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Oil refiner and marketer Western Refining Inc. (WNR - Analyst Report) came out with weak third quarter profits due to higher operating expenses and lower refining margins.

The company reported earnings per share (excluding special items) of 99 cents, much lower than prior-year quarter earnings of $1.37. Earnings also fell well short of the Zacks Consensus Estimate of $1.46 per share.

Quarterly net sales of $2.45 billion, however, surpassed the Zacks Consensus Estimate by 9.90%. The results were better than the year-ago level of $2.40 billion.

Refining Segment: Analysis

Throughput: Total refining throughput averaged 144,198 barrels per day (Bbl/d), compared with 149,556 Bbl/d in the year-ago quarter. Overall, throughput volumes at the El Paso refinery were slightly up year over year to 124,364 Bbl/d, while those in the Gallup unit were down 21.5% from the year-ago quarter at 19,834 Bbl/d.

Refining Margins: Gross refining margin (excluding unrealized losses on hedging) slashed 33.3% year over year to $13.83 per barrel. In terms of different regions, refining margin was up 3.3% at El Paso to $28.40 per barrel and down 16.9% at Gallup to $29.48 per barrel.

Operating Expenses: Direct operating expenses at El Paso during the quarter averaged $5.21 per barrel, up 49.70% year over year. Costs at Gallup were up 42.80% from the year-ago period to $10.97 per barrel. Hence, direct operating expenses at the company’s units were $6.47 per barrel for the three months ended September 30, 2012, up from $5.41 per barrel in the year-ago period. The cost increase was due to lesser crude oil throughputs with increased turnaround cost at Gallup refinery.

Capital Expenditure & Balance Sheet

El Paso, Texas-headquartered Western’s total capital spending during the quarter was $71.3 million, much higher than $18.7 million in the third quarter of 2011. As of September 30, 2012, Western had cash and cash equivalents of $509.8 million and total debt of approximately $495.8 million, representing a debt-to-capitalization ratio of 33.2%.


For the fourth quarter of 2012, total refinery throughput is anticipated to be approximately 131,000–135,000 Bbl/d at the El Paso refinery and 21,000–24,000 Bbl/d at the Gallup refinery. The company expects capital spending for 2012 to be in the range of $170.0 million to $180.0 million.

Recommendation & Rating

Among Western’s peers, Tesoro Corporation (TSO - Analyst Report) came out with weak third quarter 2012 profits, with earnings per share of $2.05, against the Zacks Consensus Estimate of $2.37.

Western Refining has recently doubled its quarterly dividend payout to $0.08 per share ($0.32 per share annualized). The company also announced a $200 million share repurchase program. We believe that the hike in dividend and the buyback authorization not only highlights Western Refining’s commitment to create value for shareholders but also underlines the company’s confidence in its future earnings momentum.

However, the inherent volatility of the refining business reduces the accuracy and reliability of long-term earnings and revenue estimates. Additionally, results are exposed to unplanned shutdowns that may have a lingering impact.

For the short-term, Western Refining currently retains a Zacks #3 Rank (Hold rating).

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