Shares of Western Refining
How it got here
Strong financial results have pushed Western refining higher in the past year, particularly after first-quarter results. In the quarter, sales rose 27.2% to $2.3 billion and net income excluding special items was $85.1 million, or $0.81 per share. The price differential between WTI Cushing crude oil and WTI Midland crude oil helped push margins higher.
As you can see in the chart below, Western Refining has broken out from the trading pattern of other refiners lately, and this has partially been caused by the location of the company's assets, which can benefit from the difference in oil prices. Tesoro
As you can see below, Western Refining is now trading at higher multiples than these competitors. The lower price/book for Valero and Tesoro is offset by their lower return on assets at the moment.
|
Company |
Price/Book |
Return on Assets |
Forward P/E |
Dividend Yield |
|---|---|---|---|---|
| Western Refining | 2.9 | 17.3% | 6.8 | 0.7% |
| Valero Energy | 0.9 | 5.8% | 5.5 | 2.4% |
| Tesoro | 1.0 | 6.7% | 6.5 | N/A |
| HollyFrontier | 1.5 | 18.3% | 9.1 | 1.6% |
Source: Yahoo! Finance. N/A = not applicable.
The question is how long Western Refining will be able to benefit from the large difference in oil prices at the two hubs mentioned. Cushing has been plagued by an excess of supply, but during the second quarter the Seaway pipeline was reversed to flow to the Gulf, so some of the pressure there may be relieved.
What's next?
I don't think the higher margins will last as pipeline owners adjust to the new market conditions. The U.S. has rapidly expanded oil production in places like North Dakota and this has put some pressure on the system as transporters adjust. In time, Western Refining will see some of its recent windfall return to normal operating conditions, and financial conditions may not look quite as rosy.
With that said, analysts are still expecting $3.55 per share in earnings in 2013, and while that may be lower than the $4.39 expected this year, it still results in a very reasonable 6.8 forward P/E ratio. The CAPS community thinks that price is very attractive and has given the stock our top five-star rating.
I think the operational windfall may soon come to an end but that Western Refining's stock can continue to rise because of the company's stock price and the fact that management is aggressively repaying debt. The stock may not outperform competitors by a wide margin in the next year, but management should be able to improve results in the short term.
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