In the 1990s the refinery industry in many parts of the world was burdened by over-capacity and costly new environmental regulations, and the big firms were keen to sell off or merge their operations. This, by and large, they did. With refining capacity extremely tight, independent refiners such as Western Refining (WNR) have been demonstrating that there is money to be made out of refining. At least enough for WNR's director Frederick Francis, that he has spent $961,933 buying 40,181 shares at $23.94 each in the company:
Francis' heavy buying of WNR came just two days after it announced the $1.5 billion acquisition of Giant Industries, another refining and marketing company. With regulatory approval, the deal will be consummated in the 4th Q of this year making WNR the fourth largest publicly traded independent refiner and marketer in the US. With the GI acquisition, WNR's crude oil refining capacity by 84% to about 216,000 barrels a day. It will also enhance the amount of sour crude WNR can process. Since sour heavy crude is cheaper than lighter oils, this will dramatically boost the company's margins. WNR also picks up 159 gas stations as part of the deal. Refining and marketing assets are undervalued in the market, and Western is picking up quality assets at a reasonable price. WNR has predicted that the deal will be immediately and significantly accretive to its earnings and free cash flow. Merrill Lynch analyst Christopher Moore thinks so too. "The GI acquisition gives WNR increased exposure to one of the key fundamental strengths behind our buy recommendation: premium, southwest niche refining margins," he says. "Also, the transaction reduces the risk and volatility around WNR's single refining asset and diversifies earnings outside of the southwest market," added Moore. WNR was doing rather well even before the GI acquisition. Its second quarter net income soared to $86.5 million or $1.29 a share, compared with $40.4 million a year earlier, driven by higher refinery gross margins and increased refinery throughput. Why is WNR succeeding where the oil majors failed? Part of the explanation is simply a mastery of detail. Refining is a high-volume, low-margin business; so even minor improvements in the cost process can have a big impact on profits.
WNR has often bought crude oil a few cents cheaper than other companies, kept its inventories a little lower and its manufacturing costs a fraction tighter. Another trick is to buy refineries at an attractively low price, which WNR is doing with its acquisition of GI. With the stock trading at a Forward multiple of only 10.92, it makes a lot of sense to tag along with Mr. Francis and buy WNR.
Related: Insider Score looks at recent insider buying activity at Western Refining.