MLPs General Partnership's Will Be Hot Buys In 2014

by: Tom Dorsey

On November 12, 2013 Western Refining, Inc. (WNR) announced that it has entered into a definitive agreement to acquire ACON Investments' ownership interests (General Partnership) in Northern Tier Energy LP (NTI) for a total consideration of $775 million. ACON and TPG will receive the distribution on the common units that Western has acquired with respect to the quarter ended September 30, 2013. As a result of this transaction, Western owns Northern Tier Energy's general partner and 35,622,500 limited partner units, or approximately 38.7% of Northern Tier Energy. The balance of the limited partner units will remain publicly traded. The transaction was signed and closed on November 12, 2013.

A case study of Western Refining buying Northern Tier Energy demonstrates several positives.

The current deal was funded with a $550 million senior secured Term Loan B facility; the remainder was funded with $245 million in cash. Currently, the lower cost of borrowing money allowed Western Refining to purchase now and reap the benefits in the years to come. Based on these and the fiscal third-quarter balance sheet figures, this additional debt and reduction in cash will push Western Refining's debt-to-equity ratio to more than 100%. Our analysis is that Western is unlikely to try to acquire all outstanding units of Northern Tier. This could continue to be a positive factor, as Western Refining is expected to maintain a high level distribution for itself and investors.

There are many companies with excess cash looking for a good reason to buy income producing companies. This may become a trend in 2014, if the assets are able to provide a positive cash flow and cost savings for the new buyer.

On the company's website (as noted above) the assets acquired from Northern Tier include the following:

  • St. Paul Park Refinery in St. Paul Park, Minnesota 89,500 barrels per day refining capacity.
  • Processes 100% cost-advantaged crude oil - 75% light, 25% heavy.
  • Pipeline access to Bakken and Canadian crude oil 17% interest in a 455,000 barrel per day crude oil pipeline.
  • Products terminals, storage tanks, rail facilities and Mississippi river dockage.
  • Retail assets which include the SuperAmerica retail chain of 163 company operated convenience stores and 74 franchised convenience stores.

As a result of the acquisition, Western Refining's platform will include:

  • Refining capacity of 242,500 barrels per day.
  • Pipeline access to cost-advantaged crude oil sources in the Bakken, Permian, San Juan, and western Canada regions.
  • Wholesale distribution of approximately 160,000 barrels per day to customers in the Southwest, mid-Atlantic, and Upper Midwest.
  • Integrated network of 458 retail convenience stores.
  • Extensive crude oil and refined product logistics assets.

Western Refining currently has two refineries located near the Gulf Coast. Northern Tier's one refinery is located in the upper Midwest, St Paul Park, MN, giving the company access to cheap Canadian oil sands and Bakken crude. As more markets become available through pipelines and other distribution network capabilities, the profitability will be more favorable.

Western Refining did not have to develop the business structure, just continue operations and reap the profits. This would have take the company many years to develop and many competitors challenging for every facet of the business. This move removed one competitor and entrenched itself as a buyer and seller of current customers.

Western Refining owns and operates 200 convenience stores within Arizona, Colorado, New Mexico, and Texas, and with Northern Tier operations of 163 convenience stores and 73 franchised convenience stores, primarily in Minnesota and Wisconsin. So overall total is 436 convenience stores across six states. This creates an opportunity to expand and connect the two operations gaining efficiencies in the long run.

The benefit ACON investors (the sellers) gained is counted by $475 million reasons. NTI operations will not change, and the return for investors of Northern Tier is not expected to change with distributions remaining in the double-digit range.

There are other MLPs that are ripe for picking as they have good business operations and positive cash flows. The industry could see 2014 as the year of realigning MLPs to gain a foot hold in new areas, to restructure or expand operations.

One MLP that comes to mind quickly is Alon USA Partners (ALDW), with its parent company of Alon USA Energy (ALJ) would make the perfect target. Alon USA Energy owns the general partner and 81.6% of Alon USA Partners. The company is the largest 7-Eleven licensee in the U.S. with 298 retail gasoline/convenience stores in Central and West Texas. So the company could present an attractive target. With a market capitalization of $835 million for Alon USA Partners and $785 million for Alon USA Energy, the two would be a tidy acquisition considering Northern Tier is currently worth around $2.4 billion.

Alon USA Partners reported a loss last quarter (which was due to a fire at the refinery). This depressed the unit price valuation since the fire in September 2013. The refinery has since been repaired and back to full operational status. Opportunistic buyers could take advantage of this as the company returns to profitability in the fourth quarter, 2013 and beyond.

CVR Refining LP (CVRR) is another refinery company that owns and operates 2 refineries, one in Coffeeyville, KS and the second in Wynnewood, OK. The two combined supporting refineries includes a 115,000 barrel per day complex full coking, medium-sour crude oil refinery operated by Coffeyville Resources Refining & Marketing in Coffeyville, Kan., a 70,000 barrel per day medium complexity crude oil refinery operated by Wynnewood Refining Company in Wynnewood, Okla., approximately 350 miles of pipelines, more than 125 crude oil transports, a network of strategically located crude oil gathering tank farms, and more than six million barrels of owned and leased crude oil storage capacity.

Both of these refineries would make for an excellent target with many of the same benefits listed above. I have written on both of these companies as they pay over a 10% annual return in their distributions. Alon USA Partners LP is expected to return a distribution for 4Q, 2013 and pay in February 2014. These two MLPs are expected to pay a profitable distribution this quarter, due to the spread between the Brent Oil Price (quoted December 3, 2013) during midday trading at $111.45 and WTI at $93.82 the same). The increase in the crack spread through late 3 quarter has spread even more,

There are additional pipeline companies that are good candidates for acquisitions, as they provide services to larger companies and provide feeder lines into and out-of areas supporting drilling and refining locations. Purchasing these companies can capture cost savings and most provide a positive cash flow with a quarterly or monthly distribution. Many of these larger companies have excess cash with the ability to buy with limited financing if desired. Most of these, due to the supporting of the buyers current operations provide lower risks and seen as valuable additions to their business operations. Having priority through pipelines to move your own product can create less competition and ensure stable income and trickle down to the bottom line.

Disclosure: I am long NTI, CVRR. 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.