February 13, 2015

Western Refining, Inc. Current Recommendation

NEUTRAL

Prior Recommendation

Outperform

Date of Last Change

12/02/2012

Current Price (02/12/15)

$40.34

Target Price

$42.00

(WNR-NYSE) SUMMARY We are maintaining our Neutral recommendation on Western Refining shares ahead of fourth quarter results. We like the company for its shareholder friendly financial policy and the initiatives to improve reliability while reducing operating costs. However, in an effort to tighten fuel emission norms, the EPA has proposed new gasoline standards, asking refiners to significantly curb sulfur content in gasoline starting from 2017. These new standards are expected to hit the company hard. Compliance with the new rules is expected to raise capital expenditures for downstream operators like Western Refining. The company is also faced with volatile industry fundamentals and limited geographic diversification, which may further limit its ability to generate positive earnings surprises.

SUMMARY DATA 52-Week High 52-Week Low One-Year Return (%) Beta Average Daily Volume (sh)

$47.72 $32.51 8.94 1.96 1,425,302

Shares Outstanding (mil) Market Capitalization ($mil) Short Interest Ratio (days) Institutional Ownership (%) Insider Ownership (%)

99 $3,978 2.14 62 33

Annual Cash Dividend Dividend Yield (%)

$1.20 2.97

5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%)

12.4 74.6 168.5

P/E using TTM EPS

11.9

P/E using 2016 Estimate

10.6

Zacks Rank *: Short Term 1 3 months outlook

Type of Stock Industry Zacks Industry Rank *

3

Hold

Large-Value Oil Refing & Mktg 146 out of 267

ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $)

2013 2014 2015 2016

Q1

Q2

Q3

Q4

Year

(Mar)

(Jun)

(Sep)

(Dec)

(Dec)

2,178 A

2,430 A

2,448 A

3,022 A

10,078 A

3,725 A

4,351 A

4,052 A

2,991 E

15,119 E

3,051 E

3,732 E

4,407 E

2,774 E

13,964 E 14,548 E

Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses)

Q1 (Mar)

9.9

P/E using 2015 Estimate

Average,

Risk Level *

2013 2014 2015 2016

Q2 (Jun)

Q3 (Sep)

Q4 (Dec)

Year (Dec)

$0.94 A

$1.25 A

$0.33 A

$0.60 A

$3.12 A

$0.44 A

$1.29 A

$1.73 A

$0.90 E

$4.36 E

$0.69 E

$1.13 E

$1.14 E

$0.43 E

$3.39 E $3.82 E

Projected EPS Growth - Next 5 Years %

* Definition / Disclosure on last page

© 2015 Zacks Investment Research, All Rights reserved.

www.Zacks.com

10 S. Riverside Plaza, Chicago IL 60606

10

OVERVIEW Incorporated in 2005, El Paso, Texas-headquartered Western Refining Inc. (WNR) is an independent refiner and marketer of refined petroleum products in the Southwestern and Mid-Atlantic regions of the U.S. The company operates in three segments: Refining (accounted for 93% of the company s total 2013 operating income), Wholesale (5%), and Retail (2%). Additionally, Western Refining owns the general partner and approximately 65% of the limited partnership interest of Western Refining Logistics L.P. (WNRL), and the general partner and approximately 39% of the limited partnership interest in Northern Tier Energy L.P. (NTI). Refining: The Refining segment manufactures and sells various grades of gasoline, diesel fuel, jet fuel and other refined products to customers through its own service stations and wholesale group, independent wholesalers and retailers, commercial accounts, and sales and exchanges with major oil companies. Western Refining owns and operates two refineries a 128,000 barrels per day (Bbl/d) facility in El Paso, Texas and a 25,000 Bbl/d refinery in Gallup, New Mexico. This segment also operates a crude oil transportation and gathering pipeline system in the Four Corners region of New Mexico, an asphalt plant in El Paso, three stand-alone refined product distribution terminals, and four asphalt distribution terminals. Until 2009, Western also operated a 17,000 Bbl/d refinery near Bloomfield, New Mexico and a 70,000 Bbl/d facility in Yorktown, Virginia. However, in response to the weak refining margin environment, Western Refining decided to consolidate the operations of its Four Corners refineries (Bloomfield and Gallup) into one at the Gallup refinery and shutdown its Yorktown refining operations. Despite shuttering the Bloomfield and the Yorktown facilities, Western continues to operate the refinery s products terminal. Wholesale: Western Refining also owns and operates a Wholesale division that includes several lubricant and bulk petroleum distribution plants, unmanned fleet fueling operations, a bulk lubricant terminal facility, and a fleet of finished product and lubricant delivery trucks. Through this group, the company purchases commercial wholesale petroleum products from the refining group, and from third-party suppliers and then distributes them to customers primarily in Arizona, California, Colorado, Nevada, New Mexico, Texas and Utah. Retail: The Retail segment distributes motor fuels (gasoline, diesel fuel) to the general public through a network of approximately 229 convenience stores and gas stations located in New Mexico, Arizona, and Colorado, primarily under the Giant , Mustang , Howdy's , and Sundial names.

