Of all the energy companies out there, Western Refining (NYSE: WNR ) garners the most hate among investors. 36.6% of the companies shares are sold short. What is even more surprising is that many of its competitors are not found on this list. So what exactly makes Western so unique that it invokes so much bearish sentiment? Let's take a deeper look at Western Refining in comparison to its peers and see what could be causing this.
Standing out among its peers? Not really
Unlike the major refinery companies in the US that have multiple refineries, Western's refining capacity comes from only two refineries totaling just over 150,000 barrels per day. Also, its El Paso facility is responsible for 128,000 of it. While it may seem risky to be invested in only one or two refiners because of downtime and maintenance, but there are plenty of others out there. CVR Refining's (NYSE: CVRR ) 185,000 barrel per day capacity is only divided up among 2 facilities, and Northern Tier Energy (UNKNOWN: NTI.DL ) has only one 89,500 barrel per day facility.
Perhaps it's the location? With Western's refineries in the Southwest, the largest source of crude for the company is from the Permian Basin. What this means is that a majority of the crude that Western runs is a lighter, sweeter crude, which is generally more expensive. By contrast, Northern Tier's facility is in Minnesota and CVR's are in Kansas and Kentucky. These regions have better access to the heavier, more sour crudes that we see coming out of Canada, which are much less expensive. Companies all across the Midwest have been trying to increase their ability to run heavy Canadian crude. Some companies like HollyFrontier (NYSE: HFC ) have gone so far as to build rail facilities to get Canadian crude all the way down to its facilities in New Mexico.
Right now, Western has the ability to run about 15% of its capacity on sour crudes, which may put it at a slight disadvantage to the other players. With companies like HollyFrontier moving Canadian crude all the way to New Mexico to take advantage of the difference in price, then perhaps Western should consider retooling its facilities to handle the cheaper feedstock.
Probably the largest outlive between Western's business and its peers isn't in the actual refining business, but in its retail and distribution business. It is the only one that has a wholesale distribution business, which mostly serves the Mid-Atlantic region. The company's distribution assets generate about 33% of sales, but has a razor thin 0.6% net income margin.
Despite having a slight disadvantage because of feedstocks and generating so much of its revenue from such a low return business. Western has still been able to keep pace with its peers, so it's hard to see anyone betting against the company on these reasons alone.
Old Sentiment, New Results
Back in 2007, Western really stretched its financials thin when it tried to acquire Giant Industries for $1.5 billion. The company went from completely debt free to having a debt to capital ratio of 68%, and the subsequent financial collapse made it look like the company was skating on very thin ice.
Since then, though, the company has really turned its prospects around. Western has since sold its Virginia refinery and shuttered one other that were part of the Giant deal, and thanks to a boom in Permain production, the company's has been able to run its facilities at a utilization rate of 98% and operational cash flow has grown 640% in the past 4 years. Since the company has been throwing off so much cash, it has been able to reduce its long term debt by 78% and now its capital structure is much more in line with is peers like CVR and Northern Tier. As that debt position continues to wind down, don't be surprised if the company starts a more aggressive share buyback program or bumps its dividend.
What a Fool Believes
Western isn't a perfect company, but it's nowhere near the ticking time bomb that it was a few years ago. Those who are shorting Western's stock may have seen an opportunity back in 2008 or 2009, but today Western is in a much better place and doesn't deserve the title of most hated energy stock.
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