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Western Refining, Inc. Message Board

  • northernhick22 northernhick22 Feb 14, 2013 3:20 PM Flag

    Education for all the non-believers

    this is an except from a My Watchlist acticle by Jim Mueller.
    "Two kinds of spread
    Western Refining makes its money between the cost of the oil it refines and the price at which it sells the resulting gasoline, diesel, aviation fuel, and other products. This is called the crack spread, a phrase taken from the nickname for the chemical process of "cracking" the oil into its derivative products.

    Yet the company has another advantage going for it, and that is the spread between the two popularly quoted prices of crude oil: Brent and West Texas Intermediate, or WTI. Oil that is produced in the North Sea (and elsewhere around the world) is usually priced at the Brent price, while oil produced in central North America is usually priced at the WTI price. Historically, these two prices have been fairly close to each other, but in the past few years, Brent oil has become quite a bit more expensive, currently about $20 more per barrel than WTI-priced oil.

    The reason is that the supply of oil coming from central North America has increased a lot, which has driven the price down. Western Refining is taking advantage of that situation, because it buys WTI-priced oil but sells the products into markets where the price is determined by Brent-priced oil.

    Right now, the market is pricing shares as if the company could produce no more than $480 million in FCF a year going forward (discounted at 15%). Yet the company produced more than $750 million over the past year.

    I think the disconnect comes from the belief that the glut of oil at Cushing is going to be relieved fairly soon, by either reversing the flow direction of oil pipes connecting it to refineries located along the Gulf Coast, building new pipelines, or shipping oil by rail down to the Gulf. (These refineries tend to use Brent-priced oil.) This would relieve some oversupply pressures at Cushing, letting the price rise and reducing the arbitrage that Western Refining is currently enjoying.

    While the oversupply at Cushing is probably going to be solved, eventually, I don't think it's going to happen as quickly as the market believes. New extraction techniques are part of what is contributing to the oversupply in the first place, and those aren't going away. Plus, new pipelines bringing oil into Cushing are in the works. Even a new pipeline being built between Cushing and Houston (with completion expected later this year) is thought not to be enough to relieve the oversupply.

    Given all that, I believe that Western Refining's advantage is going to last longer than believed, which is why I'm willing to buy more, now, adding to my position."

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