The Cheap Refiner for 2013: Western Refining, Inc. (WNR)

Western Refining, Inc. (NYSE:WNR) was one of the top 7 stocks for 2013 recommended by The Motley Fool’s analysts. Its stock price has increased significantly in the last 3 years, from only $5 per share in the middle of 2010 to nearly $36 per share. Should investors buy Western Refining when it has already reached $36, its 52-week high? Let’s see.

Western Refining, Inc. (NYSE:WNR)Business Snapshot

Western Refining is an independent crude oil refiner, operating two refineries with a total capacity of around 151,000 barrels per day. In addition, the company also operates stand-alone refined product distribution terminals and asphalt terminals, with around 210 retail service stations and convenience stores in the US. The majority of Western Refining’s revenue was generated from gasoline sales that accounted for 44.1% of the total sales in 2011. The second biggest revenue contributor was diesel fuel, accounting for 35.1% of the total revenue. Jet fuel represented 12.9% of the total sales while asphalt accounted only 3.6% of total sales.

Western Refining had a diverse customer base, with no single customer accounting for more than 10% of the net sales in 2011. Western Refining’s products were sold via both retail and wholesale channels. In 2011, the wholesale revenue was more than $4.75 billion while the retail segment generated only $940.4 million in revenue. While the wholesale segment generated only $26.6 million in operating income, the operating income of the retail segment was $4.7 million.

Benefiting from High Brent/WTI Spread

As Western Refining purchased crude oil based on WTI pricing and sold its refined products based on Brent pricing, it has benefited from the widening Brent/WTI spread. The wide Brent/WTI spread also benefited other refiners including Valero Energy Corporation (NYSE:VLO) and Tesoro Corporation (NYSE:TSO). Since the middle of 2010, Tesoro’s stock price has grown from $11 per share to $54 per share, while Valero has increased from $16 per share to $45.6 per share during the same period. As Western Refining has its operations solely in the US, the company is in the best position to benefit fully from the current high spread.

Consistent Cash Flow and Stronger Balance Sheet

In the past 5 years, Western Refining has consistently generated positive operating cash flow, from $113 million in 2007 to $508 million in 2011. The free cash flow has increased from -$164 million in 2007 to $424 million in 2011. In the same period, the company has managed to pay down the long-term debt, from $1.57 billion to $500 million. Since the end of 2010, Western Refining has reduced the debt/total capitalization ratio, from 61% to only 33%. As of September 2012, Western Refining had $1 billion in total stockholders’ equity, $510 million in cash and $500 million in long-term debt. In addition, it had $270 million in deferred tax liabilities that were considered an interest free loan from the government.

Peer Comparison

With the current trading price of $36 per share, the total market cap is $3.17 billion. The market is valuing Western Refining at only 3.7x EV/EBITDA. Valero is a much bigger company with $25.27 billion in market cap. With the current trading price of $45.65 per share, Valero is valued at 4.53x EV/EBITDA. Tesoro, with $7.44 billion in market cap, is valued at 3.7x EV multiples. Among the three, Western Refining had the highest operating margin of 9%. The operating margin of Valero, 4%, is the lowest while Tesoro had a 5% operating margin.

Foolish Bottom Line

Western Refining looks cheap even after reaching its 52-week high. With the highest operating margin, cheap EV multiples and stronger balance sheet, investors might consider Western Refining for their portfolios in 2013.

The article The Cheap Refiner for 2013 originally appeared on and is written by Anh HOANG.

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