Western Refining IPO Has Tailwind From Phillips 66 Partners

| About: Western Refining (WNRL)

Western Refining Logistics, LP (NYSE:WNRL), Western Refining (NYSE:WNR)'s recently-formed midstream assets MLP, plans to raise $250 million in its upcoming IPO on Thursday October 10, 2013. The El Paso, Texas-based firm plans to offer 12.5 million shares at an expected price range of $19.00-21.00. If WNRL can find the midpoint of that range at $20.00 per share, the firm would command a market value of $912 million.

WNRL filed on July 25, 2013
Joint Managers: BofA Merrill Lynch, Barclays, Goldman Sachs, Wells Fargo Securities
Co-Managers: Credit Suisse, Deutsche Bank, UBS Investment Bank, Credit Agricole CIB, Suntrust Robinson Humphrey

WNRL is a master limited partnership formed by Western Refining to own, operate, acquire, and develop terminals, storage tanks, pipelines, and other logistical assets for its parent company. Its assets include some 300 miles of pipeline and 7.9 million barrels of active storage capacity located in the southwestern United States; these assets are integral to the operation of Western's refineries located in El Paso, Texas and Gallup, New Mexico.

The firm generates income by charging fees in exchange for storing and transporting oil through its pipeline system, meaning that its income will not be as substantially affected by changes in the price of oil as other elements of the oil industry might be. The bulk of its initial income will be generated by a pair of ten-year contracts with its parent firm.

WNRL offers the following pro forma figures in its S-1 balance sheets for the six months ended June 30, 2013, which do not include $3.5 million in general and incremental expenses projected to be incurred annually as a result of the firm becoming a separate, publicly traded entity:

Total Revenues: $50,482,000
Net Income: $14,286,000
Total Assets: $189,243,000
Total Liabilities: Not reported

WNRL plans to offer quarterly yields of $0.2875 per unit, or $1.15 per unit annualized. At the midpoint of the expected price range at $20.00 per share, this translates to a 5.75% annual return on investment.

We're positive on this IPO and rate it a buy in the $19 to $20 range. WNRL will no doubt be kept stable through continued business generated by its parent company. We also feel that WNRL will be compared to Phillips 66 Partners LP (NYSE:PSXP) which went public this summer at $23 and is currently trading at about $30.

It isn't clear that there will be much demand for WNRL's services outside of its parent unless the firm makes large acquisitions in the future, since its current assets are positioned specifically to serve Western's refineries. The quarterly yields are solid but nothing special, and are also subject to the firm having sufficient available cash to make the payments. As the firm candidly acknowledges in its SEC filings, its parent has a significant hand in determining exactly how much cash is available for distribution, so there is some risk that investors will never see the yields they expect.

WNRL's total dependence on its parent - Western accounted for over 99% of unaudited pro forma revenues for the six months ending June 30, 2013 - means that it is extremely susceptible to changes in its parent's fortunes. Problems surrounding the Gallup or El Paso refineries would no doubt have an adverse affect on WNRL, since it seems unlikely to develop other sources of revenue in the near future.

Western is obligated to meet a minimum usage of WNRL's resources, but it no doubt would sink to this minimum in the case of the failure of either of the refineries; WNRL warns in its SEC filings that, should Western choose only to meet the minimum, WNRL will be unable to make quarterly payments to investors.

Western is faced with high levels of competition in petroleum refining and marketing. Major competitors include Valero Energy Corp. (NYSE:VLO), Phillips 66 Company (NYSE:PSX), Alon USA Energy, Inc. (NYSE:ALJ), HollyFrontier Corporation (NYSE:HFC), Tesoro Corporation (NYSE:TSO), Chevron Products Company (NYSE:CVX), and Suncor Energy, (NYSE:SU), among others.

WNRL's general partner, Western Refining Logistics GP, LLC, is responsible for management of the firm, making WNRL more or less entirely controlled by the officers of Western, particularly CEO Jeff A. Stevens, who has been with Western or its affiliates in executive roles since 2000.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in WNRL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is neither a recommendation to buy or sell shares, and investors should always do their own research including reading the S-1 and reviewing investment decisions with their financial adviser.