Western Refining, Inc. (NYSE:WNR)
Bank of America Merrill Lynch Refining Conference Call
March 7, 2013 11:20 am ET
Jeff A. Stevens – President and Chief Executive Officer
Jeff A. Stevens
Thanks, Jason. Good morning. I am Jeff Stevens. I am CEO and President of Western Refining. I appreciate everybody’s interest in Western, and I’d like to just go through kind of a high level of the asset base here, just to kind of remind everybody, we’re located in the Southwest. We have two refineries: we have the El Paso refinery located in El Paso, Texas, it’s approximately 130,000 barrel a day refinery; and then we have the Gallup, New Mexico refinery, it’s approximately 25,000 barrels a day.
Along with the two refineries, we have two other businesses: we have a wholesale business that distributes products to end-users throughout the Southwest and we also have a retail business with approximately 200 plus stores that are located throughout the Southwest and support both of the refineries. Along with this, we have other assets, pipelines, crude pipelines, crude gathering systems, asphalt product terminals that all support the two refineries.
When you’re looking at Western Refining today and who we are, really it’s a story about location, and location where our two refineries are and where they get their crude from. And we’ll talk about that advantage along with our logistics assets, our wholesale, retail and really the dynamics of the improved balance sheet that we’ve seen in the last two years and some of our growth opportunities.
When you talk about the crude advantage, there is really two plays that affect our two refineries; our El Paso refinery is 100% Midland based WTI crude and it's all – we run about 70% WTI and about 30% WTS, it's all gathered in the Permian basin delivered to El Paso. The crude that we run at Gallup is the San Juan Basin, it's a local crude, we have gathering across to gather that pipelines that distribute that crude to the refinery and that pricing on that crude is tied WTI NYMEX and we receive a fairly significant discount that help to support the overall profit of that refinery.
It is a map that really just kind of outline the crude oil and whereas for El Paso and if you look at it, we really are focused these days on this Permian, Delaware Basin, the Delaware Basin is west of Midland, it's where a lot of the new shale crude is coming. The primary crude is Avalon/Bone Spring; this crude is important to El Paso because of the light sweet crude and it has a high refining value to it and the crude that we bring in is from a location is closer to our gathering system, so we're able to get the little bit of a location differential and like I said up in the four corners, we have a pipeline system that supports that crude up there that we gather all of that for the Gallup refinery.
When you're talking about products, then this an important differential between us and some of our competitors, is a lot of analysts tend to know that this is MidCon refiner, because we like crudes that are tied to WTI pricing. But it’s important to understand the products we serve.
If you look at the El Paso refinery, it’s really two different areas. The Phoenix market is our largest market and it’s probably typically our highest netback. the gasoline is sold there in that blue shaded area. It’s similar to CBG gas, which is similar to the LA Corp. standard gas, it’s a hard spec, a spec to make, and there’s certain dynamics of barrier to entry in that market, because of the difficulty of the spec.
So when you’re looking at the El Paso refinery about 30% to 40% of our product is sold in the Arizona market, the price is more in line with the LA market. the rest, the balance of the market is Albuquerque, El Paso and we do supply some into Mexico and that’s all tied on a Gulf Coast price differential. The Gallup refinery is more of a 50-50; it can go either into the Arizona market or that northwestern part of the four quarters there.
When you’re talking about our two other businesses; the wholesale business moves about 75,000 barrels a day, that’s one of the largest wholesale businesses in the United States and it primarily moves product out of El Paso. so it’s the significant customer to El Paso’s product production, and then the retail supports our Gallup refinery about 75% of our gasoline out of Gallup goes through our own retail network.
So it’s an important part of our distribution and these two business units really help us stay right above, which is important in our business, because it allows us to run full and always kind of have that built-in customer, which really helps as far as ratable lifting.
I’ll talk a little bit about the capital structure and you can just see here from 2010 to 2012, the change in the company, in its balance sheet over those two years, we paid off nearly $600 million in debt and we’ve been able to raise our cash on the balance sheet and really change the dynamics and allows us to focus on our business and really start spending money on discretionary capital project, which is an important part of the growth that we see going forward. I would just mention the senior secured notes, are at a high coupon today at 11.25, they become callable in June this year. So I think you’ll see addressing those converts – as they become callable in June of 2014.
And when you look at kind of the growth opportunities for Western, I think it really centers around this crude play. we want to take advantage of all the new crude that’s coming on. We want to not only supply our refineries with the best yield in both class crudes, but we also sit in a unique position, as I’m sure you’ll hear it throughout this conference, the West Coast market continues to look at trying to deliver some of this cheaper, better quality inland crude and because of our locations at Gallup and El Paso, we do sit very close and we sit on the head of these two main rail lines, the BNSF up in Gallup, and the UT in El Paso.
We’ve started delivering a modest amount of crude out of Gallup to the West Coast, we believe with a small investment at both locations, we could ramp that up and like I said, just because of our locations and where we sit. We sit in a unique position there potentially be a supplier of a significant amount of crude to the West Coast and we’re going to focus on that and build around those assets over the next couple of years.
