The WNR/Giant Epic Fail

Per my post on Seeking Alpha, here are some more details on this deal by WNR to borrow over $1B in long term debt to buy the Giant refinery in Yorktown VA in 2007: This was such a monumentally bad deal that business students will be studying it for generations....

At the time the deal was made, the 70,000 bpd heavy crude refiner sold at $1.12B, which is almost $19,000 per BOD capacity. I can understand the desire for the company to increase its heavy crude refining capability, but the $19000 per BOD is greater than a lot of the greenfield projects were going at the time of the deal...

As we mentioned earlier, just to service this debt, the company needs $1.45 per barrel refining margins for the foreseeable future just to pay the debt, and a total of $13-14 to approach being an investment. Current is about $11, Assuming they wanted to make a profit on the deal, their internal analysis must have been telling them that the refining margins were going to be much higher than that....We all know how that worked out. To be fair, a reasonable analyst might have known that this level was pretty close to the long-term industry average for refining margin.....so maybe they were a bit of a victim of the recession.

At the current price of $5.30 per share, WNR can literally be purchased for the value of what they have in the tank farm, and that is probably optimistic. Assuming for the moment that you did this, you would in effect be buying the refining capacity of 220,000 barrels per day for the price of the $1.1B in debt. This comes out to about $5100 per BOD capacity, laughable in light of the $19000 per BOD capacity that they paid for Giant.

To continue the laughability, the Giant facility was bought when WNR was at about 45 per share. Since then nearly 90% of the market capitalization of the company has vanished. Assuming that same ratio, the same deal today might have been only $100M or so and could have been financed out of cash. Recently Valero sold their Delaware City refinery for $220M, at 220,000 bpd capacity this amounts to $1000 per BOD capacity. Timing is everything.

To further the thought exercise, the current value of Valero's 2.8 million barrels of refining capacity is $10.1B in market capitalization, which equates to about $3600 per BOD capacity, which is still greatly lower than the $5100 that WNR would be worth if you incurred the $1.1B debt, so you can assume from that that WNR is at least 40% overvalued at the current price.

WNR only has about $25M of cash on hand. They are 100% at the mercy of the people that they are using to roll over their debt. This debt could be restructured from the 11.25% per year that it currently is down to something more reasonable...somebody is going to have to take a writeoff.

WNR could, at some level, maybe $3 per share, be a buy for someone with deep pockets that could afford to take on the debt, or someone with a lot of credit at the current lower interest rates. FTO might be a candidate, no debt, lots of cash, similar business but in a different part of the country, but why would they? They might be able to get the desirable refinery later on if the company is split up. Valero: Forget it. They have too much capacity as it is......

It's interesting, the company is owned 40% by insiders, the remainder by the mutual fund people. Most of this group is institutionally owned at about 80%. I am thinking if this had been the case for WNR someone would have been a bit more conservative in their analysis, and thought better of the deal, or waited for a better price.

Unless the refining margins get to the highest levels in history for a sustained period, giving people some money, this will not go on much longer