Western Refining Debt Restructuring

We wrote in a previous blog entry about the epic catastrophe that befell WNR's decision to buy a 72Kb/d refinery in Yorktown VA.

To recap, these fellows borrowed $1.12B and bought this refinery at the absolute peak of the market, paying on the order of $20,000 per barrel of capacity. This spring, they finally gave in and shut the doors on the place, they are going to use the location as a terminal, and they are going to "monitor conditions", with the idea that they could restart the place.

In the meantime they have the ongoing problem of the $1B of long term debt.

They had a stock offering this spring which managed to raise $150M thus paying off the current portion.....

Their interest expense is $34M per Quarter, as of the most recent quarter. this amounts to approximately $2.75 per barrel of refined product....

So....

As long as the refining margins stay high enough so that they can continue to service the debt, plus provide a little profit, they can make the current situation last for a long time. This is obviously not a desirable situation, but they have some prospects to make it work.

Their strategy also involves rolling out the long term debt that is coming due by issuance of five-year notes, at high interest rates. The notes issued in the first quarter this year had a face value of more than 11%, so on that basis, if you really, really had confidence in this business, this would be a pretty interesting way to play it.

The question comes up: Could the sell the plant for some amount of money, and based on the analysis we did earlier on the current value in the marketplace for refinery capacity, it is unlikely they could get more than 4000 per BOD of capacity, or about $280M for the plant. This is so far below the value of this place on WNR's books that the likelihood of it happening is practically zero.

WNR has also been quite successful with working with their bankers using a revolving credit arrangement to roll out the remainder of their long term debt as it comes due. I suppose if you look at it from the bank's point of view, as long as WNR is able to service the debt, it makes no sense to pull the rug out from under them under the theory that if you owe someone $100 you and cannot pay it back you have a problem but if you owe someone $1B and cannot pay it back, THEY have a problem.... so as long as the margins are strong enough that WNR can continue to service the debt, the game will continue.

At some point, in theory, refining margins will go back up to some reasonable level, the light/heavy crude oil differential will re-widen again, and they will be able to start this refinery back up, and at that point it will have some value in the marketplace.

Until then, nothing is going to happen on this, the situation is not good, but it is stable, and a plan is in place for the medium term survival of the company, until such time, if any, that the margins get back to where they were.

Note: If we do have a double dip, or even worse, if we get into a situation where the feedstock costs go way up but the refining margins stay stable, then these guys are going to be in a heap of trouble, like they used to say.

In the meantime, Morgan Stanley likes their plan, they have upgraded the stock, and that is another interesting development. We will see what happens.