Is This The Right Time To Sell Western Refining (WNR) Stock?

On Jul 5, Zacks Investment Research downgraded oil refiner and marketer Western Refining Inc. (WNR) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Given that Texas-based Western Refining’s core business is capital intensive, it faces a high degree of volatility. In addition, the company’s lack of exposure to the other refining regions in the country weakens its competitive positioning, which in turn, might hamper its profitability.

Moreover, policies to reformulate fuel and lower emission from refinery operations may hurt earnings. This is mainly because the company needs to divert cash flows to ensure regulatory compliance. This accounts for our cautious stance on the downstream operator's shares.

In an effort to reduce pollution, EPA recently outlined a proposal that would require refiners to significantly reduce sulfur content in gasoline from 2017 onward. To comply with the new standards, Western Refining will have to increase its capital expenditures, which will adversely impact earnings and cash flows.

Lastly, with the cost of gasoline, heating oil, and other refined products catching up on the beaten down crude price, crack spreads (or refining margins) have come under pressure. This is expected to reduce Western Refining's near-term profitability.

These bearish factors have recently prompted downward estimate revisions for the company. In fact, over the last 30 days, the Zacks Consensus Estimate for third quarter of this year saw a decrease as all the estimates were revised downward from the earnings of 85 cents per share to 43 cents. Moreover, for full-year 2016, 5 out of 6 analysts have rendered negative estimate revisions on the stock over the same period. This has resulted in the Zacks Consensus Estimate of earnings to fall to $1.53 per share from $2.06.

WESTERN REFING Price and Consensus

WESTERN REFING Price and Consensus | WESTERN REFING Quote

Stocks That Warrant a Look

We expect Western Refining to perform below its peers and industry levels in the coming months and see little reason for investors to own the stock. However, one can consider better-ranked players in the energy sector like Sasol Ltd. (NYSE:SSL) , Braskem S.A. (NYSE:BAK) and McDermott International Inc. (NYSE:MDR) . All these stocks sport a Zacks Rank #1 (Strong Buy).