Upgrading Western Refining to Speculative Outperform; Improving Liquidity Could Create Upside

6/13 - "It is certainly well known by now that WNR is facing serious liquidity issues, but we believe that the market conditions are currently favorable for possible upcoming developments to spark a rally in the stock. Several recent reports indicate that WNR is actively negotiating with both creditors over a possible covenant waiver and Petrobras (PBR-N, NR) as a new crude supplier. While the company’s financial risks remain high, these negotiations indicate to us that WNR’s liquidity issues could ease if these developments come to fruition. As such, we are upgrading our rating from Underperform to Speculative Outperform and increasing our price target from $11.00 to $14.00."

"WNR’s highly leveraged balance sheet has undoubtedly impacted the company negatively, but we believe meaningful operational improvements underlay the current intense focus on liquidity issues. Actual margins in Q1/08 were better than reported after excluding a significant inventory-related loss and a new crude supply contract at Yorktown could improve profitability and stabilize working capital challenges."

"While investing in WNR remains a risky proposition, a somewhat inefficient current market for the company’s shares could limit further meaningful downside. An exceptionally high short interest position on WNR has likely made it difficult to add many incremental shorts given the limited remaining borrow. This situation could effectively place a floor under WNR and elicit massive short covering should any positive news surface."