A 24% Dividend Yield, What’s Going on Here?

Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Alon USA Partners, LP (NYSE: ALDW) was formed when Alon USA Energy (NYSE: ALJ) created a variable rate master limited partnership (MLP) to own the Big Spring Refinery in Texas and its related pipeline and storage facilities.  ALDW, with a current share price of $21.73, completed an offering of 18.4% of its equity, 10 million shares, at $16 per share in late November.  ALJ planned to use the proceeds from the IPO for debt reduction. 

ALDW variable rate MLP requires the quarterly distribution of all available cash, resulting in a significant dividend for equity owners.  Management of ALJ, who will continue to manage Big Spring, estimated a dividend payout of $5.20 over the first twelve months based on revenue of $3.3 billion and net income of $337 million.  This results in a dividend yield of 24% based on the current share price versus an average of 1.4% from major refiners.  The tax advantage is also noteworthy, only 50% of the cash dividend is taxed through 2015 since 50% is accounted for as repayment of capital.  When you compare this to another refiner like Phillips 66 (NYSE: PSX), ALDW investors have a major advantage on a dividend basis.  Phillips 66 has a dividend of 1.9% and shareholders are fully taxed on the dividend.

The Big Spring Refinery was Alon USA Energy’s best asset and biggest single contributor to EBITDA in recent history.  As part of the deal, Alon US Energy transferred a $250 million term loan to ALDW, an $84 million revolver and retains an 81.6% equity stake, although the underwriters have the option to offer another 1.5% of equity for sale up to 30 days after the IPO.  

Big Spring refines West Texas crude both sour and sweet.  Eighty percent of its feedstock is sour crude which is a cost advantage versus competitors.  ALDW will continue to benefit from its ability to refine sour since it make up an increased portion of domestic and global production.   Big Spring is located inland as opposed to many of its competitors on the coast giving it an advantage in both proximity to lower cost feedstock (oil) and its customers.  Big Spring had a 97% utilization level up through the filing of the S-1 and utilization of 88.3% in 2011.  On a per barrel basis, Big Spring had profits of $22.88 and $23.57 respectively in 2012 and 2011.  It has capacity of 83,000 barrels per day but only refining 68,400 barrels per day.  Half of production is gasoline, 33% is diesel and jet fuel, 7% asphalt and the remainder petrochemicals and small amount of other products. 

ALDW is a direct way to profit from expected profitability at refiners.  The payout of all cash reserves will vary overtime as profits increase/decrease at the refinery and upgrades, maintenance and expansion capex varies.  There is a planned shutdown in 2014.  A major risk for the stock: ALDW holds only one asset so any unexpected shut downs or maintenance will translate to a loss of income quickly for the holder. 

Overall, ALJ is a great way to gain income from the profitability in the refining industry as of late.  However, there are great risks that go along with these 24% rewards!  Invest at your own risk.  


mthiessen has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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