Western Refining Thrives In Our Post-Gustav World
Unlike everything else in today's oil/commodity crash, WNR continued its steady ride higher.
As some of you know, I pitched WNR $10 calls at 35 cents as a good idea last week. Now, one Hurricane Gustav later, WNR is one of the few Hurricane plays (homebuilders being the other) trading higher. WNR rose 13 cents (1.5%) in volatile trading today. What does this mean for the future?
The picture at WNR now: Obviously the hurricane play didn't quite work. However, the other thing that bullishly drives refiners is now in play: declining oil price. Western carries roughly ~$750 million in oil inventory at any given time according to the Q2 conference call... guess what... they suddenly have to carry less inventory now, to the tune of 5% ($37 million or so less) than last week. The company was celebrating a $60 million tax refund in the CC... certainly extra cash on hand is good for a company needing to raise cash. The price of gas has fallen slower for WNR meaning they are getting a higher profit margin while carrying less inventory... this is refiner heaven. Plus, gas at $3.25-$3.50 should stimulate demand for gasoline thus boosting spreads further.
Also at work, WNR is selling off its logistic black sheep: The Yorktown Refinery. I expect that this sale will be interpreted as bullish since the inflow of cash will greatly strength the balance sheet and remove the cloud of doubt that overhangs the company regarding their debt covenates. Finally, we're looking at a much higher EPS number for Q3 as the company is enjoying the higher crack spread. At this level, the company can expect to make somewhere in the neighborhood of 25 to 30 cents EPS for Q3, thus doubling last quarter's EPS and leading to a respectable sub-10 P/E if this new range of EPS can be maintained. Remember, WNR sported a 4 P/E recently and will again if the crack spread gets cranking.
One more thing, besides oil, the other major input cost at WNR is nat gas. That dropped 9% today, but their product, gasoline, only dropped 4%... that's a 5% one-day increase in the profitably of using nat gas to turn oil into gasoline... that will boost earnings as well.
For all you dissappoined by today's WNR action post-Gustav, let me give you some numbers on the Hurricane Gustav plays:
Oil (USO) (-4.2%)
Nat Gas (UNG) (-9.47%)
Oil service (OIH)(-4.62%)
Exxon (XOM) (-3.35%)
Transocean (RIG) (-2.28%)
Gasoline (UGA) (-4.17%)
Gold (GLD) (-3.32%)
Beazer (BZH) (+6.03%)--only other hurricane play up on reasons that escape me.
and other refiners:
Tesoro (TSO) (-6.95%)
Valero (VLO) (-4.20%)
Alon (ALJ) (-5.99%)
Delek (DK) (-4.18%)
Western (WNR) +1.44%
Clearly Western is outperforming everything in sight. I'm still long the Sept $10 calls, the 275 physical shares of stock I own, and $5 March calls I owned going into Gustav, and I've added some Oct $12.5 calls as well as I fully except this 35 cent flyers to double as the stock nears $12 by the end of the month.