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REASONS TO BUY Western Refining is one the largest independent oil refiners in the U.S. with a combined crude oil processing capacity of approximately 153,000 Bbl/d. A major advantage for the company is its proprietary access to pipelines, which inhibits lower-cost competitors from supplying Western Refining's key markets. Western Refining's retail and wholesale operations compliment its refineries and provide a stable base of cash flow and an earnings stream. This is evident from Western Refining's recent operational results, where fuel volumes and margins remained healthy in its wholesale operations, while the retail unit had an encouraging quarter despite the challenging marketplace. Western Refining has taken certain strategic actions to improve performance and competitiveness in a cost-effective manner. As part of this effort, Western Refining has consolidated the operations of its Four Corners refineries (Bloomfield and Gallup) into one at the Gallup refinery and has shutdown its Yorktown refining operations. The company sold its Yorktown, Virginia refinery, which not only helped the firm to monetize the assets but also exit the volatile East Coast refining market. With refiners being buyers of crude whose price has seen a steep decline since June their profitability has been favorably impacted due to a fall in the input cost. Operators like Western Refining are expected to benefit from this low oil price environment. Western Refining recently hiked its quarterly dividend payout by 15% to $0.30 per share ($1.20 per share annualized). The company also has an active repurchase program. We believe that the hike in dividend and the buyback authorization not only highlights Western Refining s commitment to create value for shareholders but also underlines the company s confidence in its future earnings momentum.

REASONS TO SELL In an effort to reduce pollution, the Environmental Protection Agency (EPA) has recently outlined a proposal that would require refiners to significantly reduce sulphur content in gasoline starting from 2017. To comply with the new standards, downstream operators (like Western Refining) will have to increase their capital expenditures, which will adversely impact earnings and cash flows. In terms of geographic diversification, Western Refining s lack of exposure to the other refining regions in the country weakens its competitive positioning, in our view. The company s Southwestcentric operating footprint act as a major liability. The inherent volatility of the refining business reduces the accuracy and reliability of long-term earnings and revenue estimates. Additionally, results are exposed to unplanned shut-downs that may have a lingering impact. With refiners being buyers of crude, an increase in oil prices can squeeze their profitability. As a result, if the commodity s price rebounds to around $100 per barrel, we expect Western Refining s margins to be negatively impacted due to a rise in the cost of oil it buys to make gas, jet fuel and other refined products.

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RECENT NEWS

Fourth Quarter 2014 Results Announcement Western Refining plans to release its fourth quarter and full year 2014 results on Feb 26, 2015 before the opening bell.

