WNR Loss Narrows but Stays “Sell” – Analyst Blog

Oil refiner and marketer Western Refining Inc. (WNR) reported better-than-expected fourth quarter results, helped by higher sales volumes. Its loss per share, excluding special items, came in at 58 cents, narrower than the Zacks Consensus Estimate of 65 cents.

 

Western’s encouraging results are in contrast to that of larger rivals Tesoro Corp. (TSO) and Sunoco Inc. (SUN), both of which posted bigger-than-expected losses.

 

In the year-ago period, the Texas-based company earned 49 cents per share. The main factors causing the year-over-year negative comparison reflects lower margins and throughput on the back of weak fuel demand and high inventories caused by the prolonged economic slowdown. However, revenue of $2.0 billion was up 18.3% from the fourth quarter 2008 level.

 

 

With respect to earnings surprises, the stock has fluctuated substantially over the last four quarters, with two positive and two negative surprises. However, the average remained negative at 14.5%. This implies that Western has missed the Zacks Consensus Estimate by 14.5% over the last four quarters.

 

 

Western’s refining segment experienced an operating loss of $84.4 million, much worse than the $9.5 million incurred in the year-earlier quarter. Segment results were adversely impacted by a continued weak economy, reduced demand for transportation fuels, and narrowing of the sweet/sour crude spread, all of which resulted in lower refining margins.

 

 

Total refining throughput averaged 199,739 barrels per day (Bbl/d), compared with 206,052 Bbl/d in the year-ago quarter. Overall throughput volumes in Western’s Yorktown refinery fell 22.6% year-over-year to 52,489 Bbl/d, while for the Four Corners refineries, it was down approximately 9.4% to 24,713 Bbl/d. However, throughput in the El Paso refinery increased 10.4% year-over-year to 122,537 Bbl/d.

 

 

Gross refining margin decreased 35.2% year-over-year to $5.35 per barrel. In terms of different regions, refining margin was down approximately 30.0% in El Paso to $5.82 per barrel, 45.7% in Yorktown to 94 cents per barrel, and roughly 52.2% in Four Corners to $12.09 per barrel.

 

 

Direct operating expenses during the quarter averaged $4.74 per barrel, down 14.0% year-over-year. Costs in El Paso, Yorktown and Four Corners were $3.85 per barrel (down 15.6% year-over-year), $4.03 per barrel (down 21.1%), and $9.55 per barrel (up approximately 5.6%), respectively.

 

 

Western’s total capital spending during the quarter was $22.1 million, bringing the full year total to $115.9 million. As of December 31, 2009, Western had cash on hand of $74.9 million and long-term debt of approximately $1.1 billion, representing a debt-to-capitalization ratio of 61.9%.

 

 

Given the weak refining margin environment, Western has taken certain strategic actions to improve the company’s performance and competitiveness in a cost-effective manner. As part of this effort, Western consolidated the operations of its Four Corners refineries (Bloomfield and Gallup) into the Gallup, New Mexico refinery. The company hopes to save $25 annually (beginning in the first quarter of 2010) through this streamlining.

 

Western has identified and implemented another $25 million in cost savings 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 restricting its executive compensation and other employee related costs.

 

 

For the first quarter of 2010, total refinery throughput is anticipated to be approximately 190,000 – 200,000 Bbl/d. Operating costs are likely to be approximately $4.40 per barrel at El Paso, $8.60 per barrel at the Gallup refinery and $5.55 per barrel at Yorktown. The company further informed that it expects capital spending for 2010 to be approximately $100 million, 80% of which will be for regulatory projects.

 

 

Given that the overall environment for refining margins is likely to remain poor, we are bearish on oil refiners like Western. The sharply lower refinery utilization (at just 81.9% of capacity) provides enough evidence that refineries are cutting back on production because the economy is still struggling on the demand side.

 

The recent rally in crude prices has added to refiners’ miseries by increasing the cost of oil they buy to make gas, jet fuel and other refined products. Being a major independent refiner, Western remains particularly exposed to this unfavorable macro backdrop.

 

 

As a result, estimates for the current quarter (first quarter of 2010) have been trending down. We note that 3 of the 6 analysts covering Western have reduced their earnings estimates for the quarter over the past 7 days, while there have been no positive revisions. Overall, estimates for the first quarter have dipped by 11 cents during this period, with the current Zacks Consensus Estimate standing at a loss of 31 cents (with a downside potential of 5 cents or 16.1%).

 

The company is expected to return to profitability as the year progresses. For the second quarter of 2010, the Zacks Consensus Estimate is for earnings of 9 cents (with a downside potential of 11 cents or 122.2%). But even in this case, the overall trend in estimate revisions is unfavorable. Over the past 7 days, estimates have been down by a penny with 2 of the 5 analysts covering the stock cutting back on their estimates. There were no positive revisions during this period.

 

Considering the negative earnings revisions trend and given that the overall environment for refining margins is likely to remain poor, our short-term recommendation on the stock is Sell (Zacks Rank #4), meaning that Western is expected to underperform relative to the overall market during the next 1−3 months. Therefore, the stock should most likely be sold or avoided over this time period.

 

 

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 operates in three segments: Refining, Retail and Wholesale.