Back to top

Analyst Blog

Nilanjan Choudhury

Tesoro Set to Snap Up Western Refining in $6.4 Billion Deal

TSO WNR BP WNRL

Trades from $3

Downstream operator Tesoro Corp. (TSO - Free Report) has agreed to acquire El Paso, TX-based fellow oil refiner Western Energy Inc. (WNR - Free Report) for about $6.4 billion. The deal has been unanimously okayed by both companies’ boards but is subject to shareholder and regulatory approvals. Tesoro and Western Refining – each carrying a Zacks Rank #3 (Hold) – expect to close the transaction in the first half of 2017. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Terms of the Deal

As per the deal, Western Refining shareholders would have the option to receive $37.30 in cash or 0.4350 shares of Tesoro common stock for each share they hold, representing a total value of $4.1 billion. At Western Refining’s Wednesday’s closing stock price of $30.50, the deal values the company’s shares at 22% premium. Additionally, Tesoro will assume $1.7 billion in debt and shell out another $605 million for a non-controlling stake in Western Refining Logistics L.P. (WNRL - Free Report) – the fee-based limited partnership formed by Western Refining.

About Western Refining

Western Refining is an independent refiner and marketer of refined petroleum products in the Southwestern and Mid-Atlantic regions of the U.S. The company owns and operates three refineries – a 131,000 barrels per day (Bbl/d) facility in El Paso, a 90,500 Bbl/d unit in St. Paul Park, MN and a 25,000 Bbl/d refinery in Gallup, NM. Western Refining also operates a crude oil transportation and gathering pipeline system in the Four Corners region of New Mexico, an asphalt plant in El Paso, three stand-alone refined product distribution terminals, and four asphalt distribution terminals.

Apart from refining operations, the company owns midstream and retail assets.

Tesoro’s Benefit from the Deal

Scale Advantage: The acquisition will allow Tesoro to increase its refining capacity to more than 1.1 million barrels per day (or about 6% of the nation’s crude processing capacity) from a total of 10 refineries in 8 states, catapulting it to the status of the fourth-largest independent U.S. refiner. In particular, Western Refining’s units would expand Tesoro’s midstream and retail footprint across the Southwest and Mid-Continent regions.

Permian Exposure: One of the most important reasons behind the transaction is believed to be Tesoro’s growing interest in the Permian Basin of West Texas, an area that continues to be profitable even at the current low oil prices. Western Refining buy will plug this hole and help Tesoro to take advantage of the basin’s crude production growth through access to pipelines and refineries that connect to the lucrative basin.  

Prop Up Margins: Till recently, the downstream operators (oil refiners and marketers) benefited from crude’s collapse. This is because the companies use oil as an input from which they derive refined petroleum products like gasoline, the prime transportation fuel in the U.S. Hence, the lower the oil price, the higher will be their profits.

However, this also led to overproduction and stock build-up that now threatens to bite refiners. Notably, refiners are struggling this year with the existing stocks of refined product inventories – gasoline and distillate – remaining at their maximum seasonal levels in at least 20 years despite healthy demand. Consequently, margins have narrowed, forcing some of the operators to announce production cuts, postpone capital spending and retrench employees.

In fact, as per industry data from British oil major BP plc (BP - Free Report) , refining margin – the income from converting crude into gasoline and diesel – dropped 42% year over year to $11.60 per barrel in the third quarter of 2016.

The Western Refining takeover might help Tesoro to widen its margins by expanding into different areas.

Accretive: After the purchase, the combined company is expected to deliver cost synergies of $350 million to $425 million within the first two years, while increasing Tesoro’s earnings per share by 10 to 13% in 2018.

Confidential from Zacks

Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>