Contributor Analysis: Western Refining Inc. (WNR)

Brodie HinkleStocks3 Comments

Brodie Hinkle, a senior at the University of Oklahoma, is a contributor to the Acquirer’s Multiple. Brodie is a double major of finance and energy management. He will be periodically writing opinionated articles about individual companies that show up on the stock screeners. If you’d like to contribute an article, please contact me at Contributors receive complimentary access to the screeners.

When researching the Large Cap 1000 Screener on the Acquirer’s Multiple website (, you will see Western Refining Inc. (WNR) as a top pick according to the value metrics laid out by Tobias Carlisle. Western Refining is a small oil and gas refiner in relation to domestic peers, having only two refineries. Western Refining operates their two refineries at full capacity, processing 151 mbbl per day. WNR also owns a 38.7% stake in Northern Tier Energy, which operates a refinery in Minnesota. At current, we see several compelling objectives that make Western Refining a prospect for investment.

First, WNR is geographically competitively positioned, which results in wide margins. As initially stated, WNR has a refinery in close proximity to the Permian Basin. Therefore, Western will obtain wider margins due to the decrease in transportation costs from field to refinery. According to Morningstar, Western Refinery benefits by $5 to $6 per barrel due to the transportation savings. Furthermore, the Permian is one of the best producing plays domestically, which oversaturates the supply for its region, as well as, worldwide. Furthermore, the Permian has shown staggering production growth year over year on a field-wide basis. According to the EIA, the Permian Basin is currently producing about 2 million barrels per day, in comparison to 800,000 barrels per day in 2007. As the Permian continues to increase production, pipeline infrastructure, and logistics technology, we estimate climbing revenues for WNR in response. Moreover, Western Refining will conclusively receive raw crude at a discount in relation to the current spot price on WTI. Also previously stated, WNR owns a large stake in Northern Tier (NTI), a variable distribution MLP in Minnesota. The refinery is built to cultivate both domestic light crude, as well as, Canadian heavy crude. NTI’s refinery currently processes an average of 89.5 mbbl per day. It is a probability that Western Refining will enhance the productivity of their refineries through enabling variable grades of crude. Bottom line, Western Refining is very well positioned geographically, and will continue to receive discount crude at full capacity throughout the foreseeable long-term horizon.

Second, raw quantitative figures for WNR are stunningly impressive. For example, Western Refining is currently operating at a 20% return on capital due to their sustained feedstock from the Permian and Canada. As WNR reinvests retained earnings into new projects, we expect to see Western Refining’s ROC ever increasing. Greater margins will be employed through the implementation of new logistics projects, which cut down on transportation costs. Furthermore, we expect to see an expansion of allowable capacity into current refineries operated by WNR. A boost in capacity would be a relatively inexpensive investment and would drive revenues higher. Likewise, WNR has a P/E of 8.1, which is a positive indicator of value since WNR’s 5-year average P/E is 16.6. WNR also has a dividend yield of 2.9%, which is slightly above the average S&P dividend yield of 2.3%.

Conversely, it is prudent advisory to understand the underlying risks that Western Refining may face in the foreseeable future. There are two primary risks that could inhibit future revenues: commodity pricing and adverse weather conditions. Although Western Refining is currently benefitting from the oversupply of crude in the Permian, there is always the possibly of supply racing back to meet demand. If demand would happen to overrun supply, Western Refining will tighten margins in the event due to competitive bidding campaigns amongst producers and refiners. Additionally, adverse weather conditions, such as hurricanes, may inhibit affected refineries from potentially operating for a period of time. Anytime severe weather is expected within the general area of a refinery, it is a safety standard to shut down the site due to precautionary purposes. We must also include the risk of future approval for crude exports. A lift on exports would increase refining competition, resulting in condensed margins. Lastly, as the legislation is always tightening environmental emission tolerances, there is the possibility of further tightening of carbon dioxide emission tolerances. Carbon dioxide is a byproduct of refineries; therefore, a tightening of tolerances would increase expenses for Western Refining.

In conclusion, we view WNR strategically placed as a buy for our portfolio. Western Refining’s strengths outweigh all current weaknesses, which offers a statistically viable opportunity for investment. The long-term prospectus of WRN appears favorable due to all reasons mentioned above. Lastly, Morningstar is valuing WRN at $50 per share, which calculates to an 11% premium to the current market price of $45.00.

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3 Comments on “Contributor Analysis: Western Refining Inc. (WNR)”

  1. Who would you prefer …. Wnr or vlo. Both have very good metricks…

    Whice is better? Thanks a lot for the article

  2. Godi, thank you for the kind words. As Tobias stated, VLO does have a higher ranking when using the Acquirer’s Multiple benchmark. About two weeks ago, I wrote an analysis article covering VLO if you’d like to take a look. VLO is essentially a larger refiner with more complex systems, which is one its many strengths. Very similar business models, but WNR is a scaled down version in the genesis of its business cycle.

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