2 Investments to Add To: Western Refining, Inc. (WNR) and More

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The reason is that the supply of oil coming from central North America has increased a lot, which has driven the price down. Western Refining is taking advantage of that situation, because it buys WTI-priced oil but sells the products into markets where the price is determined by Brent-priced oil.

Right now, the market is pricing shares as if the company could produce no more than $480 million in FCF a year going forward (discounted at 15%). Yet the company produced more than $750 million over the past year.

I think the disconnect comes from the belief that the glut of oil at Cushing is going to be relieved fairly soon, by either reversing the flow direction of oil pipes connecting it to refineries located along the Gulf Coast, building new pipelines, or shipping oil by rail down to the Gulf. (These refineries tend to use Brent-priced oil.) This would relieve some oversupply pressures at Cushing, letting the price rise and reducing the arbitrage that Western Refining is currently enjoying.

While the oversupply at Cushing is probably going to be solved, eventually, I don’t think it’s going to happen as quickly as the market believes. New extraction techniques are part of what is contributing to the oversupply in the first place, and those aren’t going away. Plus, new pipelines bringing oil into Cushing are in the works. Even a new pipeline being built between Cushing and Houston (with completion expected later this year) is thought not to be enough to relieve the oversupply.

Given all that, I believe that Western Refining’s advantage is going to last longer than believed, which is why I’m willing to buy more, now, adding to my position.

The article 2 Investments to Add To originally appeared on Fool.com and is written by Jim Mueller.

Jim Mueller owns shares of Western Refining and Western Digital and has the following option: Long Jan 2014 $10 Calls on Dendreon. The Motley Fool owns shares of Bridgepoint Education, Dendreon, Western Digital, and Western Refining.

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