Western Refining Inc. (WNR) , a company that can be counted among the largest US publicly-traded downstream oil and gas refiners, made a huge leap towards a new 52-week high in Tuesday trading after announcing the purchase a nearly 40 percent stake one of industry peer Northern Tier Energy LP (NTI) for a reported $775 million.
The advance in share-price was perfectly reasonable for a number of reasons. The acquisition will give Western Refining a greater range of motion with regard to highly-prized Bakken Shale crude, as well as to Canadian reserves. And while the company is buying a 37.8 percent stake of its peer/competitor, it is also taking 100 percent of the general partner that controls Northern Tier.
Furthermore, the move is expected to greatly improve the company’s production capacity as well as its refining margins. Western will end up with an estimated refining capacity of 242,500 million barrels per day, and as a bonus will be able to expand retail operations into previously untapped areas of the Midwest and double its own network of retail operations to around 400 gas station/convenience stores.
Ahead of the closing bell, Western Refining was up over 9 percent at $36.15 per share, while Northern Tier added 4 percent to $24.16.
While markets reacted bullishly to the news, there are potential reasons for concern, as the deal was financed by Western with over $500 million in debt. Furthermore, despite a decent 20 percent year-to-date return rate, the company sports a nearly 37 percent short float.