised its quarterly cash dividend to 18 cents per share (72 cents per share annualized), representing an increase of 50% over the previous payout. The new dividend is payable on Aug 15, to shareholders of record as of Jul 31, 2013.

Western Refining, which plans to release its second quarter results on Aug 01, before the start of trading, has bolstered its long-term earnings and cash flow visibility on the back of the company’s success in reducing debt and the initiatives to improve reliability/reduce operating costs.

We believe that the dividend hike – together with the company’s ongoing share buyback plan – not only highlights Western Refining’s commitment to create value for shareholders but also underlines the oil refiner’s healthy financial condition and confidence in its business going forward.

Western Refining is one the largest independent oil refiners in the U.S. with a combined crude oil processing capacity of approximately 151,000 barrels per day. A major advantage for the company is its proprietary access to pipelines, which inhibits lower-cost competitors from supplying Western Refining's key markets.

However, the Environmental Protection Agency’s (EPA) proposed new gasoline standards are expected to hit the company hard. In an effort to tighten fuel emission norms, the agency has asked refiners to curb sulfur content in gasoline by 67% starting from 2017. Compliance with the new rules is expected to push up capital expenditures for downstream operators like Western Refining.

Western Refining is also faced with limited geographic diversification, which may further limit its ability to generate positive earnings surprises. Rising crude oil prices have added to its miseries by increasing the cost of production.

This accounts for Western Refining’s current Zacks Rank #5 (Strong Sell), implying that it is expected to significantly underperform the broader U.S. equity market over the next one to three months.

While we expect Western Refining to perform below its peers and industry levels in the coming months and see little reason for investors to own the stock, one can look at Dril-Quip Inc. (DRQ - Analyst Report), Blueknight Energy Partners L.P. (BKEP - Snapshot Report) and Natural Gas Services Group Inc. (NGS - Snapshot Report) as good buying opportunities. These energy equipment service providers – sporting a Zacks Rank #1 (Strong Buy) – have solid secular growth stories with potential to rise significantly from current levels.

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