Zacks_Analysts' Blog : Western Holds on to Neutral Rating - Analyst Blog

We reaffirm our Neutral recommendation on Western Refining Inc. (WNR), reflecting the expectation that the company’s strategic plans along with strong retail and wholesale operations will counterbalance the weak fuel demand and high debt and inventories levels.

Being one of the largest independent oil refiners in the U.S, Western owns and operates three refineries, with a combined crude oil processing capacity of approximately 221,000 barrels per day (Bbl/d). With its primary focus in the Southwest and Mid-Atlantic, the company has expanded into the East Coast and enjoys the scale and diversification benefits offered by its portfolio of three refineries.

Moreover, the company has successfully concluded the planned 19-day turnaround at the El Paso refinery and 10-day catalyst regeneration at the Gallup refinery. This stride has improved the refining operations of the company. Hence, we expect the refining segment to post operating gains over the next few months with all three plants benefiting from attractive crude pricing and stronger product margins.

As a part of Western’s strategy to improve operational effectiveness and competitiveness in a cost-effective manner, management has consolidated the operations of its Four Corners refineries (Bloomfield and Gallup) into one at the Gallup refinery.

Through this move, management looks forward to save $25 million annually (effective from first quarter of 2010). Western has also identified and implemented another $25 million in cost cutting initiatives. During the first quarter of 2010, Western Refining was well ahead of schedule in realizing the 2010 cost reduction goal of $50 million and continues to execute additional cost savings strategies.

However, Western’s weak balance sheet will likely pressurize the near-term profitability. We particularly remain concerned about the high debt levels and weak liquidity position, which leave the company vulnerable to an extended drop in refining margins. As of March 31, 2010, Western had cash on hand of $25.3 million and total debt of approximately $1.2 billion, representing a debt-to-capitalization ratio of 65.3%.

Another crucial factor that could negatively impact the company’s growth is the increasing imbalance of global demand and supply of refined products. Being a major independent refiner, Western remains particularly exposed to this unfavorable macro backdrop.

Guidance

For the second quarter of 2010, Western expects total refinery throughput to be approximately 195,000 Bbl/d to 205,000 Bbl/d. Operating costs are likely to be approximately $3.75 per barrel at El Paso, $6.50 per barrel at the Gallup refinery and $5.25 per barrel at Yorktown.

Total capital spending of Western for 2010 is expected to be approximately $100 million, of which 80% will be for regulatory projects.

Texas-headquartered Western is an independent refiner and marketer of refined petroleum products in the Southwestern and Mid-Atlantic regions of the U.S. The company faces competition from Alon USA Energy Inc. (ALJ) and Valero Energy Corp. (VLO).

The Zacks #3 Rank, which translates into a short-term ‘Hold’ rating, also correlates with our long-term recommendation.