Refiners are hardly the flavor of the month. The revelation that Washington was going to allow a small amount of lightly refined crude to be exported from the country once again reignited the export debate. Now, some analysts are stating that it is only a matter of time before the export ban is fully lifted, which would squash refining profits.
However, Western Refining (WNR +0.00%) has attracted attention recently, as Wall Street analysts have started to float the idea that the company could unlock value for shareholders, by transforming itself into a master limited partnership.
Good position
Western's acquisition of the general partner of Northern Tier Energy (NYSE: NTI) last year laid the groundwork for a master limited partnership structure.
Western spent $775 million to acquire the general partner, broadening the company's range. Northern's refinery is located in the Midwest, giving the company access to cheap Canadian oil sands and Bakken crude, while Western currently has two refineries located close to the Gulf Coast – a region that accounts for about half of U.S. refining. What's more, Western and Northern own a convenience store network, with a total of 436 stores across six states.
According to analysts on Wall Street, the deal unlocked the prospect of a potentially game-changing asset swap for Western and the first step in the company's transformation into a partnership.
Asset swap
Wall Street is suggesting a complicated asset swap/holding company type structure. This would involve the transformation of Western into a holding company, holding the interests in Northern Tier and Western Refining Logistics.
At present, Western owns the general partner of Northern and Western Logistics. The company also own 39% of Northern's partnership units and 65% of Western Logistics' partnership units. Undertaking an asset swap, restructuring, and unlocking value would be a huge benefit to Western and the new limited partners.
What's being suggested is that Western exchanges its refineries for the remaining partnership interests in Northern; as part of the deal, Northern would swap its convenience store assets with Western.
If this swap were to occur, Northern would have three refineries, but would become a wholly owned subsidiary of Western. Western itself would be a retailer but would also have a significant income from its interest in Northern and Western Logistics. As a holding company, Western would then convert itself into a master limited partnership, unlocking significant value for investors through hefty distribution payouts and a higher valuation.
But what about crude prices?
Even though investors are concerned about the effect a lifting of the export ban will have on refiners, Wall Street analysts remain positive on Western's outlook for two reasons.
Firstly, the company has plenty of restructuring potential as covered above. Secondly, Western's ownership of Western Logistics has helped pull the company ahead of its peer group.
Indeed, Western owns the general partner and 65% of the partnership units of Western Logistics. Western Logistics owns around 300 miles of pipeline in the South of the U.S., along with 7.9 million barrels of storage capacity. Additionally, the partnership owns four refined product terminals and four fee-based asphalt terminalling facilities.
Still, it's fairly standard for a refiner to own a selection of logistical assets. Nevertheless, these assets, combined with Western's current structure and potential for restructuring, make the company more attractive than many of its peers.
The bottom line
The refining sector has fallen out of favor with investors recently, however Western remains attractive.
Indeed, Western has the potential to restructure its sprawling business in order to unlock value from its ownership of Northern Tier and Western Logistics. That being said, I should state that as of yet Western has no plans to undertake the suggested restructuring. Nevertheless, Western's potential remains attractive.
