Trade Entry – Western Refining
This is a Buy recommendation to establish a position in Western Refining Inc. (NYSE:WNR). We made a nice 24% short term gain in WNR in the first quarter, and the company is again set up for a nice gain, either short term, or between now and the end of the year.
There is a laundry list of reasons to buy WNR:
- The refining sector has been very profitable year-to-date and refining margins just keep getting wider. I track a crack spread based on NYMEX spot prices for WTI crude, unleaded gasoline, and No. 2 Diesel fuel. For the second quarter, my tracked crack spread widened by $1.18 per barrel. If WNR realizes a similar operating margin gain, gross profits from its two owned refineries will be 10% higher in Q2 compared to Q1.
- Western Refining controls and owns 38% interest in Northern Tier Energy LP (NYSE:NTI). Northern Tier is a variable distribution refining MLP. Western received the Q1 NTI distribution in Q2, which was more than double the $17 million received from the MLP in Q1. This will show up in the WNR cash flow statement, but not consolidated earnings.
- Western Refining controls and owns 66% of midstream MLP Western Refining Logistics LP (NYSE:WNRL). WNRL is growing distributions by 4.5% per quarter, so LP and incentive distribution rights to WNR will go up by at least 7% for the quarter.
- The consensus earnings estimate for Q2, is $1.33 per share, compared to $1.29 earned a year ago and $1.18 reported for 2015 Q1.
- A 10% increase in EBITDA for the quarter would be $31 million, which should fall all the way to the bottom line. That amount of cash flow works out to $1.50 in EPS for the quarter.
The signs point to a blow-out quarter for WNR, and the company should handily beat the consensus EPS estimate. At the same time, the share price is down $2.00 from where we closed out the position in March and $4.00 below the $50 peak hit in late March. The market has not priced in how much more profitable the refining companies were in Q2. Quarterly earnings will be announced on August 4 before market open.
The crack spread has continued to spread in the first few weeks of July, so refining profits should continue to increase. Western also has a history of paying large year-end dividends. The initial trade goal is a quick 10% gain on the earnings announcement. If the market doesn’t react as expected, the trade can stay open as long as the crack spread remains high enough to support a large bonus dividend later this year.
Trade recommendation: Buy WNR up to $47. Target price: $51.75. WNR is a 1099 tax reporting company.