WNR Reports Another Solid Quarter - Analyst Blog

Oil refiner and marketer Western Refining Inc. (WNR) reported better-than-expected third quarter results, buoyed by higher refining margins and gains from cost saving initiatives, partially offset by lower refinery throughput.

Earnings per share, excluding special items, came in at 13 cents, higher than the Zacks Consensus Estimate of 9 cents. The Texas-based company also improved from the third quarter 2009 loss of 10 cents per share (excluding special items).

Revenue of $2.0 billion was up 7.5% from the year-ago level and beat the Zacks Consensus Estimate by 11.1%.

Refining Segment Results

Western's refining segment, which accounts for bulk of the company's sales/profits, recorded an operating income of $51.9 million. This compares with $21.5 million in the year-earlier quarter. Segment results were favorably impacted by higher gross margins.

Throughput

Total refining throughput averaged 211,167 barrels per day (Bbl/d), compared with 223,129 Bbl/d in the year-ago quarter. Overall throughput volumes in the El Paso refinery increased 3.8% year-over-year to 135,090 Bbl/d. However, this was more than offset by a 21.3% fall in Western's Yorktown refinery throughput (to 50,763 Bbl/d) and an approximately 11.0% fall in its Four Corners refinery throughput (to 25,314 Bbl/d).

Refining Margins

Gross refining margin rose 28.6% year-over-year to $9.31 per barrel. In terms of different regions, refining margin was up approximately 21.4% in El Paso to $9.77 per barrel, 38.5% in Four Corners to $19.44 per barrel, and roughly 25.5% in the Yorktown refinery to $3.35 per barrel.

As a result of the challenging refining margin environment on the East Coast, Western suspended operations at its 64,500 barrels-per-day Yorktown, Virginia, refinery in September. But the company continues to operate the Yorktown products terminal and supply the region with finished products.

Operating Expenses

Direct operating expenses during the quarter averaged $4.56 per barrel, up 6.3% year over year. Costs in El Paso and Yorktown were $3.27 per barrel (up 8.6% year over year) and $6.17 per barrel (up 23.9%), respectively. Somewhat offsetting these cost increases were an 18.7% reduction in the Four Corners refinery operating expenses to $6.21 per barrel.

Capital Expenditure & Balance Sheet

Western's total capital spending during the quarter was $19.7 million, down from $24.0 million in the year-ago period. As of September 30, 2010, Western had cash on hand of $77.5 million and total debt of approximately $1.1 billion, representing a debt-to-capitalization ratio of 61.7%.

Initiatives

Given the uncertain refining margin environment, Western has taken certain strategic actions to improve performance and competitiveness in a cost-effective manner. As part of this effort, the company has consolidated the operations of its Four Corners refineries (Bloomfield and Gallup) into one at the Gallup refinery and shutdown its Yorktown refining operations.

Additionally, Western has identified and implemented other cost saving 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 restriction of its executive compensation and other employee-related costs.

Western Refining plans to save $50 million annually (starting in 2010) through this streamlining and is well on target to achieve this goal.

Guidance

For the fourth quarter of 2010, total refinery throughput is anticipated to be approximately 130,000 – 135,000 barrels per day at the El Paso refinery and 25,000 – 27,000 barrels per day at the Gallup refinery. The company expects capital spending for 2010 to be approximately $85 million.

Our Recommendation

Western Refining shares currently retain a Zacks #3 Rank, which translates into a short-term "Hold" rating. We are also maintaining our long-term "Neutral" recommendation on the stock.

 
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