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Western Refining (WNR)Stock (Energy Industry, Oil & Gas Refining Industry)
 The Longhorn Pipeline, however, threatens Western's market position, as it gives companies with lower-cost refining techniques access to El Paso from the Gulf of Mexico and will have a carrying capacity larger than Western's entire production capacity.[2] Another major threat to Western's position includes rising oil prices, which depresses margins as refiners cannot pass the entire increase in cost of production onto their customers. Western's vertically integrated, oil major competitors are somewhat insulated from this problem as they also sell the refined oil at the pump, while Western's must sell to third-party distributors. Other risks include a production failure at any one of Western's four refineries, knocking out a major portion of the company's capacity, and a national push away from gasoline towards hybrid and alternative energy technology which could lower demand for Western's principal product. [edit] Business & FinancialsWestern Refining, with facilities to refine petroleum into gasoline, diesel, jet fuel, and asphalt, went public in 2006, though its performance really ramped up in the year before. 2005 was a great year for Western because of the powerful hurricane season, which caused a number of refinery shutdowns in the Gulf of Mexico and pushed up profitability for companies like Western, who weren't as badly affected. From 2005 to 2006, Western's revenue and income did not rise as much as going into 2005, as many of the disabled refineries came back online, but the company was able to grow despite quickly rising oil prices.
Source: WNR 2006 Annual Report[3] 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[4]. 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[5]. 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. [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[6]. 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[7]). 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] Trends and Forces[edit] The Longhorn Pipeline Threatens to Bring Cheap Petroleum Products from the Gulf, Undermining Western's Regional AdvantageWestern's main refinery is situated in the Southwestern distribution hub of El Paso, Texas; previously, the company was one of the main distributors of refined petroleum products to large Southwestern markets like Phoenix and Albuquerque through the pipelines that run from El Paso to those cities. The Longhorn Partners Pipeline, however, threatens Western's position in the region by enabling low-cost refiners in the Gulf Coast to send their products to El Paso and access the rest of the Southwest. As of 2008, the pipeline can only send 72,000 bpd, but the plan is to eventually expand it to 225,000 bpd[8], which is more than Western's total refining capacity. Furthermore, the pipelines from El Paso to Phoenix and Albuquerque will be expanded to accommodate the capacity increase added by the Longhorn. Currently, Western is in a position to defend itself; as a historical user of the El Paso-Phoenix and El Paso-Albuquerque pipes, it has dibs on much of the upcoming capacity expansion. Eventually, however, the pipelines will expand past the point where Western can fill them, and the Southwest will open up to cheaper petroleum from the Gulf Coast, forcing Western to either cut prices and depress margins to compete, or expand into new regions to extract crude. [edit] Western is Highly Vulnerable to Production FailureDespite being the fourth-largest independent refiner in the U.S., Western's 223,000 bpd[9] of capacity is split between just four refineries. This makes the company vulnerable to slow-downs or shut-downs of production at any one of the refineries; fires, bad weather, terrorism, or simple accidents could all potentially cripple the company's operations. [edit] Rising Oil Prices Depress Western's MarginsAs a refining company, Western uses crude oil as an input. Since oil is a commodity, it is prone to cyclical pricing; in recent months, oil prices have risen to stratospheric levels, with a barrel trading in early January at $100. Higher oil prices mean higher costs and depressed margins, and can be used to explain why Western's operating income for 3Q07 was over 30% less than its operating income for 3Q06[10]. [edit] The "Green Revolution" is a Huge Threat to Western's Ability to Sell its ProductsWhether it’s because of the desire for energy independence, the rising price of oil, or fears of climate change, people are becoming more and more disillusioned with petroleum. 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. Internationally, the Kyoto Protocol has started a shift toward cleaner sources of energy, and though the U.S. isn't partaking Kyoto's changes, the recently passed Energy Independence and Security Act of 2007 is 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[11], the Act could greatly reduce the growth of the petroleum refining industry - and environmentalists, who have deemed climate change to be "Our Generation’s Defining Moral Challenge", will continue to push for greater change. Western Refining could be one of the hardest hit by the continuous march of progress - in 2006, over 90% of the company's refining capacity went toward producing light fuels like gasoline, diesel, and jet fuel: 54% of this was gasoline, 31% was diesel, and 8% was jet fuel[12]. 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] Competition
Western Refining is the main supplier of refined petroleum to the Southwest United States, though (as mentioned above) the Longhorn Pipeline threatens to shift this balance by enabling Gulf Coast refiners (like Chevron, Exxon, Valero, and Sunoco) to ship cheaper products into the Southwest distribution hub of El Paso.
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