-- 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.
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.
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).
Western's adequate liquidity position reflects the following expectations and
-- 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
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".
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.
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
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