Buoyed by favorable trends in the refining industry along with the company's initiatives to improve reliability and reduce operating costs, we have upgraded independent oil refiner and marketer Western Refining Inc. (WNR) to Outperform from Neutral.
An uptick in economic activity overseas (mainly in China and India) and prospects for higher fuel demand in the U.S. are likely to push 2011 industry margins higher than the last year’s level. Against this backdrop, we expect income from Western Refining’s refining operations to improve in 2011.
Additionally, we believe Western Refining’s strategic actions – to improve its performance and competitiveness in a cost-effective manner – will drive the company’s profitable growth and boost its stock valuation. As part of this effort, Western Refining has consolidated the operations of its Four Corners refineries (Bloomfield and Gallup) into one at the Gallup refinery and has shut down its Yorktown refining operations.
Additionally, Western Refining 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 underperforming retail outlets, and restriction of its executive compensation and other employee-related costs. Western Refining plans to save $50 million annually through this streamlining.
In the near term, the company stands to benefit from its exposure to the profitable Southwest refining assets. Western Refining’s strong retail and wholesale operations strengthen the positive sentiment.
As such, we believe Western Refining is well positioned going forward and view it as an attractive investment. Our long-term Outperform recommendation is supported by a Zacks #1 Rank (short-term Strong Buy rating).
Incorporated in 2005, El Paso, Texas-headquartered 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 (accounted for 72% of the company’s total 2010 net sales), Retail (6%), and Wholesale (22%).
Western Refining competes in the Oil Refining and Marketing industry with companies like Valero Energy Corp. (VLO), Tesoro Corp. (TSO), Sunoco Inc. (SUN).
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WESTERN REFING (WNR): Free Stock Analysis Report
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