Why Western Refining Looks Promising


Independent crude oil refiner and marketer Western Refinery (NYS: WNR) announced its fourth-quarter results earlier this week. The company missed estimates, posting adjusted earnings of $0.48 per share, excluding special items. However, in the long run, it is a different ballgame altogether.

Short-term trouble...
In the previous earnings call, management had indicated a drop in throughput volumes at the Gallup refinery for the fourth quarter. The 23,000-barrels-per-day refinery was expected to undergo maintenance to improve its reliability. Additionally, the company had to briefly halt processing at its 128,000 bpd El Paso refinery because of unexpected maintenance activities. As a result, the Texas refinery was expected to have an output of 118,000 to 122,000 bpd.

...but a brighter future
But I think prospects for Western in the longer term are quite positive. Firstly, WTI crude -- which Western's refineries process -- is still trading at a substantial discount to its Brent counterpart. According to reports, the reversal of the Seaway pipeline that should eventually reduce the oil glut at the delivery point in Cushing, Okla., might not take place within the expected timeline, which is officially the second quarter of this year. Also, the scrapping of TransCanada's Keystone XL pipeline isn't a good sign for those who were hoping for the spread to narrow. My guess is that these two factors won't come into play before 2014.

Secondly, the company is investing $15 million to improve infrastructure at its El Paso refinery to increase crude inputs from Bone Springs shale by up to 20,000 bpd. Western plans to construct one 80,000-barrel crude tank, seven offloading stations, and a 25-mile crude pipeline. While this initiative will give access to cheaper Bone Springs oil, it will reduce the impact of the Seaway pipeline reversal. The entire project is expected to be completed by the third quarter this year.

Thirdly, Western is increasing its Gallup refinery capacity to 25,000 bpd. Estimated to be completed by the third quarter, the expansion will add to top-line growth. Fools shouldn't miss out on its long-term benefits.

Foolish bottom line
Since November, Western's shares have been quite volatile, falling more than 28% after the announcement on the Seaway pipeline's reversal, followed by a downgrade by Deutsche Bank from buy to hold. But since then, the stock has shot up more than 60%.

However, Fools shouldn't base their judgments on any one earnings release. As I see it, if Western's share prices fall, it would be a great opportunity to accumulate its stock.

Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Western Refining. Motley Fool newsletter services have recommended buying shares of TransCanada. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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