Western Refining, Inc. reported a third quarter net loss of $4.8 million, down from net income of $109.2 million due primarily to lower refined product margins which were driven by weakness in finished product prices relative to crude and feedstock costs.
The company also reported that heavy and sour crude differentials remained tight, which negatively impacted margins at its refinery in Yorktown, Virginia, and, to a lesser extent, at the refinery in El Paso, Texas. The Yorktown refinery also experienced lower coking margins during the quarter.
Net sales in the third quarter dropped to $1.896 billion from $3.165 billion during the comparable 2008 period.
“Refining margins were depressed during the third quarter, historically a strong quarter for refiners, primarily due to the prolonged economic slowdown,” said Paul Foster, Western’s CEO.
In the third quarter, Western generated cash flow from operations of approximately $28 million and year-to-date has generated cash flow from operations of $148.6 million.
“Overall, margins declined substantially in the latter part of the quarter. However, we are pleased that fuel volumes and margins remained stable in our wholesale operations and that our retail unit had a strong quarter despite the challenging marketplace.”
In announcing its earnings results, Western said it will consolidate operations of its two Four Corners refineries into one at the Gallup refinery, which follows a thorough evaluation of its Four Corners assets in northern New Mexico. The refiner said the consolidation would eliminate certain operating costs of approximately $25 million a year beginning in the first quarter 2010 while maintaining the capability to process the same volumes of crude that have been recently processed at both Bloomfield and Gallup combined.
The company said it will continue to operate the Bloomfield products terminal and supply the Fourth Corners will refined products by utilizing new pipeline connection and exchange supply agreements. Western will also maintain its marketing assets, and through long-term exchange agreement, will supply barrels to Bloomfield in exchange for barrels produced at the El Paso refinery. The company is evaluating alternative uses for the Bloomfield refinery, including the possibility of biofuels production.
“The decision to idle the Bloomfield refinery was a difficult, but necessary decision to ensure that Western remains well positioned for the future, despite the weak industry dynamics,” said Foster.
As a result of the refinery consolidation, Western expects to take pre-tax charges against fourth quarter earnings of approximately $55 million to $65 million, the majority which will be non-cash. These charges are primarily related to asset impairment and idling costs.
In addition to the refinery consolidation, the company has identified a number of additional cost savings initiatives that will generate approximately $25 million in annualized savings. The majority of the actions are in the early stages of implementation and will be fully realized in the beginning of the first quarter 2010.
“The market is certainly challenging, but we are continuing to take decisive actions to ensure we are running our operations in a reliable and cost effective manner which we believe will allow us to be profitable over the long run in a variety of market conditions,” said Foster.
