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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 and marketer Western Refining Inc’s ( WNR - Analyst Report ) 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. ( VLO - Analyst Report ) and Tesoro Corp. ( TSO - Analyst Report ) .
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 positive sentiment.
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 short-term.
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