Western Refining Loss Narrows, But Misses Estimates

| About: Western Refining, (WNR)
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Oil refiner and marketer Western Refining Inc. (NYSE:WNR) reported weaker-than-expected fourth-quarter results, reflecting lower refinery throughput. The company incurred a loss per share (excluding special items) of 4 cents, versus the Zacks Consensus Estimate for a profit of 5 cents.

However, the El Paso, Texas-headquartered company improved considerably from the fourth-quarter 2009 loss of 58 cents per share (excluding special items) amid higher refining margins and gains from cost-saving initiatives.

Revenue of $1.9 billion was down 4.8% from the year-ago level and missed the Zacks Consensus Estimate by 2.2%.

For full-year 2010, Western Refining lost 11 cents per share on revenues of $8.0 billion.

Refining Segment Results

WNR's refining segment, which accounts for bulk of the company's sales/profits, recorded an operating income of $23.0 million. This compares with a loss of $92.9 million in the year-earlier quarter. Segment results were favorably impacted by higher gross margins.


Total refining throughput averaged 157,044 barrels per day (Bbl/d), compared with 199,739 Bbl/d in the year-ago quarter. Overall, throughput volumes in the El Paso refinery increased 7.7% year over year to 131,906 Bbl/d, while Western’s Four Corners refinery witnessed a 1.7% rise in throughput (to 25,138 Bbl/d).

However, these increases were more than offset by the suspension of operations at its 64,500 barrels-per-day Yorktown, Virginia, refinery in September last year, due to the challenging refining margin environment on the East Coast.

Refining Margins

Gross refining margin rose 107.0% year-over-year to $10.12 per barrel. In terms of different regions, refining margin was up approximately 51.7% in El Paso to $8.83 per barrel and up 16.9% in Four Corners to $14.13 per barrel.

Operating Expenses

Direct operating expenses in El Paso during the quarter averaged $3.57 per barrel, down 7.3% year over year, while costs in Four Corners were $6.91 per barrel (down 27.6% from the year-ago period).

Capital Expenditure & Balance Sheet

Western’s total capital spending during the quarter was $21.4 million, down slightly from $22.1 million in the year-ago period. As of December 31, 2010, Western had cash on hand of $59.9 million and total debt of approximately $1.1 billion, representing a debt-to-capitalization ratio of 61.3%.


Given the uncertain refining margin environment, Western has taken certain strategic actions to improve performance and competitiveness in a cost-effective manner. As part of this effort, the company consolidated the operations of its Four Corners refineries (Bloomfield and Gallup) into one at the Gallup refinery, while also shutting down its Yorktown refining operations.

Additionally, Western has identified and implemented other cost saving initiatives that include the reduction of contractor services at the company's refineries, changes in its “Wholesale” operations in response to market conditions, closure of the underperforming retail outlets, and restriction of its executive compensation and other employee-related costs.

Western Refining plans to save $50 million annually (starting in 2010) through this streamlining and achieved the goal last year.


For the first quarter of 2011, total refinery throughput is anticipated to be approximately 95,000 – 100,000 barrels per day at the El Paso refinery and 23,000-25,000 barrels per day at the Gallup refinery. The company expects capital spending for 2011 to be approximately $62 million.

Our Recommendation

Western Refining shares currently retain a Zacks #3 Rank, which translates into a short-term "Hold" rating. We are also maintaining our long-term "Neutral" recommendation on the stock.

Western Refining competes in the Oil Refining and Marketing industry with other established firms like Valero Energy Corp. (NYSE:VLO), Tesoro Corp. (TSO), Sunoco Inc. (NYSE:SUN), etc.