24% Dividend Yield From Pure Play On Crude Oil Spreads
Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Northern Tier Energy (NYSE: NTI) is a variable rate MLP with a refinery in St. Paul Park, MN. It can exploit the difference between WTI and “north of Cushing” crude, primarily from Bakken oil shale. There is little to no organic growth opportunities so owning the shares is a bullish play on Mid Continent (MidCon) refining margins. Earnings and cash flow move in step with these margins along with dividends.
Northern Tier Energy was formerly part of Marathon Oil (NYSE: MRO). Marathon divested its 74,000 b/d St Paul Park, Minnesota refinery, related logistics and retail network, known as Super America, and a 17% stake in a pipeline to Northern Tier. The facilities are in good condition and require relatively low levels of maintenance capex. Along those lines, management recently announced a planned maintenance shutdown in 2013 would last 25 days, five days less then previously announced. Over the past seven years, the refinery has had a 96.9% mechanical availability.
The outlook for MidCon refineries is strong and Northern is a play of discounted Bakken oil prices (49% of 2011 throughput) versus WTI. Currently, Bakken crude trades at about a $35 discount to WTI. Margins are likely to remain at high levels for the foreseeable future for MidCon refineries as a whole, Northern among them. Analysts believe it is unlikely pipeline capacity will keep pace with production levels from Bakken and Canadian oil sand. Rail is transporting a significant portion of incremental production from Bakken and will likely continue to. As a result, “North of Cushing” oil will remain at a discount to Brent and WTI. Northern Tier Energy gets 100% of its oil from these price advantaged regions.
In the most recent quarter, Northern reported earnings of $1.88 per unit ($1.79 consensus estimate), EBITDA of $204.8 million ($198.9 consensus) and a quarterly distribution of $1.48 per unit ($1.23 consensus). A quick note, the CEO recently resigned effective immediately. Rodriguez, co-founder and CEO, left to pursue other opportunities following the successful IPO. Hank Kuchta, COO and co-founder, will take over at CEO. There are no alarm bells over this departure and it appears the company is in capable hands.
This is a pure play of the bull case on MidCon, particularly Bakken, spreads, versus WTI. There is no other variable rate MLP currently in this market. The biggest risk is an event causing a shutdown at their only refinery and their primary asset, the St Paul Park refinery. The refinery does have a two tier system so the refinery would likely maintain a portion of product during an unexpected maintenance event. The other key risk is in the spread shrinking between “north of Cushing” and Brent/WTI over the coming years. For that to happen, transportation needs to improve significantly. Historically, pipeline projects come in behind schedule and have delays, not the reverse. Planned pipeline capacity would also need to increase from current expectations to absorb forecasted production levels a few years out.
NTI is a nice investment vehicle to play expected changes in refinery spreads. Also, as with other MLP’s, there are tax advantages. The shares trade at $24 and unless expectations on profitability improve further, they are close to fair value. Fifty percent of distributions are tax deferred through 2015. That said, the dividend yield for NTI of over 10% versus a 2.4% average among refiners is attractive.
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