Western Refining Inc (WNR.N) reported a 37 percent fall in quarterly net profit due to weak margins, but said refining margins were recovering as the company accesses cheaper crude.
The company's refining margin fell to $25.69 per barrel in the second quarter from $34.58 per barrel a year earlier due to a rise in costs of the crude it processes.
Western Refining said on Thursday that it started operating its Delaware Basin crude gathering system during the second quarter giving it access to low-cost crude oil for its El Paso refinery in Texas.
The company, which also has a refinery near Gallup in New Mexico, has benefited in recent years due to its proximity to the Permian Basin and access to cheaper Mid Continent crudes.
Western Refining said hedges also helped offset the pressure on refining margins in the second quarter.
The company, like other inland refiners, purchases low-cost U.S. crude and sells refined products, such as gasoline and diesel, at prices linked to the more expensive European benchmark, Brent.
However, the cost benefit is eroding due to rising crude prices in the United States. The premium of North Sea Brent to U.S. benchmark West Texas Intermediate was $2.51 on Thursday, down from about $20 for most of 2012.
Rising ethanol credit costs, which have shot up in recent months due to a feared shortfall next year, are also weighing on refinery margins.
Refiners need the credits, or Renewable Identification Numbers (RINs), to prove they are meeting gasoline blending targets set by the U.S. Environmental Protection Agency.
Western Refining said on Thursday its growing wholesale and retail businesses generated enough RINs to satisfy a significant portion of its obligations.
Net profit fell to $149.3 million, or $1.46 per diluted share, in the second quarter, from $238.5 million, or $2.19 per share, a year earlier.
Sales fell nearly 2 percent to $2.43 billion.
Western Refining shares closed at $30.13 on Wednesday on the New York Stock Exchange. The stock has risen about 29 percent in the past year.
(Reporting by Swetha Gopinath in Bangalore; Editing by Sriraj Kalluvila)