Today, we’re facing a global gasoline glut. Oil refiners have produced so much fuel that supply is outpacing demand. We have seen gasoline inventories rise and prices drop.

That’s good news for American drivers. I don’t know anyone who likes paying more at the pump.

But it’s bad news for the companies that produce and sell gasoline. Oil refiners like Western Refining (NYSE: WNR) have seen their margins shrink.

[ad#Google Adsense 336×280-IA]Usually, gasoline prices move in tandem with oil prices, which helps protect refiners’ margins.

But with excess supply today, refiners have been unable to pass their increased costs on to consumers.

The “crack spread” is the profit refiners make from turning crude oil into products, such as gasoline.

The larger the crack spread, the more money refiners make.

But a narrowing crack spread reduces free cash flow.

Western Refining is suffering from a shrinking spread. But will its dividend keep flowing?

The Well Is Running Dry

Back in 2012, Western Refining’s cash flow was gushing. It was $714.2 million.

At that time, crack spreads were wider, even though oil prices were higher. But. As U.S. producers started pumping more oil, they discounted their oil prices below foreign sources so refiners would buy more of it.

Western Refining had higher margins than its competitors the export ban did not apply to gasoline. The company could sell its finished products overseas at the same prices that competitors charged.

But since then, Western Refining’s margins have fallen with the price of gasoline. By 2015, free cash flow had fallen 22.7% to $552.2 million.

So Western Refining will have to dig into its cash stores to fund the $144.2 million in dividends that it’s expected to pay shareholders.

Without positive free cash flow, Western Refining won’t be able to fund its dividend forever. Eventually, it’ll be forced to suspend it. It has done so before.

Double-Crossed Track Record

In 2008, Western Refining double-crossed investors just like J.R. Ewing did in the hit TV show Dallas. It suspended its dividend after making a large acquisition financed with debt.

Gasoline prices fell sharply in 2008, and the company’s crack spread contracted. It was a recipe for dividend disaster. It took the company four years to reinstate the dividend.

Today, it looks like Western Refining could recycle the old Dallas storyline.

Last quarter, the company closed another large debt-financed acquisition.

It bought smaller refinery operator Northern Tier.

Although management has tried to assuage investors’ dividend fears , debt reduction comes first.

Unfortunately, this 7% yielder is running on fumes.

Unless fuel or crude oil prices turn around in the near future, Western Refining’s dividend [will be] out of gas.

Dividend Safety Rating: F

Good investing,



Source: Wealthy Retirement