Today, November 7, 2013, Alon USA Partners LP (ALDW) opened at $11.93. Last night after the close the company released its 3Q results, and they were less than expected. The net loss was $16.1 million dollars and the company will not pay a distribution this quarter. I had been previously bullish on the stock as it paid a strong distribution, but with this quarterly report the stock price has dropped below the 52 week low of $11.40. During midday trading the price is $11.11, which is down 7.65% so far today. My estimation is it will move below $10 per share over the next week.
The Big Spring FCC outage during the quarter resulted in additional expenses and lost opportunity costs of approximately $12 million, or ($-0.19) per unit. Without the FCC outage effect, the third quarter results would have been a net loss of ($-0.07) per unit. In my opinion, had the incident not occurred, the company would have continued production near 70,000 bpd, it would have made a profit for the quarter, however slim. The profit difference would have been the costs of damaged equipment and repairs paid.
Big Spring Refinery in Texas
Refinery operating margin was $6.46 per barrel for the third quarter of 2013 compared to $27.75 per barrel for the same period in 2012. This decrease is mainly due to lower Gulf Coast 3/2/1 crack spreads and a narrowing WTI (West Texas Intermediate) to WTS (West Texas Sour) spread. The refinery's throughput for the third quarter of 2013 averaged 63,090 barrels per day ("bpd") compared to 69,563 bpd for the same period in 2012. Throughput and refinery operating margin for the third quarter of 2013 were impacted by unplanned downtime at the refinery during the second half of September 2013. Also impacting refinery operating margin was approximately $1.2 million of costs associated with RINs (renewable identification number) obligations for the third quarter of 2013.
The average Gulf Coast 3/2/1 crack spread was $14.23 per barrel for the third quarter of 2013 compared to $31.76 per barrel for the third quarter of 2012. The average WTI to WTS spread for the third quarter of 2013 was $0.08 per barrel compared to $3.70 per barrel for the same period in 2012.
The quarterly report highlighted another factor in the quarter that is important, not only for Alon USA Partners, but other small MLP oil companies, is the difference between WTI and the Brent oil price, and the crack spread. Because the crack spread closed so tight the company lost its much of its buffer between a profit and loss. The spread has increased to near $11-12 in November and this should reflect positively on the profit statement next quarter if it remains in this range or even grows.
Alon USA Partners is also preparing to change their processing operations at Big Springs Refinery due to the federal regulations of biodiesel blending. Their statement includes the comment:
"For the fourth quarter of 2013, we expect the throughput at Big Spring to average approximately 72,000 barrels per day. We are continuing planning and preparation work for the first quarter 2014 turnaround at Big Spring. This is a major event that will affect throughput in the first quarter. We estimate that first quarter throughput at the refinery will average 55,000 barrels per day. Though RINs prices have declined from the highs reached in July, we continue to work to mitigate the costs associated with our RINs obligations. To that end, we have begun biodiesel blending at Big Spring and will continue to evaluate blending economics. We recorded approximately $1.2 million of costs in the third quarter for RINs obligations. We anticipate that our RINs obligation at Big Spring for the fourth quarter will be approximately $1.0 million, which would result in a full year 2013 impact of $10.2 million."
Two points I noted here. The first is the production level in the 4Q of 72,000 bpd and in the 1Q, 2014 reduced to 55,000 bpd. That decrease in 1Q, 2014 will result in less cash income. The second is expected higher production costs due to the blending process the company will use beginning in January, 2014.
In the statement Mr. Paul Eisman (CEO and President) also stated "Though WTI Cushing and WTS traded near parity during the third quarter, we believe this dynamic is temporary given the transportation cost to Cushing and the Gulf Coast, and the difference in product value between sweet and sour crudes. In the fourth quarter to date, the WTI Cushing to WTS spread has widened $4.35 per barrel to our benefit. In addition, we are working on a number of initiatives at Big Spring that will further enhance future profitability of the refinery and will positively impact future distributions."
I concur that the crack spread narrowed during the 3Q, 2013 and has widened since the beginning of the 4Q. It seems a bit dangerous to use this as leverage for profitability going forward. I also agree that Alon is well-positioned to received Texas crude at a lower price due to the strategic location near the oil reserves. All of this creates opportunity, and the company now has to demonstrate the ability to make profits to earn back its investors trust to see the stock price recover.
This quarter's no distribution demonstrates the thin line that small MLP companies operate on and the risk for investing in smaller companies like this. It also highlights the rewards of profitable times where profits can be high and distributions can exceed 10-20% returns. Investors need to be knowledgeable about their investments and make sure you evaluate the risks in these investments.