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Western Refining Going Strong in 2Q

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Oil refiner and marketer Western Refining Inc. came out with bright second quarter profits, owing to better refinery activities plus a slowdown in operating expenses.

The company reported earnings per share (excluding special items) of $1.89, almost doubling from the prior-year quarter’s profit of 97 cents. The result also moved ahead of our projection of $1.68 per share.

Quarterly net sales of $2.47 billion surpassed the Zacks Consensus Estimate by 12.6%. However, the result dipped 3.5% from the year-ago level of $2.56 billion.

Refining Segment: Analysis

Throughput: Total refining throughput averaged 157,960 barrels per day (Bbl/d), compared with 152,945 Bbl/d in the year-ago quarter. Overall, throughput volumes in the El Paso refinery nudged up 1.3% year over year to 132,157 Bbl/d, while that in the Gallup unit jumped 14.7% from the year-ago quarter at 25,803 Bbl/d.

Refining Margins: Gross refining margin (excluding unrealized losses on hedging) surged 47.7% year over year to $34.58 per barrel. In terms of different regions, refining margin was up approximately 29.5% in El Paso to $31.91 per barrel and up 8.9% in Gallup to $31.95 per barrel. The higher profitability could be attributed to the company’s use of the less expensive West Texas crude oil as refinery inputs.

Operating Expenses: Direct operating expenses in El Paso during the quarter averaged $3.91 per barrel, down 5.1% year over year and costs in Gallup dropped 25.9% from the year-ago period to $7.98 per barrel. Hence, direct operating expenses at the company’s units were $5.33 per barrel for the three months ended June 30, 2012, down from $6.18 per barrel in the year-ago period. The cost reduction can be attributed to improved throughputs, together with lower natural gas catalyst and chemical expenses.

Capital Expenditure & Balance Sheet

The El Paso, Texas-headquartered Western’s total capital spending during the quarter was $37.2 million, up from $15.2 million in the second quarter of 2011. As of June 30, 2012, Western had cash and cash equivalents of $346.1 million and total debt of approximately $491.8 million, representing a debt-to-capitalization ratio of 32.9%.


For the third quarter of 2012, total refinery throughput is anticipated to be approximately 125,000–129,000 Bbl/d at the El Paso refinery and 20,000–23,000 Bbl/d at the Gallup refinery. The company expects capital spending for 2012 to be approximately $162.1 million.

Recommendation & Rating

Another independent Tesoro Corporation declared better-than-expected second-quarter 2012 results, with earnings per share of $2.87, breezing past the Zacks Consensus Estimate of $2.28.

We are maintaining our long-term Outperform recommendation for Western Refining shares on the basis of favorable trends in the refining industry, along with the company’s initiatives to improve reliability and reduce operating costs.

For the short-term, though (1-3 months), Western Refining currently retains a Zacks #2 Rank (Buy rating).

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