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Actionable news in WNR: WESTERN REFINING Inc,

Western Refining Mid-Cycle Valuation Offers 100% Upside

Summary

Short-term upside is nearly 50% from current share price.

Shares offer +7% dividend yield while you wait.

WNR has an attractive asset base and above-average profitability.

This article will analyze Western Refining, Inc. (NYSE:WNR).

Key Statistics as of July 31, 2016

Closing Price:

$20.85

Desired Entry Point:

Wait for support to be established

Price Target: 1y/3y

$30/$39

Return to Target:

44%/87%

52-Week High:

$50.71

52 Week Low:

$18.14

Reporting Currency:

USD

Sales (prior year)

8,924 M

Market Cap

1,800 M

Shares Outstanding

94 M

Float

74 M

Cash

593 M

Total Debt

1,659 M

Equity

1,219 M

Debt/Equity

1.36x

ROA

5.77%

ROE

27.69%

Operating Margin

8.44%

Net Profit Margin

3.71%

DCF Intrinsic Value

$35

Cost of Equity

11%

Forward Div %

7.57%

Dividend Payout Ratio

41%

Trailing P/E

5.58x

Est. Fwd P/E

10.44x

Fiscal Year End

Dec 31

Click to enlarge

Company Description

Western Refining is a small-scale refiner with above average profitability for its industry and boasting an attractive asset base. The company only has three refining facilities which produce approximately 253,000 bbl/day after accounting for the acquisition of full control in NTI earlier in the year. Previously, the company owned a 38% interest in NTI and in the years prior to 2014 the company had only two refineries with production capacity of 152,000 barrels. Therefore, production capacity going forward will be 30% higher than the most recent operating history that included 38% ownership of NTI and approximately 60% higher than in the previous business cycle before WNR initiated its stake in NTI.

The NTI acquisition was paid for with $860M in cash and an offering of 17.1M shares dilutive to the share count. Our fair value calculations will have to account for the effect of the NTI acquisition on WNR's resulting capital structure.

The consensus opinion is that the best thing about WNR is the strategic positioning of their refineries. The three refineries are located in close proximity to the Bakken and the Permian Basin. Oil production in recent years has been highest in these regions, creating an oversupply of crude which allows WNR to purchase this crude at a discount, directly assisting gross margins. This is a direct cost saving compared to other refiners who don't exclusively operate in these two regions. The increased production in both the Bakken and Permian Basin regions during the most recent oil cycle resulted in significant discounts on the crude that WNR would purchase which led to improved gross margin profitability and cash flow yield in the past 5 years during the shale oil boom, compared to the previous business cycle that took place prior to 2009.

Given the oversupply of crude in the Bakken and Permian Basin regions, oil producers are disappointed that their product is receiving discounted prices when they sell to refiners. This has led to plans to build more pipelines to take crude out of the local Bakken and Permian Basin regions to areas where the price will not be so heavily discounted. Even still, those crude producers will have to pay to have their crude shipped. At the same time, crude staying local with WNR's refineries will not have to be shipped, saving the producers from paying these transport costs. WNR stands to capture some of these cost savings as they will be passed on from the producers and shared with WNR. Therefore, the advantageous location of the refineries is still relevant even after accounting for oncoming pipeline infrastructure.

Investment Thesis

Once again, we have another investment thesis primarily based off of an opportunity that the short term-ism of the market is providing us. This company's share price has been heavily discounted over the past 12 months as we reach what would seem to be a cycle trough for refineries. Research shows that there are 5 refinery stocks with at least 4 or 5 star ratings according to Morningstar. This tells me that the team at Morningstar believes the industry is currently undervalued and the long term outlook for this market is much better than what is currently being priced in.

This also happens to be what I believe to be the case given historical operating performance relative to today's conditions. What the market is failing to appreciate today is that market conditions for these refineries will eventually recover and return to some level of normalized operating conditions. For the purposes of long-term investing, mid-cycle earnings and valuations are how the company should be valued.

Industry

Some of the larger players in the refining industry include multinational integrated companies like Exxon Mobil, Chevron and BP. However, those companies are balanced between upstream and downstream operations so let's focus exclusively on companies whose primary business is refining, as is the case with WNR.

A peer review analysis of refiners yields the following results:

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Market Cap (m)

P/S

P/B

P/E


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