Oil refiner and marketer Western Refining Inc. (WNR) came out with weaker-than-expected third-quarter 2011 results, hurt by lower refinery throughput and higher operating costs.
The company reported earnings per share of $1.37, missing the Zacks Consensus Estimate of $1.40. However, results improved considerably from the third-quarter 2010 profit of 8 cents per share amid higher refining margins.
Net sales of $2.39 billion were up 17.7% from the year-ago level and also outpaced the Zacks Consensus Estimate by 16.0%.
Refining Segment Results
The refining segment, which accounts for the bulk of the company's sales/profits, recorded an operating income of $171.4 million. This compares favorably with a profit of $51.9 million in the year-earlier quarter. Segment results were aided by higher gross margins.
Throughput
Total refining throughput averaged 149,556 barrels per day (Bbl/d), compared with 211,167 Bbl/d in the year-ago quarter.
Overall, throughput volumes in the Gallup refinery remained almost flat at 25,279 Bbl/d, while that in the El Paso refinery dropped 8.0% from prior-year level to 124,277 Bbl/d. The refinery at Yorktown, Virginia, resumed operations this quarter after being shut down for almost a year and recorded a throughput of 50,763 Bbl/d.
Refining Margins
Gross refining margin rose 122.8% year over year to $20.74 per barrel. In terms of different regions, refining margin was up approximately 181.3% in El Paso at $27.48 per barrel and up 82.5% in Gallup at $35.47 per barrel. At Yorktown refinery, gross refining margin was $3.35 per barrel.
Operating Expenses
Direct operating expenses in El Paso during the quarter averaged $3.48 per barrel, up 6.4% year over year, while costs in Gallup increased 23.7% from the year-ago period to $7.68 per barrel. The expenses were $6.17 per barrel at Yorktown refinery.
Capital Expenditure & Balance Sheet
Western’s total capital spending during the quarter was $18.7 million, down from $19.7 million in the third quarter of 2010. As of September 30, 2011, Western had cash on hand of $402.6 million and total debt of approximately $1.1 billion, representing a debt-to-capitalization ratio of 54.6%.
Our Recommendation
We believe that Western Refining will benefit from the favorable trends in the refining industry, along with its initiatives to improve reliability and reduce operating costs. The company’s strong retail and wholesale operations, along with an exposure to the profitable Southwest refining assets, add to the positive sentiment.
Hence we maintain a long-term Outperform rating on Western Refining, which competes in the ‘Oil Refining and Marketing’ industry with other established firms like Valero Energy Corp. (VLO), Tesoro Corp. (TSO) and Sunoco Inc. (SUN).
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