Western Refining to Offload Assets

Independent oil refiner and marketer Western Refining Inc. (WNR - Analyst Report) has agreed to sell its Yorktown, Virginia refinery and part of a crude pipeline in southeast New Mexico to subsidiaries of Houston, Texas-based partnership Plains All American Pipeline, L.P. (PAA - Analyst Report). The transaction – expected to close in the fourth quarter of 2011 subject to regulatory approvals and other customary conditions – is valued at $220 million. 

Per the deal, Western will offload its 70,000 barrels-per-day Yorktown refinery that has been idle since September last year and currently being used as a products terminal and storage facility with a capacity of 6.6 million barrels of crude oil, products, and LPG. The El Paso, Texas-headquartered downstream operator abandoned the Yorktown facility amid difficult East Coast refining conditions and was in the lookout to sell the refinery.

The buyers – Plains Marketing, L.P. and Plains Pipeline, L.P. – will also gain access to an underutilized 82-mile 16-inch stretch of a 424-mile crude oil pipeline in New Mexico’s Permian Basin, together with related connections and tanks. However, Western will retain its East Coast wholesale business and continue to market products in the Mid-Atlantic region. The company expects to record a fourth-quarter write-down of $440 million to $460 million as a result of the asset dispositions.

We view the Plains transaction as a positive for Western, as it will help the firm to monetize the Yorktown assets and exit the volatile East Coast refining market. Further, Western will be able to utilize the proceeds from the sale to strengthen its balance sheet by reducing its debt.   

Western refining is currently a Zacks #3 Rank (Hold) stock, implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.

Western Refining’s comparatively thin liquidity position and the lack of meaningful debt reduction have overshadowed its gains from successful restructuring initiatives over the last two years. Rising crude oil prices have added to the company’s challenges by increasing the cost of production. Given these headwinds, we expect Western Refining shares to perform in line with the broader market.

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