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goldminingXpert (29.76)

Western Refining: It's Time To Buy

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August 07, 2008 – Comments (12) | RELATED TICKERS: WNR

Reported profit of 12 cents a share (would have been 24 if not for a tax write-off) this morning. Received ~$60 million in a tax refund boosting liquidity position greatly. Will be selling off one of their refineries to pay off a large chunk of debt but in the meantime they've secured a new credit line. At 24 cents a share per quarter profits, the company has a forward P/E of 8... and assuming oil continues to drop, they will make a mint. I listened to the CC, and the only thing the CEO wanted to talk about was reducing debt and boosting the balance sheet. This company is well-run and management has a good handle on what is going on. Plus, the short interest is gigantic and will soon be covering.

12 Comments – Post Your Own

#1) On August 07, 2008 at 11:11 AM, RVAspeculator (31.13) wrote:

I agree... picked up a small position today.

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#2) On August 07, 2008 at 11:12 AM, AnomaLee (28.88) wrote:

"the company has a forward P/E of 8... and assuming oil continues to drop, they will make a mint."

I will go against the consensus of CAPs All-Stars and tell you that it's absolutely insane to buy a domestic oil refiner....

I guarantee you that there will be bankruptcies next decade...

If you believe that much in this investment then I'd be willing write a derivative and sell it to you @ a set price 7-10 years in the future. After all the basis of trading is taking someone's money.

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#3) On August 07, 2008 at 11:16 AM, dpid (88.34) wrote:

If domestic demand is reduced, oil prices will drop as fast as they moved up.  Thereby, helping refineries over the short term.

If anything, it will help refineries stay in business for a little longer and at worst, refineries would be sold or companies bought.

I'm seeing little downside here.... what am I missing?

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#4) On August 07, 2008 at 12:01 PM, DemonDoug (92.48) wrote:

what you are missing is more oil going to Chindia where they are building more refineries and have government owned companies, which makes the global demand for oil go up while supplies remain flat, this will continue to squeeze margins of refiners, I didn't quite see this as a cause-and-effect before but I can see it now.  I don't think refiners will be going out of business, but I'm betting that most refiners will merge or be bought out by oil producing companies, or just swallowed up by the mega caps (CVX, XOM, COP etc.)

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#5) On August 07, 2008 at 12:31 PM, dpid (88.34) wrote:

DemonDoug,

 If these refiners get bought out or swallowed up by the big ones, would it be a good time to enter refiners as they have assets that are worth something?

 

I look at WNR and its has a P/E of 3.65 which is about half of all the other refiners.   

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#6) On August 07, 2008 at 1:01 PM, dpid (88.34) wrote:

DemonDoug,

 If these refiners get bought out or swallowed up by the big ones, would it be a good time to enter refiners as they have assets that are worth something?

 

I look at WNR and its has a P/E of 3.65 which is about half of all the other refiners.   

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#7) On August 07, 2008 at 1:20 PM, WillSurfForFood (88.01) wrote:

I don't remember any details but I seem to remember an article from a week or two ago where a major oil company was thinking of spinning off its transportation and refining business. My guess was they don't see long term margins improving for these businesses so they want to separate it from the more profitable exploration and production. Also wasn't Exxon planning on selling some of its gas stations? It is another business where margins get worse as the price of oil goes up. It seems to me industry is not in the process of consolidating.

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#8) On August 07, 2008 at 1:23 PM, TDRH (99.76) wrote:

As beaten down as this stock is I would agree.   There is a finite amount of refinning capacity in this country and huge barriers to entry.   I had a buy in at $6.50 a share, but it did not reach.    The slightest good news and this one could double.  

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#9) On August 07, 2008 at 1:29 PM, dpid (88.34) wrote:

DemonDoug,

 If these refiners get bought out or swallowed up by the big ones, would it be a good time to enter refiners as they have assets that are worth something?

 

I look at WNR and its has a P/E of 3.65 which is about half of all the other refiners.   

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#10) On August 07, 2008 at 1:31 PM, dwot (97.03) wrote:

8 million profit in a quater, 880 million debt...  That just doesn't look good.

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#11) On August 07, 2008 at 2:36 PM, goldminingXpert (29.76) wrote:

hey, they lost money the previous 2 quarters, +8 million is better than neg... you don't buy for present earnings, you buy for future earnings. Besides, they are selling one of the 4 refineries to pay off some of that debt. As soon as the crack spread reaches normal again this stock shoots the moon.

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#12) On August 08, 2008 at 8:14 AM, dexion10 (27.79) wrote:

SHORT THE REFINER RALLY - I'VE LOST HOPE FOR 90% OF THE INDUSTRY

IF YOU LIKE THIS POST - PLEASE RECOMMEND MY BLOG HERE:  

I saw a post earlier today by goldminingXpert encouraging people to buy a refiner WNR.

I too used to be a bull on the refiners but the investment thesis is broken. There is no reason to expect these businesses to return to their recent profitability - in fact they are all going to return to their prior multi-decade trend of creating no value at all. 

This industry will not be healthy again until some of the poorest refining assets are shuttered and capacity is reduced... WNR and TSO have some of the poorest assets so I'd worry about bankruptcy in both cases... longer term this should benefit VLO, FTO, HOC - as they have some of the best assets - and they will survive the cycle. 

 Reasons to Short Refiners AFTER a sustained rally higher:

+ New U.S. capacity will destroy margins

+ New Foreign capacity will destroy export markets (diesel)

+ High debt in a time of rising corporate refinance charges 

+ Lower U.S. demand further destroys capacity. 

 

The fundamental causes are gone and they are not returning. While crack spreads (margins) may widen in the short term there will be a lasting margin compression for the industry

 I implore the author to do so more research here - this is a  super dangerous trade to put on. I'll explain below... but quickly here are the bullet points

I've done lots of research on this industry for months and the only stocks I'd own in this space are VLO, FTO, HOC, MRO - and I wouldn't own any of them in the near term except FTO because I believe they'll be bought and they have premium assets and no net debt.

Most of the other independents are in jeopardy of going bankrupt... they are high cost producers in a shrinking market.  Their replacement cost doesn't even matter because in some cases the capacity isn't even needed over the long-term. 

I won't despute that you can own all of these stocks for a trade 

Refining is a pretty miserable business it has been for decades... if you look at all the refininers charts they were flat lines below $10 $20 for over a decade... that tells you that these businesses didn't increase intrinsic value ... they were just barely servicing large debt loads with skinny profit margins.

 

Refiners are doomed here is why:


Remember the only reason these refining stocks popped the last few years was that oil refining capacity was tight and these guys had wider margins (crack spreads).

Now we have negative trends and secular changes that are going to challenge this industry for years until the weakest refiners like WNR TSO ALJ are put out of business. 

 

++ DEMAND SHOWS NEGATIVE GROWTH

Now we no longer have tight capacity because the U.S. population is driving less and switching to fuel efficient cars. 

 U.S. CAPACITY

Did you know that there is more U.S. Refining capacity coming online via upgrades from other major refiners like Marathon Oil and Valero. 

 

++ CAPACITY

New refineries are coming online overseas so export markets for diesel which have been propping up U.S. refiners will no longer be as viable and pricing will be destroyed... Additionally some of the new Asian refineries are more modern than many of our U.S. facilities so they are more efficient at refining gas for lower prices.

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