TEXT-S&P raises rating on Western Refining to 'B+'

Thu Aug 30, 2012 5:19pm EDT

Overview
     -- U.S. refining company Western Refining has paid down a considerable 
amount of its debt since 2010. We expect leverage to be below 1x for 2012.
     -- We are raising our corporate credit rating to 'B+' from 'B'. We are 
also raising the ratings on the senior secured debt to 'BB' and ratings on the 
unsecured convertible issue to 'B+'.
     -- The stable outlook reflects our expectation that the company will 
continue to maintain the current level of debt while keeping a base level of 
cash flow even in mid-cycle conditions.

Rating Action
On Aug. 30, 2012, Standard & Poor's Ratings Services raised its corporate 
credit ratings on U.S refining company Western Refining Inc. (Western)
to 'B+' from 'B'. We also raised the rating on the senior secured debt to 'BB'
from 'B+' and changed the recovery rating to '1', indicating a very high
recovery (90% to 100%) in case of default. In addition, we also raised the
ratings on the unsecured convertible issue to 'B+' from 'CCC+' and changed the
recovery rating to '3', indicating a meaningful recovery (50% to 70%) if a
payment default occurs.

Rationale
The rating on the El Paso, Texas-based  company reflects its considerable debt 
reduction over the past two years, its access to discounted feedstock crudes, 
and its ability to benefit from currently wide crack spreads. Western has paid 
off about $860 million of debt since 2010, including $322 million paid off 
this year. As of June 30, 2012, Western had adjusted debt of slightly more 
than $622 million, the trailing 12-month debt to EBITDA ratio is down to about 
0.5x, a considerable improvement from year-end 2010 when adjusted debt was 
about $1.13 billion and the debt to EBITDA ratio was more than 4x. The company 
also benefits from access to light sweet crude from the Permian shale plays, 
which it can access directly from the well-head at a discount to the Midland 
prices it pays for its remaining feedstock. These strengths are somewhat 
offset by its small size, lack of asset and geographic diversity, exposure to 
the cyclical and capital-intensive refining industry, and volatile operating 
margins. Ratings also reflect its "adequate" liquidity (as defined in our 
criteria), and decent proceeds from selling its Yorktown facility and a 
segment of its New Mexico crude pipeline. 

Standard & Poor's characterizes Western's financial risk profile as 
"significant". We think that profitability and credit measures will continue 
to be strong in 2012, given the company's access to lower priced crudes, its 
current hedging position and the potential that the Brent-West Texas 
Intermediate (WTI) benchmark price differential will continue to be wide in 
the near term. Western buys crude at WTI prices and sells products at 
currently higher Gulf Coast and West Coast prices. We expect debt to EBITDA to 
remain around 1x for 2012 and below 2x, even in mid-cycle conditions. 
Profitability was strong in 2011, with help from the historically wide pricing 
differential between Brent and WTI, which peaked at more than $25 per barrel 
in mid-October 2011. The company's hedges on gasoline and distillate 
production in 2012 (about 25% and 45%, respectively) are also favorable for 
credit quality, because they provide modest visibility to an otherwise 
cyclical credit profile.

We consider Western's business profile to be "weak". The refining industry is 
highly cyclical, given the volatility between crude oil input costs and 
consumer demand. Furthermore, fixed costs are high for refiners because 
regulatory spending requirements and inventory purchases can be significant. 
Unplanned downtime among refineries is also common. Nevertheless, Western has 
generally done a good job avoiding unplanned downtime (notwithstanding about 
two weeks of weather-related downtime at its El Paso facility in early 2011). 
We consider Western to be a good operator and expect future unplanned outages 
to be a limited credit risk.

