Energy downstream operator Western Refining Inc. (WNR) has announced plans to buy back $200 million of its common stock. This program is over and above the ongoing share repurchase scheme of $200 million, which was approved by the Board of Directors in Jul 2012. Under the previous authorization, the company has already spent roughly $199.5 million to buy back some 6.77 million shares of its common stock through Apr 5, 2013.
As of now, Western refining has about 87.6 million shares outstanding. A share repurchase at the company would lead to a lesser number of outstanding shares, escalating its earnings per share ratio, even if profits remain the same.
We believe the new buyback plan not only highlights the oil refiner’s commitment to create value for shareholders but also underlines the confidence in its cash generating abilities.
Western Refining is one the largest independent oil refiners in the U.S. with a combined crude oil processing capacity of approximately 151,000 barrels per day. A major advantage for the company is its proprietary access to pipelines, which inhibits lower-cost competitors from supplying Western Refining's key markets.
In particular, Western Refining’s easy access to the lower-priced West Texas Intermediate (WTI) crude gives a cost advantage that is reflected in the company’s high gross margins vis-à-vis its peers.
Further, we believe that the company has done a very impressive job at reducing its leverage. Having made debt reduction a priority – which reflects a supportive financial policy – Western Refining management was able to trim total debt by more than $550 million during the last four quarters.
However, we think that the current valuation is fair and adequately reflects the downstream operator’s future growth prospects. Western Refining is also faced with volatile industry fundamentals and limited geographic diversification, which may further limit its ability to generate positive earnings surprises.
Western Refining currently carries a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.
Meanwhile, one can look at Range Resources Corp. (RRC), Enerplus Corp. (ERF) and Stone Energy Corp. (SGY) as good buying opportunities. These North American energy explorers – sporting a Zacks Rank #1 (Strong Buy) – have solid secular growth stories with potential to rise significantly from current levels.
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