The refiner formerly known as Tesoro and Western Refining, Andeavor (NYSE: ANDV), finally gave investors a look at what this combined company looks like at full strength this past quarter. Based on these results, it's a good look. The company may have benefited from a better refining market in general, but its newly acquired refineries performed exceptionally well.
On top of the good earnings result, the company completed a transformational deal with its subsidiaries that should fuel growth for Andeavor for a while. Here's a look at the company's third-quarter earnings results, as well as the details of its most recent deal.
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By the numbers
What a difference a well-executed acquisition can do for a bottom line. In the prior quarter, Andeavor closed the deal to acquire Western Refining, but we only got one month of combined results. This past quarter, we got a full three months of performance from Western's assets in the fold, and the acquisition has made a noticeable difference on the refining side of the business.
Western Refining was known to have some of the highest gross margins per barrel in the refining industry, thanks to its locations in the Southwest and Minnesota. Those high refining margins showed up in this quarter's results as the company's Mid-Continent refining region produced a per-barrel throughput margin of $17.27, compared to a refining margin of $13.37 and $15.03 per barrel for its California and Pacific Northwest regions. Low operating costs also helped this segment provide a majority of the company's refining pre-tax earnings.
The other business segments performed OK, but not great. Lower fuel margins for its marketing segment ate into higher volumes sold to produce so-so results. The company's logistics segment, which consists of its assets as well as equity interests in Andeavor Logistics (NYSE: ANDX) and Western Refining Logistics, performed as expected thanks to higher revenue for all of its various services.
If there was something to point to as a potential flag for the quarter, it's Andeavor's poor cash generation. So far this year, investing and financing activities have outpaced operating cash flow by $2.8 billion and left the company with $528 million at the end of the quarter. That didn't stop management from buying back $252 million in stock in the quarter, though. We can probably chalk all those costs up to the acquisition, but it's something worth following in the coming quarters.
Not much happened in the third quarter, but on Oct. 31 the company completed its merger and restructuring of Andeavor Logistics and Western Refining Logistics. Here's how the deal worked out:
- Andeavor Logistics acquired all outstanding shares of Western Refining Logistics in a unit-for-unit transaction valued at $1.8 billion.
- Andeavor Logistics issued 78 million units to Andeavor in exchange for its general-partner stake and incentive distribution rights (IDR). The total value of those shares was $3.6 billion.
There were a couple of reasons for the deal. The first and most apparent was simplicity. It didn't make a lot of sense for Andeavor to own two separate subsidiary master limited partnerships that had a lot of operational overlap. Also, the incentive distribution rights exchange should lower the company's cost of capital and make it easier to fund future growth. In fact, the combination of the two MLPs led to a credit rating upgrade to investment grade.
What management had to say
Here's CEO Greg Goff's summary of the most recent quarter:
What a Fool believes
Andeavor seems to be doing all the right things and is so far delivering impressive results. Still, this quarter's performance was in part due to a more favorable refining environment, as several of Andeavor's peers posted similar refining margin gains.
Among the more important things management needs to focus on is completing the Western integration at both the parent and subsidiary-partnership level. If it can wring out as much in cost efficiency as management claims, then earnings in the coming years will look impressive.
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