What an eventful couple days for Northern Tier Energy (NYSE:NTI). First came Monday evening's earnings release, with results coming in better than feared. However, the distribution for Q3 was lower than anticipated. Then, a few hours later, news broke that insiders were planning to sell their 38.7% stake in NTI, which includes 100% of the general partner that controls NTI, to Western Refining (NYSE:WNR) for $775M. Doing some quick math, this sale values NTI at around $2.0B, slightly less than the current market cap. As of this writing, units of NTI are down about 5% in premarket trading.
Q3 2013 Overview
Net Income: $27.2M
Adjusted EBITDA: $51.3M
Quarterly Distribution: $0.31 per unit
Gross Margins per BBL: $11.84
Throughput: 81,168 BBLs/D
Q3 2013 operating results for NTI came in better than what I expected back in September. For the quarter, NTI posted net income of $27.2M, down 47% from last year's $51.3M. Gross margins per BBL declined to $11.84, down 68% from $36.69 per BBL last year. Adjusted EBITDA, a much better gauge of profitability for MLPs, came in at $51.3M, down 80% from $249.5M last year. This massive decline in profitability was caused mostly by a decline crack spreads. The Group 3 6:3:2:1 crack spread dropped 61% compared to last year. Also not helping matters for NTI was a contracting of crude oil differentials for landlocked sources of crude, as the discount to WTI evaporated for these sources in the quarter.
As a result of these much weaker results, NTI's distribution for Q3 is to drop to $0.31 per unit, down 80% from $1.48 per unit last year. Do note that this decline matches the decline in adjusted EBITDA.
I will admit that my previous analysis greatly underestimated the decline in margins NTI would see as a result of lower crack spreads. I had previously estimated cash available for distribution to range from $43M to $62M, well below the actual figure of $28.3M. My estimates used sensitivity guidance outlined in various SEC filings by NTI. Especially troubling is that NTI's margin per BBL came in over $4.00 per BBL below my estimates. I suspect a large part of this variance was caused by an increase in NTI's feedstock prices. However, I will need to see the quarterly SEC filing and conference call transcript to be certain.
Insiders to sell out of NTI at a discount to current prices
Very late on Monday, the WSJ reported a rumor that Western Refining was planning to buy a controlling stake in NTI. According to the report, Western Refining is to pay $775M for a 38.7% stake in NTI, including a 100% of the NTI's General Partner. The sellers are likely to be private-equity firms TPG and Acon Investments Ltd. These companies bought the refinery and assets that eventually became NTI from Marathon Oil (NYSE:MRO) for $600M back in 2010, which was incidentally a bear market for refiners due to weak fundamentals at that time.
Western Refining is an independent crude oil refiner that operates refineries in the El Paso and Gallup New Mexico, basically in the Permian Basin area. Unlike NTI, Western Refining is a dividend paying stock, not a MLP.
At Monday's closing price of $23.26, this deal may value NTI at slightly above $2.0B, which implies a 6.5% discount to NTI's current market cap of $2.14B. However, is still unclear how much Western Refining is paying per unit.
Final Thoughts and Conclusion
I have very mixed feelings about this rumored transaction. While the insiders are selling out at a discount, they are set to make quite a handsome profit from their stake. In addition, a 6.5% discount is much lower than what could have been expected if the insiders had chosen to do an equity offering of their stake instead. In the two, much smaller, unit offerings earlier this year, the discount applied was very much similar to 6.5%.
Let us not forget that theses PE firms took on quite some risk when they bought NTI. At the time, WTI often traded at a premium to Brent, which made an inland refinery with access only to WTI based feedstock a much less attractive asset.
As for Western Refining taking over NTI, we still need more information to come out to form an opinion. What are Western Refining plans for NTI? Will the companies eventually merge? Will Western Refining adopt the MLP model?
Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.
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.