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Western Refining (WNR)Stock (Energy Industry, Oil & Gas Refining Industry)
 Western Refining faces new competition from Gulf Coast oil companies, which have begun to supply the Southwest United States through the Longhorn Pipeline. Currently, the pipeline can deliver up to 72,000 bpd of unleaded gasoline and diesel, but pipeline expansions will increase Longhorn's capacity to 225,000 bpd.[2] Increased competition will reduce the price of refined products in this region. [3] In response,Western Refining has expanded its refining capacity through acquisitions of other independent refiners. In particular, Western Refining’s 2007 purchase of Giant Inc. doubled their refinery capacity. Western Refining paid for the acquisition of Giant’s New Mexico and Virginia refineries with a $1.5 billion loan. As credit becomes harder to acquire and profits become lower, Western Refining will have difficulty expanding in the future.
[edit] Company OverviewNet sales for three months ended in September 30, 2008 were 47% higher compared to net sales for the three months ended in September 30, 2007. The increase in net sales was primarily the result of higher sales prices for refined products. Cost of products sold for three months ended September 30, 2008 increased 47.1% compared to three months ended September 30, 2007. The average cost of crude oil increased 51.7% between these two periods from $75.58 to $114.62. The increase in refining margins in the third quarter of 2008 was the result of decreasing crude prices, which declined faster than the prices of refined products, and an increase in the amount of lower-cost crude oil processed at Western Refining’s refineries during the quarter.[4] In the second quarter of 2007, Western acquired Giant Industries, Inc., the merger raised the firm's production capacity from around 124,000 bpd to 223,000 bpd. In the U.S. refining industry, expansion occurs through acquisition and equipment upgrade, rather than through refinery construction; no new refineries have been built in this country since 1976. Western has achieved much of its recent expansion by upgrading its processing equipment to refine light, sour crude, as well as through the acquisition of Giant.[5]
Source: WNR 2007 Annual Report[6]
[edit] Western Cannot Refine Cheaper CrudesWestern's refineries have refining capacity that can handle 50% light sour crude, a form of crude that trades $5 lower than the norm: light, sweet crude[7]. Major refiners on the Gulf Coast, like Valero, can refine heavy sour crude, which is much cheaper than light, sweet crude (trading in the fourth quarter of 2007 at $14 less than the WTI price[8]). Refining heavy sour allows the larger refiners to produce at lower cost and sell at lower price, creating price competition for Western and depressing its margins in two directions: from below, as Western's inputs are more expensive, and from above, as Western must lower prices to compete. [edit] Business Segments[edit] Refining Segment (95% of 2007 Operating Income)Western Refining owns four refineries, which make various grades of gasoline, diesel fuel, jet fuel, and additional products from crude oil and other feedstocks. The four refineries are located primarily in the Southwest United States: one in El Paso, two in the Four Corners region of New Mexico, and one in Yorktown Virginia. With production capacity of 124,000 bpd, Western Refining’s El Paso site is its largest producer of crude oil. Each of these refineries has its own distribution centers and sells these products to service stations, independent wholesalers and retailers, and other energy companies. Sales to Chevron Products Company composed 10% of 2007 consolidated sales. 91.7% of consolidated sales in this segment came from domestic sales in the United States. The remaining 8.3% of 2007 consolidated sales were to PMI Trading Ltd., an affiliate of Petroleos Mexicanos.