Oil refiner and marketer Western Refining Inc. (WNR) came out with weaker-than-expected first-quarter results, reflecting lower refinery throughput. The company reported earnings per share (excluding special items) of 17 cents, versus the Zacks Consensus Estimate of a profit of 30 cents.
However, the El Paso, Texas-headquartered downstream operator improved considerably from the first-quarter 2010 loss of 35 cents per share (excluding special items) amid higher refining margins and gains from cost-saving initiatives.
Net sales of $1.8 billion were down 4.0% from the year-ago level but outpaced the Zacks Consensus Estimate by 5.8%.
Refining Segment Results
WNR's refining segment, which accounts for bulk of the company's sales/profits, recorded an operating income of $57.8 million. This compares with a loss of $26.9 million in the year-earlier quarter. Segment results were favorably impacted by higher gross margins.
Throughput
Total refining throughput averaged 121,549 barrels per day (Bbl/d), compared with 192,974 Bbl/d in the year-ago quarter. Overall, throughput volumes in the Four Corners refinery increased 18.2% year over year to 24,893 Bbl/d.
However, this increase was more than offset by a 12.6% fall in the El Paso refiner’s throughput (to 96,656 Bbl/d) and the suspension of operations at its 64,500 barrels-per-day Yorktown, Virginia, refinery in September last year, due to the challenging refining margin environment on the East Coast.
Refining Margins
Gross refining margin rose 147.2% year-over-year to $15.77 per barrel. In terms of different regions, refining margin was up approximately 170.6% in El Paso to $18.70 per barrel and up 29.0% in Four Corners to $19.70 per barrel.
Operating Expenses
Direct operating expenses in El Paso during the quarter averaged $5.91 per barrel, up 56.8% year over year, while costs in Four Corners decreased 11.1% from the year-ago period to $6.70 per barrel.
Capital Expenditure & Balance Sheet
Western’s total capital spending during the quarter was $10.8 million, down from $18.8 million in the first quarter of 2010. As of March 31, 2011, Western had cash on hand of $11.9 million and total debt of approximately $1.1 billion, representing a debt-to-capitalization ratio of 60.3%.
Guidance
For the second quarter of 2011, total refinery throughput is anticipated to be approximately 130,000 – 135,000 barrels per day at the El Paso refinery and 22,000 – 24,000 barrels per day at the Gallup refinery. The company expects capital spending for 2011 to be approximately $62 million.
Our Recommendation
We have a long-term ‘Outperform’ rating on Western Refining shares, based on favorable trends in the refining industry along with company initiatives to improve reliability and reduce operating costs. An uptick in economic activity overseas and prospects for stronger fuel demand in the domestic market make us optimistic about the sector.
Additionally, we believe Western Refining’s strategic actions – to improve its performance and competitiveness in a cost-effective manner – will drive growth in the company’s profits and boost its stock valuation. Western Refining’s strong retail and wholesale operations, along with exposure to the profitable Southwest refining assets, add to the positive sentiment.
Western Refining competes in the ‘Oil Refining and Marketing’ industry with other established firms like Valero Energy Corp. (VLO), Tesoro Corp. (TSO), Sunoco Inc., (SUN) etc.
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