Western is relatively small and has limited geographic diversity (both of its 
refineries are in the Southwest), with a combined throughput capacity of about 
151,000 barrels per day (bpd) and medium complexity (about 80% of the crude 
slate is light-sweet). Western's El Paso and Gallup refineries performed well 
throughout 2011, particularly relative to coastal refineries in the East (PADD 
I region) and West (PADD V), with industry indicators such as gasoline and 
diesel margins rebounding, and robust demand in key Southwest markets such as 
Phoenix). Western gets a substantial portion of its crude from the Permian 
Basin, which prices off of WTI, further benefiting margins relative to its 
coastal peers that use the more expensive waterborne crudes such as North Sea 
Brent or Louisiana Light Sweet. For 2012, we expect the WTI and Brent 
differential to narrow from the historically wide 2011 level, given a shift in 
pipeline dynamics that should partially mitigate the supply glut at the 
Cushing, Okla. hub.

Western produces various grades of gasoline, diesel, jet fuel, and, to a 
lesser extent, asphalt from residual refining materials. Demand for these 
products can be seasonal, with gasoline strongest during the summer and spring 
and diesel highly correlated with the economy, because it is used mainly for 
trucks and trains to transport products. Western benefits from its proximity 
to a pipeline hub that supplies the Southwest, providing some transportation 
cost advantages relative to regional competitors. Performance is tied to West 
Coast and Gulf Coast margins. In the first quarter of 2012, the Gulf Coast 
3-2-1 averaged around $25 per barrel (still considerably higher than the $18 
in first quarter of 2011). 

Liquidity
Western's adequate liquidity position reflects the following expectations and 
assumptions:
     -- We think that over the next year, Western's sources of liquidity 
should comfortably exceed uses, even if EBITDA falls by 15% to 20%.
     -- As of June 30, 2012, sources of cash include $346 million of cash- and 
cash equivalents, and availability on its revolving credit facility of about 
$440 million. Our expectation for funds from operations is about $260 million 
for the current year.
     -- We project that capital spending requirements in 2012 will total about 
$160 million, 40% of which relates to discretionary growth projects. We 
believe the company will pay dividends at its discretion, depending on its 
performance. There are no significant long-term debt maturities in the near 
term. 

While the sources and uses point to a "strong" descriptor, more qualitative 
factors--such as capital market access, collateral posting requirements 
related to the company's hedges and the refining sector's highly volatile cash 
flows--limit our liquidity descriptor to "adequate".

Recovery analysis
The issue-level rating on Western's senior secured debt is 'BB'. The recovery 
on this debt is '1', indicating our expectation for very high (90% to 100%) 
recovery if a payment default occurs. We also raised the ratings on the 
unsecured convertible issue to 'B+' from 'CCC+' and changed the recovery 
rating to '3' indicating a meaningful recovery in case of default. For the 
complete recovery analysis, see Standard & Poor's recovery report on Western 
to be published shortly on RatingsDirect. 

Outlook
The stable outlook reflects the strong credit measures given the recent debt 
pay-down and our expectation that Western will maintain adequate liquidity 
despite potential volatility in refining margins. We could lower the ratings 
if Western cannot maintain adequate liquidity throughout the refining cycle or 
we expect a considerable decline in operational performance, such that debt to 
EBITDA increases beyond 2.5x consistently, in mid-cycle conditions. An upgrade 
is unlikely given the company's small size and lack of diversity. However, we 
could consider it if the company significantly improves its business risk 
profile by increasing the size and diversity of its refining assets or starts 
to get more cash flows from stable sources such as its logistics assets. 

Related Criteria And Research
     -- Key Credit Factors: Criteria For Rating The Global Oil Refining 
Industry, Nov. 28, 2011
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Key Credit Factors: Business And Financial Risks In The Oil And Gas 
Exploration And Production Industry, Nov. 10, 2008

Ratings List
Ratings Raised
                           To              From
Western Refining Inc.
 Corporate Credit Rating   B+/Stable/--    B/Stable/--
 Senior Secured            BB              B+
  Recovery rating          1               2
 Senior Unsecured          B+              CCC+
  Recovery rating          3               6


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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