Northern Tier Energy Is Rated Buy For Unit Valuation And Distribution

Jul.22.13 | About: Northern Tier (NTI)

Now is the right time to buy Northern Tier Energy LP (NYSE:NTI). NTI is a sleeper company to many analysts, yet we found some financial strength with an opportunity for the future. NTI is a young company that has created a high distribution, that is aggressive and some investors are cautious due to the limited track record at this time.

NTI is a Master Limited Partnership and it pays distributions to unit holders, not dividends. MLPs must pay out 90% of profits to maintain the MLP tax status. We are anticipating a reduced distribution near $1.00 due to the shutdown of the refinery during a scheduled maintenance upgrade early in the second quarter. The company did stockpile product prior to going off line and did not disrupt the distribution during the refinery's down time. The refineries in PADD II region have been running at a high capacity, but not at full production over the last two months, which has supported a strong financial quarter. Sales will be lower this quarter, but not more than anticipated during the shutdown. Prices for gas and other refined products are strong and a solid profit margin will aid NTI in providing a solid return for investors.

The price is down ($24.10 as of open on 22 Jul 13) and we expect the price to increase over the next three weeks leading to the release of 2Q 2013 report. In the past quarters the company has established the Ex-date within 7 days after the release of the quarterly report and the payout within another 7 days, so the anticipated distribution will bid the price higher over the next three weeks. Last quarter's distribution was $1.23 per unit.

With the current price of $24.10 and an estimated distribution of $1.00, the return on your investment would be about 16.5% annualized. We anticipate a run-up near $26-27 per unit leading to the quarterly report release on August 12, 2013, and if the distribution is announce above $1.15, the unit price is expected near $28. Buying in at this time could provide a $2.00 per unit value increase leading to August 12, 2013. After the ex-date and payout of the distribution, we would expect the price to drop near the $24-25 dollar range after all the profit taking from traders.

A technical look at the weekly chart shows support at the $24 range and resistance at $30. The resistance level is focused on the year target with two additional quarters of strong distributions.

If you are a long-term investor, the production in third and fourth quarters is expected to return a distribution of over $1.25 with the increased capability from the upgrades at the refinery. Over the next 4 quarters many analysts are expecting near 20% distribution returns and the unit price to increase near a stable $30.00 per unit.

During second quarter, the company released a statement in response to the change of government standards for fuel products in FY17. The company's statement was positive as it clearly expressed it would meet all government standards and would not need additional capital investment to meet these requirements. Had the company needed to invest millions of dollars to change operational production methods to accomplish this, it would directly reduce the return of profits to the unit holders. Since no major investment is needed, the unit holders can expect continued profitable quarterly returns.

During the second quarter the oil prices remained steady and actually increased to over $100.00 per barrel. This allowed NTI to maintain a solid cash flow during the quarter.

With the crack spread being the revenue generator for the company, Northern Tier has the potential to process low-price crude oil and generate cash inflows through a higher crack spread. The spread between Brent priced at $109.29 per barrel and WTI at $105.88, is $3.37. This spread allows refineries to purchase crude at lower prices and market refined products at equal prices, providing increased profits. Some analysts expect the spread to move closer to $6.75 in the near future. Canadian Crude from the oil sands may have a larger spread and with the improved refinery capabilities, allow NTI to gain a greater advantage.

One issue to clarify about NTI is there are two companies that use NTI as their stock symbol. On the Canadian Market, NTI is the symbol for Northcore Technologies Inc. on the Toronto Stock Exchange [TSX]. Please do not confuse it with Northern Tier Energy LP Class A on the New York Stock Exchange [NYSE]. Northcore has some issues it is working through and a possible delisting issue on the Toronto Exchange. Not Northern Tier Energy LP Class A.

There are no negative reports about NTI's operations, cash flow or company problems. All things equal, I never pass up a double-digit return, and one approaching 20% return is a great place to be.

Northern Tier Energy LP is an independent downstream energy company with refining, retail and pipeline operations that serves the PADD II region of the United States. Northern Tier Energy operates an 84,500 barrels per stream day (so to be adjusted) with the refinery located in St. Paul Park, Minnesota. Northern Tier Energy also operates 166 convenience stores and supports 70 franchised convenience stores, primarily in Minnesota, and Wisconsin, under the SuperAmerica trademark, and owns a bakery and commissary under the SuperMom's brand. Northern Tier Energy has its headquarters in Ridgefield, Connecticut.

Northern Tier Energy will report its financial results and announce distributions to common unit holders for the second quarter of 2013 on August 12, 2013, subsequent to the closing of the market at the NYSE. Northern Tier Energy will also host a conference call to discuss its second-quarter 2013 results on Tuesday, August 13, 2013 at 11:00 am Eastern Time. Callers may listen to the live presentation, which will be followed by a question and answer segment, by dialing 877-280-4957 or 857-244-7314 and the passcode 61031520.

Disclosure: I am long NTI. 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.

Additional disclosure: Investors should evaluate this investment for risk in your portfolio. It is always recommended you conduct your own research to verify this information. Information collected from the Company, news media and industry material.