Should You Hold Western Refining (WNR) Amid Crude Rally?

We issued an updated research report on oil refiner and marketer Western Refining Inc. (NYSE:WNR) on May 24, 2016. The company expects demand for gasoline – the refined petroleum product that the company sells – to escalate during the second quarter. Moreover, although crude has started seeing momentum, it is still way below the level it touched during its glorious days, resulting in low input cost for the company.

However, policies to reformulate fuel and lower emission from refinery operations may hamper earnings going forward as the company needs to divert cash flows to ensure regulatory compliance.

The company currently carries a Zacks Rank #3 (Hold), which implies that the stock will perform in line with the broader U.S. equity market over the next one to three months.

Western Refining is one the largest independent oil refiners in the U.S. with a combined crude oil processing capacity of approximately 151,000 Bbl/d. A major advantage is the company’s proprietary access to pipelines, which inhibit lower-cost competitors from supplying to Western Refining's key markets.

Most importantly, the company expects demand for its end products like gasoline to remain strong. On top of that, raw crude – input for producing gasoline – closed at $48.62 per barrel yesterday, much higher than the 12-year low mark that the commodity touched in mid February, but still way below its $100-per-barrel level during mid-2014. Hence, the combination of low input cost and strong product demand might help the refiner to earn considerable cash flows in the near term.

However, in an effort to reduce pollution, the Environmental Protection Agency recently outlined a proposal that would require refiners to significantly reduce sulphur content in gasoline starting from 2017. To comply with the new standards, Western Refining will have to increase its capital expenditures, which will adversely impact earnings and cash flows.

Moreover, Western Refining delivered an average negative earnings surprise of 13.80% in the last four quarters despite low oil.

Stocks to Consider

Better-ranked players from the broader energy sector include McDermott International Inc. (NYSE:MDR) , PetroChina Co. Ltd. (NYSE:PTR) and Murphy USA Inc. (NYSE:MUSA) . Each of these stocks sports a Zacks Rank #1.

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