[9] Net sales in this segment increased by 68.9% to $7.092 billion in 2007 primarily because of increased production capacity, higher sales from its El Paso refinery, and a higher price of crude oil. Western Refining’s annual production capacity increased by 51.4% due to the acquisition of Giant’s refining sites in the second quarter of 2007. Their average sales price per barrel increased by 11.5% during 2007 to $90.23[10] [edit] Wholesale Segment (2.4% of 2007 Operating Income)Western Refining’s wholesale segment owns several lubricant and bulk petroleum distribution plants. It sells commercial wholesale petroleum products in Arizona, California, Colorado, Nevada, New Mexico, Texas and Utah. This segment purchases fuels and lubricants from the Company’s refining segment and some third party distributors. The wholesale segment distributes primarily to mining, construction, and transportation industries. The wholesale segment was acquired during the Giant acquisition of 2007. [11] [edit] Retail Segment (2.6% of 2007 Operating Income)Western Refining’s retail segment operates service stations, convenience stores and kiosks in Arizona, New Mexico, and Colorado. The Company’s refining segment supplies all of the service stations with gasoline and diesel fuel. Its service stations and convenience stores sell a variety of merchandise and food products. The retail group’s units are branded as CONOCOPHILLIPS (COP) , Mustang, Giant, and Royal Dutch Shell (RDS'A). The retail segment was acquired during the Giant acquisition of 2007.[12] [edit] Trends and Forces[edit] The Longhorn Pipeline and Increased Gulf CompetitionCompleted in 2005, The Longhorn pipeline connects Gulf Coast refineries to the El Paso pipeline, which delivers oil to Phoenix and Albuquerque. As a result, oil companies that operate in the Gulf Coast can cheaply and quickly supply two cities that were, until recently, relatively isolated from Gulf Coast supply lines.[13] Sales in Phoenix and Albuquerque carry higher profit margins for Western Refining because the company operates service stations in both cities. Pipelines such as the Longhorn pipeline, illustrate Gulf Coast Oil companies’ increasing investment in supplying the Southwest United States and other Western regions with oil. More competition in these cities will reduce the prices of refined products and profit margins for smaller oil refiners like Western Refining.[14] However, an expansion on the El Paso-Phoenix pipeline was completed in 2008, and Western Refining won exclusive rights to use this expansion. Due to strict pollution regulations in Phoenix, Gulf Coast Oil companies will have to retool their refineries to meet these standards.[15] [edit] Oil Prices Are Volatile, and are the Primary Determinant of WNR's ProfitsAlthough gasoline prices have been rising in 2007 and 2008, the price of refining crude oil has increased substantially more. The difference between the cost of crude and the price of refined products describes how much a company profits from buying crude oil and "cracking" it into gasoline. As the cost of crude continues to rise, it will be more difficult for refiners to sell gasoline and other fuels at a profit. From the beginning of 2004 to the end of 2007, the average price difference between the cost of crude and price of refined product peaked at $28. The typical spread is $20, meaning that a refiner profits $20 for every barrel of crude that it processes into gasoline. [16] Western Refining processed an average of 222,000 bpd of crude in the 2008 second quarter and earned $9.29/barrel in gross margin. In the second quarter of 2007, the company produced 148,000 bpd of crude and earned $21.85/barrel in gross margin. Higher oil prices mean higher costs and depressed margins, and can explain why Western's operating income for 3Q07 was 30% less than its operating income for 3Q06[17]. Western Refining, and other independent refiners, will benefit as the price of crude continues to fall. [18] However, plummeting gasoline prices also hurt profit margins for oil refiners like Western Refining. In the second half of 2008, the price of a gasoline has fallen faster than the price of oil. During October 2008, gasoline cost an average $1.86 a barrel less than crude oil. For every barrel of oil processed into gasoline, refiners lose money. In response, refiners will likely reduce production in order to raise gasoline prices. [19] [edit] The American Auto Paradigm is Beginning to Shift Away from PetroleumRising CAFE standards and especially biofuel blending could reduce future sales.[20] Environmentalists have been calling for a shift to renewable energy for years, and though the river of change is running slow, it is running deep.The Energy Independence and Security Act of 2007 has been billed as the first step towards a grander series of changes. By forcing automakers to achieve 35 mpg by 2020 and setting a Renewable Fuel Standard of 36 billion gallons of biofuels in 2022[21], the Act has the potential to greatly reduce demand for gasoline - and environmentalists, who have deemed climate change to be "Our Generation’s Defining Moral Challenge", will continue to push for greater change. During his campaign, President-elect Obama outlined his plan to increase Government spending on alternative energies like Wind Energy, Clean Coal, and Nuclear Energy in an effort to remove the United States from dependence on foreign oil. In addition, Obama also outlined Government initiatives to reduce gasoline prices for consumers. Barack Obama's election will likely lead to increased investment in alternative fuels and a push toward electric or ultra-high efficiency cars.