3 High-Yield Refiners For Income Investors

Includes: ALDW, CVRR, NTI
by: Quinn Bredl

With the market seemingly hitting all-time highs every week, it's probably time to reevaluate your positions and adjust your portfolio accordingly. It'd sure be nice if we could count on the Fed's support to prop up the market forever, but it has to end sometime. And with that in mind, you might consider adding some high-yield securities to your portfolio in order to hedge any potential downside risk, especially at a time when the market rally seems to be running out of steam.

One area of particular interest for income investors is the oil refining industry. To be more specific, I'm talking about the refiner MLPs that pay out hefty distributions from free cash flow. So who are these seemingly mythological entities?

  • CVR Refining, LP (NYSE:CVRR)
  • Northern Tier Energy LP (NYSE:NTI)
  • Alon USA Partners, LP (NYSE:ALDW)

These three top dogs in the high-yield refiner space are all worthy portfolio additions, but surely most investors can't buy them all. So which one is the best? Well that's not an easy question to answer, but there's a certain comfort that numbers afford to help guide us in the right direction.

The key metrics that we'll be looking at to compare the three:

Price/Free Cash Flow measures a company's valuation relative to free cash flow (=market cap/FCF). Typically lower P/FCF ratios indicate a discounted security relative to its free cash flow.

Price/Book measures a company's valuation relative to its book value (=unit price/(total assets-intangible assets and liabilities). Similar to P/FCF, lower P/B ratios indicate that the security is discounted relative to its book value.

Enterprise Value/EBITDA (aka the enterprise multiple) measures the value of a company (with debt considered) relative to its EBITDA so as to account for accounting variations that might distort the company's valuation (=enterprise value/EBITDA). Low enterprise multiples indicate that a company may be undervalued relative to EBITDA.

Profit Margin is an indication of a company's ability to earn a profit from revenues (=net income/revenue). Higher profit margins indicate that the company has control over operating costs and/or command over market prices for a product.

Return on Equity measures the profitability of a company relative to shareholder's equity (=net income/shareholders' equity). A high ROE indicates that a company is effective in investing shareholders' equity.

Debt/Equity indicates a company's leverage according to the proportion of debt to shareholders' equity (=total liabilities/shareholders' equity).

Current Ratio measures a company's ability to pay off short-term debt with current assets (=current assets/current liabilities).

Forward Yield is the percentage of the unit value expected to be paid out to unitholders in the form of distributions within the next year (=sum of projected distributions/unit price).

Market Cap ($) 4.48 billion 2.33 billion 1.54 billion
Current Unit Price ($) 30.35 25.30 24.68
P/FCF 6.70 8.39 2.48
P/B 2.71 4.67 6.43
EV/EBITDA 3.88 3.70 3.19
Profit Margin (%) 10.49 11.44 12.58
ROE (%) 67.34 178.88 249.68
Debt/Equity .3289 .5731 1.235
Current Ratio 2.88 1.72 1.23
Forward Yield (%) 20.82 19.45 23.99

According to the numbers, it seems that Alon USA Partners is the most undervalued compared with its peers. But while numbers are objective in their own right, there is still a certain subjectivity that pertains to this: your own values. If you favor a cleaner balance sheet, you may decide to go with CVR Refining, while if yield is all you want, then Alon USA may be the way to go. But regardless of the weight that you put on specific metrics, one thing is certain: all three of them are pretty darn appealing.

Hard to pick one? I agree. If you really can't choose, you could always just own all three for a mouthwatering average yield of 21.42%, all while minimizing company specific risk. But whatever you do choose, you can rest assured that you'll sleep much better at night while the roller coaster of a market undulates unpredictably.

Disclosure: I am long CVRR, ALDW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.