Western Foreshadows Poor 2Q Earnings For Refining Sector

Western Refining Inc.'s (WNR) early prediction of a poor second quarter signals a rough conclusion to first half of the year for most oil refiners.

This quarter independent refiners have been hit with low margins, the increasing cost of crude oil, and a contraction in a trading benefit known as contango, which in the first quarter helped the sector bring in profits. On top of that Western has burdensome interest payments and has decreased production at its El Paso, Texas refinery while it undergoes maintenance.

In a federal filing Monday, Western estimated that its second-quarter operating income will range from $5 million to $25 million. For the second quarter of 2008, Western reported a net income of $8.2 million, a 94% decreased compared with the same period in 2007.

"Even if Western were to come in at the top end of its guidance, we would still expect a loss," Credit Suisse analyst Mark Flannery wrote in a note to clients Tuesday. "We believe that there is growing evidence that weak realized margins are not confined only to Western."

Margins, however, can be volatile. Caris & Co. analyst Ann Kohler said margins were poor in April and have improved in May. In the last week of May, refining margins averaged about $10.63 a barrel of crude, compared with the last week of April when margins were at $9.94 a barrel.

"We still have a month left to go so we can't completely write things off," Kohler said. "I'm not expecting anyone else to have a loss... (but) consensus estimates for the group is too high."

The group includes Holly Corp. (HOC), Frontier Oil Corp. (FTO), Valero Energy Corp. (VLO), Sunoco Inc. (SUN) and Tesoro Corp. (TSO).

Western's early forecast was prompted by its offering Monday of 14 million common shares, $100 million of convertible senior notes and $600 million of senior secured notes.

The El Paso-based company was forced to offer debt and equity because it could not sell its Yorktown, Va., refinery to pay off existing debt covenants, Kohler said.

"They really need to escape the clutches of those covenants," Kohler said. "Their inability to sell their assets really forced them into this mode."

The company put the 63,000 barrel-a-day refinery on the block last year but has been unable to find a buyer in the economic downturn. Part of the company's existing debt covenants relate to the acquisition of this refinery and two others from Giant Industries in 2007. In addition to the El Paso and Yorktown plants, Western operates two refineries in New Mexico.

Western was just one of three independent refiners taking on debt in the last 24 hours; Holly and Tesoro both announced offerings of senior unsecured notes.

The debt raising was a way for the companies to cover future capital expenditures, Chi Chow, an analyst with Tristone Capital Co. in Denver, wrote in a note to clients.

Chow said the debt will help Tesoro deal with the rising cost of crude and the weak margins - part of what is pressuring most of the sector this quarter.

-By Susan Daker, Dow Jones Newswires; [phone]; [e-mail]