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Oil refiner and marketer, Western Refining Inc. (WNR - Analyst Report) reported mixed first-quarter earnings due to higher refining margins partially offset by increasing direct operating expenses.

The company reported earnings per share (excluding special items) of 94 cents, much higher than prior-year quarter’s earnings of 81 cents. Earnings, however, missed the Zacks Consensus Estimate of $1.01 per share.

Quarterly net sales of $2.19 billion surpassed the Zacks Consensus Estimate of $2.16 billion. However, the results were lower than the year-ago level of $2.34 billion.

Refining Segment: Analysis

Throughput: The total refining throughput averaged 122,373 barrels per day (Bbl/d), compared with 144,831 Bbl/d in the year-ago quarter. Overall, throughput volumes at the El Paso refinery were down 18.7% year over year to 97,946 Bbl/d, while the Gallup unit recorded throughput volumes of 24,427 Bbl/d which is almost in line as compared to the year-ago quarter level.  

Refining Margins: Gross refining margin (excluding unrealized losses on hedging) was up 54.1% year over year to $33.09 per barrel. In terms of different regions, refining margin was up 62.3% to $34.57 per barrel at El Paso and up 24.3% to $26.77 per barrel at Gallup.

Operating Expenses: Direct operating expenses at El Paso during the quarter averaged $6.10 per barrel, up 33.5% year over year. The rise in expenses was mainly for the cost the company incurred to restart refining operations after a periodic and planned shutdown.

Direct operating expenses at Gallup were up 17.6% from the year-ago period to $10.07 per barrel, owing to the rise of expenses related to maintenance and environment expenditures.

While direct operating expenses at the company’s units were $7.43 per barrel for the three months ended Mar 31, 2013, up from $5.70 per barrel in the year-ago period.

Capital Expenditure & Balance Sheet

El Paso, Texas-headquartered Western Refining’s total capital spending during the quarter was $65.6 million, much higher than $22.2 million in the first quarter of 2012. As of Mar 31, 2013, Western had cash and cash equivalents of $248.4 million and total debt of approximately $713.6 million, representing a debt-to-capitalization ratio of 43.7%.

Dividend & Share Repurchase

Western Refining announced 12 cents per share of dividend for second quarter 2013. The dividend is payable May 8, 2013, to shareholders of record as of Apr 23, 2013.

Western Refining has repurchased roughly 8.1 million shares from the start of the share repurchase program in Jul 2012, till Apr 26, 2013, for $29.56 per share.

Guidance

For the second quarter of 2013, total refinery throughput is anticipated to be approximately 133,000 - 138,000 Bbl/d at the El Paso refinery and 22,000 - 25,000 Bbl/d at the Gallup refinery. Western Refining expects the capital spending for 2013 to be $206 million.  

Zacks Rating

Western Refining currently retains a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next 1 to 3 months.

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

However, in our view, Western Refining’s lack of exposure to the other refining regions in the country in terms of geographic diversification weakens its competitive positioning.

In the energy sector, three firms that are expected to significantly outperform the broader U.S. equity market over the next 1 to 3 months are EPL Oil & Gas Inc. , SemGroup Corporation (SEMG - Snapshot Report) and Tesco Corporation (TESO - Snapshot Report). All three firms sport a Zacks Rank #1 (Strong Buy).

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