Western Refining Inc. (WNR:US), the owner of refineries in Texas and New Mexico, rose to the highest in five years as oil produced in Midland, Texas, continued to sell at a record discount to the U.S. benchmark.
Western climbed 1.4 percent to $29.05 at the close in New York, the highest since Nov. 26, 2007. Western has been gaining as a surge in oil production in West Texas’s Permian basin and a refinery outage have combined to push down crude prices in the region. Western shares have more than doubled this year amid a U.S. refining rally spurred by cheap and abundant oil.
Midland oil has sold for an average of $78.52 a barrel in November, a record $8.14 lower than West Texas Intermediate crude, allowing El Paso-based Western to save money on the crude they buy to run their refineries.
The company has paid off debt as refining margins have surged in the past two years, leading investors to anticipate higher cash returns when crude discounts break out in the region, said Sam Margolin, an analyst at Dahlman Rose & Co. in New York.
“When you see a quarter of historically wide differentials in their Permian Basin exposure, investors expect dividends or buybacks or some kind of accelerated cash returns in the aftermath,” he said.
Western’s two plants are among the closest to the Permian Basin, where output has grown to 1.3 million barrels a day, according to Simmons & Co., an energy investment bank in Houston. In 2011, crude production in the region averaged 772,602 barrels a day in Texas, according to the Texas Railroad Commission, which aggregates drilling data in the state.
Crude production has exceeded pipeline capacity out of the region, prompting Occidental Petroleum Corp. (OXY:US), Magellan Midstream Partners LP (MMP:US) and Sunoco Logistics Partners LP (SXL:US) to build new pipelines to transport oil to the Texas Gulf Coast.
The glut has worsened as maintenance at Phillips 66 (PSX:US)’s Borger, Texas refinery lasted longer than expected, reducing demand for crude. Production units at the plant were shut on Sept. 22.
Midland oil has historically traded less than $1 below the West Texas Intermediate price in Cushing, Oklahoma, according to data compiled by Bloomberg. This year, it has traded at an average of $3.34 less, and is $8.50 lower than WTI today, according to data compiled by Bloomberg.
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