Western Refining, Inc. (WNR)

[Timothy Smith]

2013 EPS outlook is very solid. Investor temptations may be biased towards discounting WNR’s prospects now that WTI/Brent and Midland/Cushing spreads have narrowed significantly.

That would be a mistake, in my view. I see WNR’s earnings holding up well despite the tightening crude spreads due in large part to:

(1) the unique product margin strength in the company’s core Southwest region and

(2) advantaged pricing by approximately US$2.00/bbl based on increased crude sourcing directly from the Delaware Basin from the company’s new gathering system.

I am lowering my 2013 EPS estimates slightly to US$4.91 from US$5.09, but see potentially flat earnings into 2014.

As we previously suspected, WNR’s exposure to ethanol RIN pricing appears minimal given the company’s high level of direct ethanol blending of gasoline production. In addition to its Southwest terminal system, management indicated that WNR is generating RINs at its Yorktown, VA terminal facility that can be applied to meet the company’s renewable fuels obligation. I have previously estimated WNR’s RIN purchase costs at US$12m and US$34m in 2013 and 2014, respectively, based on a US$1.00/gal RIN price.

WNR appears increasingly focused on establishing a midstream master limited partnership (MLP) to monetize its rapidly growing logistics asset base. I see significant valuation upside for an MLP and estimated that WNR’s assets could generate US$77-102m of annual EBITDA and possible valuation upside of US$4.80-6.70/sh.

All in my opinion. Interested in any thoughts you may have to share.