The Western Refining (NYSE:WNR)
Western Refining at Bank of America Merrill Lynch Energy and Power Leveraged Finance Conference
May 14, 2013 8:30 AM ET
Jeffrey Beyersdorfer - SVP, Treasurer
I’m Jimmy Leon [ph] and on behalf of Bank of America Merrill Lynch, I’d like to thank you all for joining us today. To start the morning, I would like to introduce Jeff Beyersdorfer with Western Refining and Matt Gilder, Senior Vice President, Retail.
Okay, good morning. Again, my name is Jeff Beyersdorfer, Senior Vice President, Treasurer of Western. What I want to do this morning for about 20 minutes is take you through a brief description of Western overall and then I’ve got five different investment considerations for Western and in those considerations, we’ll talk about our business where we’ve evolved from over the last couple of years and where we’re going over the next couple of years. So here is a quick snapshot on page three of the business.
For those of you not familiar with the business, we’re primarily Southwestern focused. Two refineries, one is El Paso, Texas, one in Gallup, New Mexico. Total capacity is about 150,000 barrels a day. And then we’ve got these two distribution networks to distribute production throughout the Southwest. One is a wholesale distribution network that we think sets us apart from the other refiners and that we’ve got a customer base of about 3,300 customers all the way from the gig railroad and mining companies, all the way down to the total landscaper in Tucson where we’re delivering fuel to those customers and then we also have a retail network of about 222 retail stores that’s primarily served all of our Gallup refinery, that services retail customers so again, primary focus on the Southwest.
So these five points that I mentioned a couple minutes ago, two of the ones I’ll talk about. First, the cost advantage crude which has been the primary driver of our story over the last couple years and what are dynamics going on there. But just as important are the markets of the areas we serve from a geography standpoint. We’ve got some pretty attractive markets, particularly Phoenix that we serve and I want to make sure that you understand the benefit of those markets.
The third is that distribution network, I talked about the wholesale and retail.
Fourth, some growth opportunities. We’re trying to build out infrastructure, logistics from rail to make sure we continue to have an advantage of buying this discounted crude and supplying our two refineries.
And then finally, I’ll talk about the balance sheet and may be a little bit of a change in our management over the last couple of quarters and that is a focus on reinvestment in the business combined with a balanced approach of returning some cash to shareholders through dividends or share repurchases.
So the first page and this is hard to see up here you’ve got these slides in front of you but this is the Southwest, the Permian Basin, is this basin here and this is a San Juan Basin. And our two refineries are fortunate enough to sit adjacent to these crude basins and this is what primarily has been driving the story over the last couple of years. And that discounted crude in the Permian Basin, we’re trying to substitute it at El Paso and back out some of what we call common stream crude that we’ve been buying historically. So common stream crude would be crude that aggregators buy different grades of crude and deliver it to us, or as a crude we’re buying today is primarily in the Delaware Basin and that’s what we’re trying to substitute. It’s a higher specific gravity, a higher API, it’s a better quality crude and it’s more consistent for our refinery versus the existing crude that we have been buying.
It’s hard to see on here but we’re also building infrastructure, that see, that yellow line going up into our Tex New Mex line to allow for the further delivery of that crude into El Paso. So we announced a couple weeks ago a four-phase project, two phases of which we’ve completed. Delaware Basin logistics projects; it’s this T, about 50 miles of pipeline, that’s gathering line that goes into the Delaware Basin and brings crude into this area called Mason Station on to El Paso.
But we’re also looking at building about a 70 mile pipeline that goes North and South and hooks into our Tex New Mex line that’s idle today. It’s a 16-inch line, about 100,000 barrel a day potential capacity. It’s idle today but once we have this line built here and start up Tex New Mex, we believe we’ll have the opportunity to make this buy directional and have gathering all along this line, we’ll be able to deliver crude into El Paso from areas up in here, or delivery crude back up to Gallup because Tex New Mex will be buy directional and be able to move up to the Gallup area.
Speaking of Gallup, there is a newer basin here called the San Juan Basin, Conoco, EnCana have been some of the producers announcing some modest declines today, but we see some potential up there in the San Juan Basin, also for some of this discounted shale crude to be able to enjoy to run a Gallup or as I said, as Tex New Mex restarts, we might bring some of this crude down through Tex New Mex and into El Paso. So again, the flexibility that will be a word, you’ll hear a lot going forward. The flexibility of our logistics assets allows us to buy crude and deliver crude where we need it, when we need it and again the crude is discounted and we’re fortunate enough to have our locations next to these fields where this crude is discounted.
