WNR Misses Big, to Idle Refinery - Analyst Blog

Oil refiner and marketer Western Refining Inc. (WNR) reported weaker-than-expected second quarter results, dragged down by poor East Coast Refining margins. Its earnings per share came in at 16 cents, considerably lower than the Zacks Consensus Estimate of 25 cents.

 

However, the Texas-based company improved from the second quarter 2009 loss of 39 cents per share (excluding special items) on the back of improved overall refining margins and continued gains stemming from cost saving initiatives.

 

Revenue of $2.1 billion was up 35.5% from the year-ago level and also managed to beat the Zacks Consensus Estimate by 4.2%.

 

 

Western’s refining segment recorded an operating income of $71.5 million, compared to a loss of $202.8 million in the year-earlier quarter. Segment results were favorably impacted by higher refinery throughputs and gross margins.

 

 

Total refining throughput averaged 216,948 barrels per day (Bbl/d), compared with 211,184 Bbl/d in the year-ago quarter. Overall throughput volumes in the El Paso refinery increased 9.3% year-over-year to 130,718 Bbl/d. This was partially offset by a 3.5% fall in Western’s Yorktown refinery throughput (to 61,359 Bbl/d) and an approximately 11.3% fall in its Four Corners refinery throughput (to 24,871 Bbl/d).

 

 

Gross refining margin rose 9.6% year-over-year to $9.74 per barrel. In terms of different regions, refining margin was up approximately 26.7% in El Paso to $11.57 per barrel and 12.0 % in Four Corners to $18.16 per barrel. However, profitability was down roughly 66.1% in the Yorktown refinery to $2.41 per barrel.

 

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

 

 

Direct operating expenses during the quarter averaged $4.37 per barrel, down 11.9% year over year. Costs in El Paso, Yorktown and Four Corners were $3.44 per barrel (down 7.3% year over year), $4.72 per barrel (down 13.1%), and $6.20 per barrel (down approximately 24.5%), respectively.

 

 

Western’s total capital spending during the quarter was $18.2 million, down from $31.1 million in the year-ago period. As of June 30, 2010, Western had cash on hand of $20.4 million and total debt of approximately $1.3 billion, representing a debt-to-capitalization ratio of 65.0%.

 

 

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. Western plans to save $25 million annually through this streamlining. It remains on track to achieve this target after saving $13 million year-to-date.

 

Western has identified and implemented another $25 million in cost savings initiatives (of which it has already realized $14 million) 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 third quarter of 2010, total refinery throughput is anticipated to be approximately 130,000 – 135,000 at the El Paso refinery and 22,000 – 24,000 at the Gallup refinery. The company expects capital spending for 2010 to be approximately $108 million.

 

 

Western Refining shares are currently rated as Zacks #3 Rank ('Hold'), implying that the stock is expected to perform in line with the broader U.S. equity market over the next one to three months. This is supported by our long-term Neutral recommendation.