Western Refining (WNR) Shares Rise on Positive Q4 Update On Feb 2, 2015, Western Refining provided an interim update on fourth-quarter 2014 results and gave an operational guidance for first-quarter 2015. Following the update, shares of Western Refining gained about 3% on the NYSE. The company expects fourth-quarter earnings, excluding items like hedging gains, market inventory and asset sale adjustments, to range between $1.08 and $1.14. This marks a substantial improvement from the year-ago quarter adjusted earnings of $0.60. Moreover, the company added that for first-quarter 2015, it expects throughput from the El Paso refinery to be between 133,000 barrels per day (Bbl/d) and 137,000 Bbl/d. Meanwhile, Gallup refinery throughput is anticipated to be between 26,500 Bbl/d and 28,500 Bbl/d.

Western Refining (WNR) Includes 31 Units to its Retail Chain On Jan 15, 2015, Western Refining declared that it has added 31 retail stores in southern Arizona. With this, the total number of retail units in the region has increased to 261. Western Refining has entered into a lease agreement for the stores. The company added that previously the units were operated by Reay's Ranch, which primarily owns and manages retail locations. Western Refining will now sell various kinds of fuel from the stores under its own brand. The retail stores will get roughly 30 million gallons of fuel from the El Paso refinery of the company every year. With the addition of the units to its retail chain, the company s merchandise sales are expected to increase by about 15%. Management revealed that the inclusion of retail sites is in line with the company s policy to increase the sales volume of refined fuel processed in the company s refineries with minimum investment.

VALUATION Western Refining s trailing 12-month P/CF multiple is 7.0, compared to the 9.9 average for the peer group and 15.1 for the S&P 500. The company s trailing 12-month EV/EBITDA multiple is 6.8, compared to the industry average of 9.3. Western Refining recently hiked its dividend and authorized an additional share repurchase program, which are actions expected to drive the company s stock valuation. Additionally, we believe the company stands to benefit from exposure to the profitable Southwest refining assets and the ongoing drop in input costs. Furthermore, the recent acquisition of interest in Northern Tier Energy will help Western Refining gain access to areas that have direct pipeline connectivity to crude oil resources in the Bakken, Permian, Equity Research

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San Juan and western Canada regions. Other positives for the firm include the strong retail and wholesale operations. However, with volatile industry fundamentals and limited geographic diversification, we do not see any significant price upside for Western Refining stock in the near-to-medium term. Moreover, the EPA s proposed new gasoline standards to be imposed from 2017 are expected to significantly increase capital expenditures for refiners, thereby reducing future earnings and cash flows. Our continued Neutral recommendation and $42 price target reflects this view.

7.3X trailing twelve-month cash flow

Key Indicators

P/E F1

P/E F2

Est. 5-Yr EPS Gr%

P/CF (TTM)

P/E (TTM)

P/E 5-Yr High (TTM)

Western Refining Inc. (WNR)

11.9

10.6

10.0

7.0

9.9

41.5

4.5

Industry Average S&P 500

29.1 16.5

24.3 15.4

13.1 10.7

9.9 15.1

30.1 19.0

90.2 19.4

10.3 12.0

17.0 41.9 115.7 10.9

9.9 7.8 4.7 4.7

Murphy USA Inc. (MUSA) 22.3 18.8 8.6 10.6 14.6 Global Partners L.P. (GLP) 17.1 17.2 21.1 8.3 9.1 CVR Energy Inc. (CVI) 22.7 7.3 14.3 CVR Refining L.P. (CVRR) 6.4 4.5 10.5 3.3 8.6 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow

P/E 5-Yr Low (TTM)

P/B Last Qtr.

P/B 5-Yr High

P/B 5-Yr Low

ROE (TTM)

D/E Last Qtr.

Div Yield Last Qtr.

Western Refining Inc. (WNR)

1.2

3.5

0.6

14.2

0.4

3.0

6.8

Industry Average S&P 500

2.1 5.3

2.1 9.8

2.1 3.2

13.3 25.5

0.2

4.1 2.1

9.3

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EV/EBITDA (TTM)

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Earnings Surprise and Estimate Revision History

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DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of WNR. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1121 companies covered: Outperform - 15.3%, Neutral - 76.9%, Underperform 7.2%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each th stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.

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