“You’re damned if you do and you’re damned if you don’t” — that seems to be the prevailing mantra when placing a bet on an oil recovery. While oil prices have — somewhat — stabilized, the price of crude is still some 40% below its June 2014 peak.
The “new normal” is what the market is working to adjust to. Regardless of the immediate direction oil prices take, it’s tough to bet against Western Refining, Inc. (NYSE:WNR), which processes crude oil into various usable products like gasoline and diesel fuel.
Unlike the bigger names in energy, Western Refining continues to figure out a ways to keep its profits climbing, making WNR stock a solid growth producer for any portfolio.
A Refined Advantage
WNR, headquartered in El Paso, Texas, is not a well-known name. Although, by now it should be. Investors who understand how refining makes money have banked on WNR stock while the oil majors rushed to slashed capital expenses budgets to remain above water.
Amid all of the turmoil, it was business as usual for Western Refining, sending WNR stock up more than 16% so far on the year, dominating the 4% gains in the Energy Select Sector SPDR (ETF) (NYSE:XLE).
Why has WNR and WNR stock done so well? Unlike energy companies that specialize in the exploration and production of oil and gas, refiners like WNR make their profit margins based on the difference of what it costs WNR to produce oil products — something known as the a “rack.” This is the wholesale price of what WNR and other refiners — in general — sell out of the refinery.
The profits, then, stem from a lot of things, including refinery capacity, product inventories, the cost of crude oil and how much it cost to transport oil. But here’s the thing, Western Refining is able to capitalize on higher crude and West Texas Intermediate prices by passing the higher prices to distributors and consumers.
The oil majors and the onshore and offshore drillers, which sensitive to the direction of oil prices, don’t have such a benefit and thus have to cut spending. In some cases, oil majors and the onshore and offshore drillers have had to cut dividends, too.
Moreover, unlike exploration and production companies, Western Refining can still operate profitably amid weak oil price environments since it can maintain its margins by passing on these costs. And these proved beneficial again Tuesday when WNR reported first-quarter earnings.
Solid First-Quarter Results
Lower costs helped Western Refining deliver a 24% year-over-year jump in first-quarter earnings Tuesday. For the quarter that ended Mar. 31, WNR profited $106 million, or $1.11 per share. On an adjusted basis, taking out one-time gains and costs, WNR earnings were $1.18 per share, enough for a beat of 16 cents per share. Now, let that marinate for a second.
CEO Jeff Stevens said in a statement:
“[We’re] Building on momentum from the first quarter, the second quarter is off to an exceptionally strong start.”
In an environment where the large oil majors and drillers are cutting capex, ending projects prematurely and lowering profit forecasts, here’s a company that is raising the bar. And even better, Western Refining is beating earnings estimates by around 16%.
Essentially, analysts have yet to fully understand the advantages Western Refining has or — for that matter — the value in WNR stock.
But here’s why WNR earnings beat really stand outs. Western Refining posted revenue of $2.32 billion, marking a 37% decline year over year. Essentially, revenue in this business is secondary because Western Refining can extract value by squeezing as much profit it can from each dollar in brings in.
Now imaging if oil prices wasn’t a factor? Assuming revenue for the quarter was, say, 10% higher at $2.55 billion. It’s possible the earnings-per-share number would have been 1 cent higher, adding to an already-exceptional number.
Bottom Line
The obvious question is: What’s not to like?
Despite Western Refining’s solid performance and the gains already seen in WNR stock, the shares are cheap and trading at just eight times earnings. At around $44 per share, and adding a 13 multiple to this year’s estimates of $4.39, I come to a fair value of $55 for WNR stock in the next 12 to 18 months. Add in the 3.07% annual dividend yield paid out by WNR stock, and you’d be damned not to own it.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
