Western Refining (WNR)

Presentation at Deutsche Bank Leveraged Finance Conference

October 13, 2011 8:35 a.m. ET


Jeff Beyersdorfer - Treasurer and Head of Investor Relations


Kathryn O’Connor - Deutsche Bank


Kathryn O’Connor

Good morning, and welcome to day two of the Deutsche Bank Leveraged Finance Conference. My name is Kathryn O’Connor. I cover energy here at Deutsche Bank on the high-yield side. First up, in terms of our energy companies, is Western Refining. From the company we have Jeff Beyersdorfer. He’s the treasurer and head of investor relations.

Jeff Beyersdorfer

Good morning. Thanks for coming. Again, my name is Jeff Beyersdorfer, treasurer and head of investor relations. If you don’t mind, I’m going to walk around a little bit as I make remarks about the slides.

Over the next 25 minutes, I want to talk about three topics, or hit three things. One is a brief overview of our asset base and the markets in which we operate. Number two, talk about the well-documented already WTI Brent Spread, both what implications that has for us from an operational perspective and also from a hedging perspective. And then number three, spend a little bit of time on the capital structure of the company and talk about some of our initiatives for the capital structure longer term.

So quickly, a brief overview of the company. We’re mainly a Southwest-based/focused company. Two operating refineries, one in El Paso, Texas, one in northern New Mexico. Combined, about 150,000 barrels a day of production. We also have a retail business, about 206 retail stores, primarily in the four corners region of the U.S. We also have a wholesale business that distributes about 70,000 barrels a day of product from El Paso and Gallup.

We have some refined products terminals and asphalt terminals, and I’ll also touch on this during the presentation, we’ve got an idled asset on the east coast in the form of a Yorktown refinery. We idled it a little over a year ago. We’re operating it today as a terminal. And again, I’ll touch on this a little bit later in the presentation.

Here are the markets we serve. This is a slide that shows all the product pipelines, refined product pipelines, in the southwest, overlaid with our two refineries. And as you can see, El Paso kind of sits at the hub of this hub and spoke system. It’s a gateway for all the refined products to the west. And the major markets we serve are El Paso itself. We also serve Juarez, Mexico, Phoenix, Tucson, Albuquerque, and Flagstaff, Arizona.

And we think we’ve got a little bit of a unique advantage given our geographic location on the pipeline system, given that the gasoline specs in the southwest are fairly patchworky and require different grades of gasoline, different grades of fuel, during different times of the year. And we think, because we’re at this hub of the hub and spoke system, we can blend those products in El Paso and deliver them on perhaps a just-in-time basis relative to some of our competitors.

This slide, one of the equity analysts has, for a couple of years, ranked the independent refiners on a refinery basis - this is all publicly available information - on an operating margin per barrel basis. And you can see the yellow highlights are our El Paso and Gallup refineries, and we’ve moved up to the top quartile of this ranking over the last year and a half or two years.

But more interesting than that, though, is the common theme that all of these top-ranked refineries have. That is, they sit on top of their crude source, number one. This is not a demand-driven margin environment today we’re in. It’s a crude-driven environment. So they all sit right on top of their crude source. Number two, they tend to be smaller, inland-based refineries. So there are some common themes for those that are doing fairly well on a margin per-barrel basis versus everyone else.

Okay, a couple slides on the WTI Brent Spread. So it’s been, as I said, fairly documented by a number of folks out there what’s transpiring in the U.S. domestic crude market. Again, quick summary. Historically, WTI and Brent have traded at parity, or close to parity. And at the beginning of this year, those two benchmarks started to break apart, or disaggregate in terms of their pricing, with WTI now trading at about $24-25 less than Brent crude.

And that’s primarily driven because of some technologies that have now been introduced, hydraulic fracking, horizontal drilling, in some mature fields - the Permian, the Bakken, Eagle Ford - and we’re now seeing a number of independent producers, as well as large producers, forecast pretty significant volumes of crude.

So because of that, we’ve seen this disconnect between WTI and Brent, and the theory goes that until that crude, WTI, that has this forecasted significant production, can get to water, basically, can get to a home, it’s going to trade at a discount to Brent. And how does it find a home? Infrastructure has to be built. Rail in the short term, trucking in the short term. Longer term, pipelines.

And so most of the experts out there predict that it’s probably 2013 or so before all that infrastructure can be built and then these two crude benchmarks trade at parity or close to parity going forward. And in the meantime, those refineries, or those refiners - on the bottom right hand corner I list a number of them - that have exposure to that WTI crude - we by the way have about 100% exposure to that WTI crude - are going to enjoy this disconnect, and enjoy good margins until that infrastructure is developed out.

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