That’s not the only story though. The other story is on the product side. That’s just as important to Western as well as the crude logistics. We serve these markets on the left hand side, Phoenix being the biggest. We supply about 15% of Phoenix’s daily gasoline requirements and these markets are important to us because the gasoline specs as indicated by these colors here, California, Phoenix are a little bit more difficult to make, the gasoline is a little bit more difficult to make, the blending is a little bit more difficult to do than your ordinary gas line and that helps from a supply standpoint. We like these markets we’re in. We’ve got about 60% to 70% Gulf Coast influence markets. As you can see here across the bottom, about 60% to 70% of our refining margin comes from Gulf Coast 3-2-1 and about 30% to 40% from LA 3-2-1. LA, Los Angeles being a pretty good market historically.
One thing I want to make sure that we understand though is that these product markets, these margins, our margins aren’t necessarily tied to the Brent/TI spread. What we’ve plotted here is the LA 3-2-1, the Gulf Coast 3-2-1 and then the Brent/TI spread and part of the inverses, the bar charts which are our margins both El Paso and Gallup. And as you see in there, right around the beginning of 2012, the Brent/ TI spread, disaggregated from the 3-2-1, both the Gulf Coast and LA while our margins continued to increase. So, our margins appear to be more correlated to the Gulf Coast 3-2-1 and the LA 3-2-1 versus the Brent/TI spread. Why is that? Let me come back to the product margins again.
If you look at gasoline frac spread in Phoenix, that market which is the red line there, tends to do pretty well versus all these other benchmarks, West Coast, Gulf Coast, Salt Lake City in good times and bad. So again, it’s not just a crude story that we’ve been enjoying over the last couple of years, it’s not just the wideness, or the narrowness of the Brent/TI spread that’s driving this story. It’s the product markets too that drive this story and again we serve some pretty good markets as evidence by this chart for Phoenix frac spreads.
Okay, so we’ve talked about crude, we’ve talked about product. Let’s go on to the three other points, the next being the distribution channels, wholesale and retail. As I mentioned, our wholesale distribution channel, primarily operates in the Southwest. Again, we sell the big land, the big railroads, the copper mines, the landscape companies, again about a network of about 3,300 people and we’ve got an infrastructure in Phoenix, we’ve got a sales and distribution network, credit and collections, customer service that supports that distribution of wholesale fuel and it’s about 75,000 or 80,000 barrels a day of our total 150,000 of production that we sell through wholesale.
The other distribution network is retail as I mentioned upfront 222 stores. The reason these are important is because each day we refine 150,000 barrels of crude and each day we’ve got a home for 150,000 barrels of product. So we’ve got a ratable home for the crude we refine every day. We don’t have to worry about getting up in the morning and thinking about where our product’s going to go. Our wholesale and retail networks take care of that.
The next point is the potential growth opportunities and they really are in three categories or three areas that I’d like to discuss. The first is El Paso. So we talked about the crude logistics, the building of the Delaware Basin logistics project in the Permian Basin. It’s really the Delaware Basin part of the Permian to facilitate the further delivery of crude into El Paso. We are also contemplating on expansion of El Paso. Today El Paso is 125,000 barrels a day. We’re contemplating expansion of 25,000 barrels a day, a 2015 timeline for that. We’re in the process of doing engineering work right now, and hopefully by the end of the summer, in the fall sometime, we’ll be in a position to submit our permitting for getting our air permits, that will take about a year we believe, to get permitting. So, towards the end of 2014, we’ll be able to begin construction if it’s approved by the Board for that 25,000 barrel a day increase. And the products are mostly leveraged to diesel. It will be about 70% to 75% diesel and we’re short diesel in the Southwest. And we also see an opportunity to supply further diesel to Mexico or a supplier today of about 15,000 to 18,000 barrels into (inaudible) and Chihuahua state but we see the opportunity to perhaps even deliver more product, diesel into Mexico in the coming years.
So that’s the first category, is El Paso.
The second is Gallup, so a small refinery, 25,000 barrels a day of production. We just completed an expansion of that refinery last year, but we also see some interesting benefits in the San Juan Basin and seen some crude growth there, and hopefully, being again able to substitute that discounted crude for perhaps some of the crude we’re running today. But also, perhaps deliver some of this crude again through that Tex New Mex line, backed down to El Paso, so crude coming out of here, we have the ability to deliver back down to El Paso when we restart the Tex New Mex line.
