I have spent quite a bit of time mulling over a myriad of stocks recently (as anyone who follows my articles would know). This said, I have finally decided to take a small position in a variable distribution master limited partnership [MLP].
A few years back I decided to invest in Calumet Specialty Products Partners LP (CLMT) in order to gain exposure to a refiner. This has arguably become one of the better [MLP] investment decisions I have made.
Last year, I followed the initial public offerings [IPOs] for both Northern Tier Energy L.P. (NTI) in July, and for Alon USA Partners (ALDW) in November. Unlike CLMT, both of these are variable distribution [MLPs], and both forecast much higher distributions for their initial year as publicly traded stocks than the distribution currently paid by CLMT.
In comparing and I did not find a significant difference for the intermediate term. I do not consider either to be a long-term hold since the crack spread will to a large extent determine the magnitude of the distributions from both.
Elliott Gue has written a number of good articles on the energy sector for SA. I read with great interest what he had to say recently about refiners profit margins. To sum up, he mentioned that crack spreads are presently yielding the best profit margins for refiners over the past several years. I believe this trend should continue at least through 2013.
Here (in simplified fashion) is my comparison between NTI and ALDW.
Northern Tier Energy L.P. operates a single refinery in Minnesota. The refinery handles about 85,000 barrels per day. They have the added incentive of owning several convenience stores as part of the MLP structure.
Their crack spread profit margin is approximately $27, and the initial quarter's distribution was $1.48. With the source of NTIs crude coming from Canada and North Dakota, it would seem that a consistent supply would remain readily available, and that the initial year's distributions would top $5.
I see the major potential downside to ownership of being the fact that they have only one refinery, and should production be interrupted for any reason, the distribution would be adversely affected. That said, NTI recently announced a 25 day period of scheduled maintenance in early Spring. This will reduce throughput and likely affect one quarter's distributions - which I do not see as being a significant issue.
At a current price of $25.10, and assuming a full years distribution of say $5.50, unit holders would have a yield of about 22 percent.
Alon USA Partners also operates a single refinery - in West Texas. The Big Spring refinery has a throughput of just over 70,000 barrels of heavy sour crude per day. They have the additional advantage of the potential for dropdowns coming from Alon USA Energy (ALJ), holder of an 84 percent equity stake in ALDW.
The current profit margin for ALDW is about $22 (with a 97 percent utilization rate), and they have yet to announce the initial quarterly distribution. Estimates for the initial year's distribution are about $5.20. They intend to disburse 100 percent of available cash.
As with NTI, ALDW has planned maintenance scheduled their refinery. In February, they expect to close down for approximately 10 days which will reduce throughput to a level of 62,000 barrels per day, with minimal impact for all of 2013.
At the current price of $22.60, and an anticipated distribution of $5.20, unit holders can expect a yield of about 23 percent for 2013.
I made a decision to initiate a position in ALDW. While I do not see a big difference in holding either, I chose ALDW based upon the following:
- A shorter scheduled maintenance period (10 days versus 25 days)
- The potential for dropdowns (from ALJ)
- A slightly higher yield (23 percent versus 22 percent)
As I mentioned previously, I view either as an intermediate-term hold (about one year), after which I would review the prospects of both and the crack spread margins before deciding to hold or sell.
Additional disclosure: This article does not constitute a buy or sell recommendation for any of the stocks mentioned.