3 Basic Material MLPs With Greater Than 5% Distribution Yield And High Insider Ownership

Includes: CF, NTI, SEP, TNH
by: Black Coral Research

(This article has been updated to identify a primary source of NTI analysis.)

The Basic Material Industry is made up of companies known as Stuff Stock. Companies in this sector are engaged in producing paper and lumber, metals and mining, chemicals, construction materials, and containers/packaging. The sector has been unstable since the economic slowdown because of the cyclical nature of their products, but should improve as economic conditions improve.

Discussed below are three stocks, which each have a great combination of performance and stability. In addition, they are over 50% owned by insiders reducing the risk of management making decisions to negatively impact shareholders, and they offer greater than 5% distribution yield so investors are paid handsomely while economic conditions improve.

*as on 21th April

Source: Yahoo! Finance

Northern Tier Energy (NYSE:NTI), based out of Ridgefield, CT has greater than 65% insider ownership. In the past few trading days, the stock price of the company has come down nearly 20% but is still up 70% since its 2012 IPO. The energy company earns a major portion of profit from its refining segment and from buying crude oil and selling the refined products. Northern Tier Energy reported full-year 2012 net income of $197.6 million, compared with $28.3 million of net income for full-year 2011. Fourth-quarter 2012 net income was $84.5 million (or $0.92 per unit) compared with fourth-quarter 2011 net income of $292.7 million.

A great article, written by Albert Alfonso, titled Northern Tier Energy: A Strategically Located Refiner With A 20% Yield summarizes the current advantages and issues facing NTI. The core points from his analysis are as follows:

  1. The stock price, while down 20%, is still up 70% since the 2012 IPO.
  2. Margin expansion should continue thanks to "plentiful sources of crude from bothe the Bakken and Canada" and cheaper feedstocks as "Canadian crude oil production is expected to double by 2030."
  3. Likely cause for NTI's recent share price decline is "fears of increased costs" from tougher standards proposed on gasoline by the EPA.
  4. Labeled an "extremely high risk stock due to the price volatility shown since the IPO" and unstable distribution.

For more on NTI, readers are encouraged to read Albert's full article.

Spectra Energy Partners (NYSE:SEP) is a MLP with greater than 59% insider ownership. The Houston, Texas-based company is in the business of natural gas pipelines and storage. The stock is worth watching because the CEO said in its annual report that Spectra is committed to increasing its distribution every year. Pipelines are also a better and more stable way of getting exposure to the energy sector compared with explorers and producers. Any company exploring gas will need SEP to market and that is how the company earns its revenue.

For 2012's fourth quarter, SEP posted a net income of $48.1 million, compared with $42.0 million in the prior year's corresponding quarter. For the full year, net income was up $22 million over 2011. The cash available in the company for distribution in was $229 million, an 8% increase over 2011.

SEP recently made changes in management by appointing Pat Reddy as chief financial officer. Laura Sayavedra, the former CFO, has been appointed as vice president and will provide leadership in defining and setting the long-term strategy of the company. SEP recently priced its underwritten public offering of 4.50 million of its common units at $37.25 per common unit. The company expects to raise approximately $168 million from the proceeds and intends to use the offering for funding capital expenditures and acquisitions, which is good news for investors.

Terra Nitrogen (NYSE:TNH) is a fertilizer MLP with 75% insider ownership from parent company CF Industries (NYSE:CF). The Deerfield, Il.-based Terra has an earnings growth rate over the previous three years of 50.68%. Terra has no debt burden and is well positioned in the industry, which witnesses a hike in demand on regular basis.

U.S. demand of nitrogen is the main contributor to Terra Nitrogen's revenue. The other contributing factor is the low price of natural gas. Nitrogen is one of the main components used for enhancing crop yields, which are not irrigated. Terra Nitrogen is also seeking to position itself by enhancing specialty nutrient demand and increasing its capital expenditure in order to upgrade its facility.

The net earnings for the fourth quarter came in at $150 million on sales of $206.5 million, an increase over $129.8 million on sales of $201 million for the fourth quarter of 2011. Because Terra is a subsidiary of fertilizer company CF Industries, it gets easy availability of the natural gas feedstock. Both the parent company and the subsidiary operate on the same manufacturing models and thus the performance of CF can be widely seen as a parameter of Terra's performance.

Terra can benefit from one simple fact: the demand for fertilizer will increase because farmers will use more fertilizers to save their crops from persistent droughts as an alternative to water. This fact alone can add substantial profits in the books of Terra.

Best Bets

All three companies discussed here have room to escalate in the future. Northern Tier can benefit from the Canadian crude price that is poised to increase. Moreover, the company has a competitive advantage because of its access to cheap sources of crude from Bakken and Canada, but the volatility in the share prices may not be good for investors.

SEP has vowed to increase its distribution every year, which is a positive sign for investors, and the demand for SEP will be stable in the future due to the demand of pipelines from exploring companies. Terra is well positioned to grow in the time ahead as the company will keep earning revenue as long as the world needs food. Natural disasters such as drought have, in a way, helped the company to increase its sales. So, both Terra and SEP are good bets, but if potential investors really have to choose just one, it should be Terra. Terra is trading closer to its 52-week range than SEP, which is trading on the higher side.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TNH over the next 72 hours.

Business relationship disclosure: Black Coral Research is a team of writers who provide unique perspective to help inspire investors. This article was written Aman Jain, one of our Senior Analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Black Coral Research is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.