So just kind of wrapping up and a real quick summary, really the takeaway is Western sits in a very unique market. We’re able to access some of the cheapest crude anywhere and we also sell products in markets that typically have –historically have had higher netbacks. So we get the best of both worlds when you look at us in the future, we’re going to continue to grow our existing logistics around our Southwest footprint and we’ve got a lot of projects that will help our overall profitability.
One other project that we’re still in the final design stages is the potential of increasing our capacity at El Pasa. We run 150,000 barrels a day, this would be about a 25,000 barrel increase and it’s obviously subject to being able to get the necessary permits but we’re kind of targeting that kind of a mid-2015 for the potential of that expansion.
So with that, I’ll take any questions that you guys have.
Again, folks we have two rolling microphones. So pleas make yourself know and we’ll go first over here in the right (inaudible) please?
Thank you. What happens to Midland crude differentials once the pipelines from the Permian to the Gulf Coast start up?
Jeff A. Stevens
Sure. What we’ve seen is the production in the Permian basin is obviously outpaced, the current takeaway, whether it’s the local refineries or the pipeline capacity leaving that market. We’ve seen the startup at the first phase, the reversal of the pipeline, which should help balance out that market. But we believe that it really is going to depend upon what your belief in the future production in the Midland basis is. if you are in the camp that that’s going to be 1.6 million to 1.8 million, there’s probably a balance in takeaway, so we should go back to what historical differentials, which are between $0.50 and $1. But if production ramps up, and let’s say 2 million barrels and I think we get back into a similar situation today where if there is a pipeline that goes down or there is a refinery that’s down for unplanned time. We’re going to continue to see the similar spikes in the market. I think for the next 12 months to 24 months, so all the pipelines fastly comes on the line. we’re going to continue to see spikes relative to that $0.50 and $1 with higher differentials when we have the any unplanned downtime or pipeline interruption.
Jeff, earlier this week, obviously, you guys announced that you might look into format MLP. And so what for you guys goes into that decision now going forward? And also if you can maybe just frame where you guys are right now in terms of EBITDA within that part of the business and growth opportunities there?
Jeff A. Stevens
Well, Jason, we did announce on Tuesday that our Board had approved the ability to keep moving forward towards doing our MLP got final decision, obviously, will be subject to Board approval.
I think that we have to be careful about what we talked about around the particular earnings on the assets potentially 50 MLP candidates, but I think it's fair to say that a lot of the assets that we’ve got, that we're working on this year. We’ve got a capital budget for discretionary about $120 million this year and I think it will be similar side for discretionary the next couple of years. That it just makes sense for us to continue to build logistics assets around this new crude coming on because it's just, it's a win-win situation for us, and so I think you'll see a lot of our capital and energy around logistics and particularly around the crude logistics, not only supporting the refinery, but potentially being third party sales to other counter-parties.
Any questions from the floor? Jeff, little unfair question, but I’ve been asking every CEO who stood up here this morning. What is your prognosis of a long-term rent TI outlook, because obviously there is a huge lot of moving parts and a huge variety of assumptions right now?
Jeff A. Stevens
Yes I think, obviously we've seen a pretty volatile rent TI, in 2011 we saw it widen out to $30. The seaway project was announced and it contracted down to $8, price shouldn’t have been at 30 and probably shouldn’t have gone down to $8. In 2012 most people had it significantly dropping and it hung in there around $20.
In 2013, I don't see much change in what we saw in 2012. I think that will continue to be volatile, longer-term these crude differentials will move around based on pipelines being announced, and other projects to move the crude in the inland areas out to the different host areas. I think from our standpoint, we remain very profitable regardless of what it does, because of our location and certainly, we don’t control the Brent/WTI spreads, but I personally think it’s probably going to be wider than most of the people are predicting, just because this crude productions coming on faster and really at the end of the day, it’s going to depend upon the ability for places like the Gulf Coast to digest this sweet crude and clear it out of the markets. So I think we’re going to continue to see volatility, probably won’t see the high ends that we saw before, but I tend to think it’s going to be in that $10 to $15 range here, the next couple of years.
Okay. Well maybe I’ll take the last one before we move back for lunch. Jeff, there’s a lot of crude coming from the Gulf, it’s not just like the potentially keystone those get approved heavy. If we look forward to a couple of years and consider capital projects, what is your principle look like two or four years from that?
Jeff A. Stevens
Sure. Our crude fleet at El Paso will probably remain a WTI/WTS, because that’s really what our refinery was built around. So Ron, but the big difference in our crude fleet is going to be where we historically run a 100% of our TI has been a common stream Midland barrel. I believe that the majority of our crude over the next two to three years will be the shale crude, which is this Bone Spring to Avalon and like I said, it definitely gives us a yield advantage and because of the location we can get a location differential on it. So longer term, in our position, we are going to be in a position at both refineries as new crude comes on to be selective about the different crudes that we run and really maximize our rates.
Could you actually give a little color around that yield advantage that you have?
Jeff A. Stevens
Yeah. The way to think about our slate as it changes on the WTI basis relative to El Paso, when you look at the location and yield pattern, it’s about $1.50 to $2 a barrel advantage on all the TIs. So we run about 125,000 barrels a day to 130,000 barrels a day at El Paso.
Jeff, we appreciate you guys coming up. Thank you so much.
Jeff A. Stevens
Thanks for having us.
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