Also, as part of that Delaware Basin logistics project, we talked about the potential of increasing our rail capacity from Gallup to the West Coast. Today, we’re railing on average of about 1,000 to 2,000 barrels a day out of Gallup to the West Coast of crude. But we have the opportunity to increase it to may be 5,000 or 6,000 barrels a day once we look at increasing the number of railcars, the offloading cars at Gallup. So we have a potential of delivering from here, crude into El Paso, delivering in the Gallup or perhaps delivering crude to the West Coast via this rail capacity we have at Gallup, or crude that comes from the Delaware Basin, down here, bring it up through our infrastructure up to Tex New Mex, put it on rail and also deliver it to the West Coast. So, again a lot of flexibility we’re trying to build into our system, the crude logistics system in order to take advantage of the differentials be it either El Paso, Gallup or the West Coast.
The final area we’re looking at is wholesale. We are expanding geographically. We’re setting up, we have set up a warehouse in Southern California so we’re starting to have a bigger presence in Southern California for our wholesale business and we’re also starting to sell existing customers with more product, as an example, our lubes product we’re starting to cross sell to some of our existing fuel customers.
So three big areas we think will drive the story over the next two years or so, the El Paso expansion, and all the crude logistics going on there, but the San Juan Basin could be an interesting story, and all the crude logistics we have there and then finally on the wholesale side, growing it into the West Coast.
Then finally, the financial strength, we’ve been able to build at the company on the balance sheet. As many of you know, we just got through doing a high yield transaction, a refinancing of our 11 and a quarter percent notes with a 6 and a quarter, eight year non-call four bond transaction at which Bank of America was joint books on. So today, we sit with a little under, a little over half a turn of leverage. And that’s kind of a goal where we want to be longer-term is around half a turn to a turn of leverage. We think about $500 million to $600 million of gross debt on the balance sheet seems to be the right amount for this company going forward. But as you heard me mention also, the matter has changed a bit at the company in the terms of balancing investment and assets and we talked a little bit about that a few minutes ago investing in El Paso, investing in logistics, balance with returning of cash to shareholders through dividends and share repurchases and at the bottom here, we show what kind of cash over the last five quarters we’ve been able to return to investors through those two methods, the dividends and the share repurchases.
So again, pretty strong balance sheet; gives us a flexibility to invest in the business but balance it with cash returning to shareholders.
So the final page of the comments that I’ll leave with you are, again, we think we have a pretty interesting opportunity given that our refining assets sit pretty close to these crude fields, the Permian, the San Juan Basin and we’re taking advantage of trying to capitalize on these crude basins with these logistics projects we’re building the pipelines, the storage tanks, the rail capacity, the rail flexibility to allow us to procure this crude for either refinery, of refinery on any given day.
The El Paso expansion I mentioned that will be a 2015 event. One of the thing, that you are probably familiar with is earlier this year, the Board gave us approval to explore the formation of a master limited partnership. Unfortunately, that’s about all we can say right now on it but stay tuned and hopefully later on this year, we’ll be able to announce some progress on that.
Then finally, we’ve got a pretty good balance sheet today. We’re targeting these BB flat credit statistics. As I mentioned we think about $500 million to $600 million of debt on the balance sheet is right for us. I mentioned upfront, we’re not the hold until the Brent/TI spread. Who knows where that’s going? But we’re doing some hedging, we continue to do hedging, the lock in Brent/TI spreads at pretty favorable rates so the cash flow insight, the insight into our cash flow going forward is there regardless what happens to the Brent/TI spread.
So with that, I will take any questions you may have. We need to give them…
What’s the gross CapEx associated with these projects and what is the potential EBITDA roughly or some directional?
Yeah, the gross CapEx budget for 2013 is about $205 million of which about 107 is for the use of assets, for the projects I described on that page, all those projects. We have not shared an order of business here with – on EBITDA for those times but again, the management need to focus is to allow us to build these logistics assets to further enhance the differential (inaudible) and put all the differential we’re getting in for this crude and again. Again we’re not just subject to Brent/TI spread. We’re walking into the differential longer team with the pipelines build outs again both in the Permian and on the San Juan Basin. So $150 million this year, don’t know the budget yet this next year respectively about the same, that’s not a little more and again we don’t have a lot of information of shareholders…
Other than the El Paso expansion, most of these projects will begin this year.
Couple of different questions. So, on some of these crude pipeline expansions that you’re talking about, they would be for proprietary shipping? You have customers that you would ship on contracted?
So, the question is the crude logistics assets, are they going to be dedicated to El Paso and now for (inaudible)
Do you have third-party contracts?
Yes. Primarily dedicated to El Paso and (inaudible)
Thank you very much Jeff for joining us today.
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