U.S. economic activity continues on the uptrend, making oil and gas supplies all the more important and crucial. With rising political instability in North Africa and Middle East, changing legislation in the North Sea, North America appears as one of the safest regions for the exploration and production of fossil fuels. Supported by a boom in the gas industry, supported by new techniques for the extraction of unconventional reserves, in addition to new safety rules and technology for deepwater production, shale exploitation and unreachable reserves have turned productive.
The advances have been possible only thanks to the high price at which crude oil and gas currently sales. Companies not only had enough cash to invest on new equipment, and take on expensive development projects, but also saw profits rise dramatically. All that production, however, before reaching the consumer had to be refined. At that point, Western Refining (WNR, Financial) began to absorb market synergies pushing forward with an impressive performance.
Flying Below the Radars
Western Refining activities are spread across three segments: refining (93%), wholesale (5%), and retail. Throughout this year, most financial institutions have rated the stock as “Neutral.” However, there is clear tendency towards boosting target price, closing in to the $45 mark. That is, $2 above the current face value. Most important, Wolfe Research and Barclays are the dissonant institutions rating the stock a “Buy.” At the same time, price has recently surpassed the Peter Lynch Earnings marking the right moment to start thinking about acquiring the stock.
Looking back and including special items, Western Refining reported full year 2013 net income of $276.0 million, or $2.79 per diluted share compared to full year 2012 net income of $398.9 million, or $3.71 per diluted share. The achievements recorded at the end of December were facilitated by the operations of the crude gathering system in the fast-growing Permian Basin, compounded by the expansion of crude oil gathering capabilities in the Four Corners region, spin off of Western Refining Logistics (WNRL, Financial) and strategic investment in Northern Tier Energy (NTI, Financial).
As of today, Western Refining is undertaking an important pipeline project in the Delaware Basin to unlock further growth. The asset is planned to connect the Western Refining Logistics existing Mason Station crude oil gathering facility in Reeves County, Texas, and a new crude oil gathering facility at Wink Station in Winkler County, Texas. Estimated daily transport capacity for the pipeline is said to be around 125,000 barrels per day, which is expected to start operating by mid-2015.
Dependent Growth
Debt has been rising and is aiming to turn into a true liability to Western Refining’s business model. For the same reason, the company issued a notice to holders of the 5.75% Convertible Senior Notes due 2014, to settle conversions of the Securities. At the current conversion rate of 105.2394 for each $1,000 of principal amount of the Securities, management expects to deliver 22,630,154 shares of common stock to satisfy conversions. In other words, debt will be refinanced by the issuing of new notes, backed by a stronger and climbing cash flow.
The strengths that will unlock growth for Western Refining lay on the initiatives to improve reliability and reduce operating costs. Additional growth catalysts can be unleashed thanks to an economy of scales and proprietary access to pipelines, which inhibits lower-cost competitors from supplying its key markets. Most important to shareholders, the firm holds a history for rewarding investors, and pays $0.26 in quarterly dividends, representing a 1.81% annual yield.
However, the downsides to Western Refining are most important. Triggering major catalysts depend on continued political instability in the Middle East and Africa. At the same time, new legislation issued by the Environmental Protection Agency, concerning sulfur content on gasoline, will impact hard the company’s finances. With this in mind, it is not a surprise that Renaissance Technologies began dropping the stock during 2013. While George Soros (Trades, Portfolio) seems as an attempt at making an important profit covered by a great risk when looking for a long-term gain.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.