[22] Western Refining could be one of the hardest hit by a shift toward alternative fuels - in 2007, over 91% of the company's refining capacity went toward producing light fuels like gasoline, diesel, and jet fuel: 52% of this was gasoline, 38% was diesel and jet fuel.[23]. A reduction in the demand for gasoline that an increasing national fuel economy would create could greatly reduce the price of gasoline; the replacement of diesel by biofuels would have the same effect. In both cases, falling prices would put heavy pressure on Western's margins. [edit] Acquisition of Giant has Long-term EffectsIn order to acquire Giant Industries, Inc., Western Refining took a $1.125 billion secured term loan. If refining margins continue to shrink, Western Refining will have trouble paying this loan.[24] In addition, Western Refining received 82% of 2007 revenue from its four refineries, and 50% of 2007 revenue from its refinery in El Paso. Events such as fires, accidents, terrorism, or natural disasters would severely hurt total refining capacity. Giant's refineries suffered three fires in two years, most recently in December 2006.[25] The 2008 Financial Crisis will hurt debt-heavy companies like Western Refining. As of the third quarter 2008, Western Refining had $1.47 billion in long-term debt and a debt ratio of .43. Interest expense for the nine months ended September 30, 2008 and 2007, was $69.8 million and $31.9 million, respectively. The increase primarily was due to an increase in outstanding debt as a result of the Giant acquisition in the second quarter of 2007.[26] As borrowing money becomes more difficult for companies with a substantial amount of debt, Western Refining will have to divert more of its cash flow to pay its current debt obligations. For 2008, Western Refining paid $61.3 million in cash to cover the interest on its long-term debt. As a result, Western Refining will have less cash available for investment in better capital and acquisitions.[27] [edit] CompetitionAlon USA Energy, INC (ALJ): Alon US Energy is an independent refiner and marketer of petroleum products in the South Central, Southwestern, and Western Regions of the United States. The Company operates in three segments: refining, asphalt, and retail. Alon operates two refineries in Texas and two refineries in California. Alon’s four refineries have a throughput capacity of 228,000 bpd. [28] Valero Energy Corp. (VLO): Valero Energy operates 17 refineries located in the United States, Canada, and Aruba with a total throughput capacity of 3.1 million bpd. In the United States, Valero distributes its refined products in the Gulf Coast, Mid-Continent, West Coast, and Northeast. Its also owns retail stores in all of these regions of the United States.[29] ConocoPhillips (COP): ConocoPhillips is an integrated energy company operating in six segments: Exploration and Production, Midstream, Refining and Marketing, Lukoil investment, Chemicals, and Emerging Businesses. It operates primarily in the United States, Canada, Norway, the United Kingdom, and Indonesia. In the United Sates, ConocoPhillips is the second-largest refinery operator. It has refining throughput capacity of 2 million bpd. Additional revenue comes from a midstream natural-gas gathering system and a 20% stake in the Russian energy company Lukoil.[30] Conocophillips does not have a significant presence in the Southwestern United States and is not one of the Gulf Coast oil companies that uses the Longhorn pipeline. Holly Corp. (HOC): Holy Corp. is a United States-based petroleum refiner. The Company operates two oil refiners and distributes its refined products in the Southwest and West United States. Holly Corp. also owns 900 miles of crude oil pipelines located in Texas and New Mexico. the Company transports asphalt and liquid petroleum gas(LPG) to wholesalers and LPG retailers.[31]
 Western Refining2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] Notes
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