We track Master Limited Partnership (MLPs) refineries for a very lucrative investment opportunity. These investments pay a distribution each quarter based on the earned income and are required to pay out 90% of earnings to investors to retain their tax-free status as an MLP.
Many of these companies do not track well with normal investment analysis. Because they focus on paying out 90% or more of their earned income, and their business model and operations are fixed, the analysts' tools do not see growth in year-over year analysis. Most technical evaluations rate these as sells, mostly because they are trying to analyze a square peg in a round hole. Once you understand who these companies are, how they operate and how they can make profitable returns, you can invest with confidence and earn the returns you are looking for.
There are risks associated with all investments, and these companies are oil refineries that are affected if an accident occurs that shuts down part of all of the facility operations for any extended time. There have been accidents in the past, but the companies have conducted repairs and returned to their profitable states.
These 3 companies I will discuss today were created from a parent company that controls over 50% control, but as an investor the distributions pay a higher distribution yield, annual based over 10% (+). Owning common shares (called units), the upside is not limited like when buying preferred shares, but the risks include the same down side that if no profits are earned per quarter there would be no distribution, and the unit price can drop.
We follow each of these MLPs and find the opportune time to buy into the company, when the unit price has dropped after a major event, and then the right time to exit when the unit price has climbed to the quarterly high point. This simple method can be reviewed through historical records as being quite successful, and easy to understand by novice investors, as well as seasoned pros.
The first company is CVR Refining (CVRR). CVRR's parent company is CVR Energy CVI) is headquartered in Sugar Land, Texas, and is a diversified holding company primarily engaged in the petroleum refining and nitrogen fertilizer manufacturing industries through its holdings in two limited partnerships, CVR Refining, LP and CVR Partners, LP. CVRR operates the refining business and CVR Partners operates the nitrogen fertilizer business. The 2 are co-located and CVR Refining provides feedstock for the fertilizer business making the cooperation profitable for both. CVI earned $54.9 million or 63 cents per diluted share, on net sales of $1,388.9 million, with a cash dividend of $0.50.
CVRR owns 2 refineries and logistics assets that includes a complex full coking, medium-sour crude oil refinery with a rated capacity of 115,000 barrels per calendar day operated by Coffeyville Resources Refining & Marketing in Coffeyville, Kansas and a complex crude oil refinery with a rated capacity of 70,000 barrels per calendar day operated by Wynnewood Refining Company in Wynnewood, Oklahoma. CVR Refining's subsidiaries also operate approximately 336 miles of owned and leased pipelines, approximately 150 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.
CVRR released its latest quarter financial report on April 30, 2015 with a net income of $46.7 million on net sales of $1,304.4 million, and non-GAAP $161.7 million compared EBITDA. At this time I will not compare to statistics from the previous year, as the numbers are not representative of accurate comparisons. The cost of crude oil dropped and a comparison would be inaccurate and misleading.
What we can measure is the return for investors. Last quarter (4Q, 2014) the company paid $0.37 per unit. This quarter the company announced $0.76 per unit in the quarterly report with the pay date on May 18, 2015, with the ex-distribution date of 7 May (buy sell on or before May 6 for date-of-record on May 11).
What is important is to understand the quarterly cycle to maximize your returns on these kinds of investments. Just prior to the ex-distribution date, the unit price reaches it highest point, as many investors want to buy in and earn the distribution. After the distribution date, the unit price falls. In a pure market analysis, the unit price would fall the exact amount of the distribution, but history bears that the price falls more, as investors who bought in for the distribution, are now selling and expand the range of the drop.
A savvy investor would allow the drop to occur and then buy in after a substantial drop like in November 2014 when the stock price the day prior the ex-date closed at $24.52. During the month of December the unit price fell into the teens, sliding as low as $13.37. We normally see the low point 15-45 days after the last distribution and recommended a buy in December. The unit price rebounded into the $18s leading to the next ex-date, allowing investors to gain anywhere from $3-5 dollars per unit on a 60 day investment. Assume a buy in at $15 and sell at $18 that would have been a 20% profit for that quarterly cycle. (Note: I do not try to use the lowest buy in and highest exit point in my examples, but realistic numbers for your assessment.)
After the last distribution in February 2015, we did not see a drop like anticipated, but the oil market was supporting a very strong crack spread that allowed refineries to sell their products for a lucrative price market up from WTI compared to Brent crude pricing. That was the market driver that pushed investors to buy early and ride the unit price up. With that said, we still saw the unit price climb from the price from 30 days after the last ex-date climb from $20.38 on March 25 to $22.15 at the close on May 1. With the goal to sell prior to the ex-date on May 6, we could anticipate the unit price to climb above the $22.38 price, and earn a $2 per unit this quarter on the 45-day investment. That would equate to a near 10% return for 45 days, and an investor can duplicate this process 4 times a year on this company. Earning 40% a year would be considered a great return, but for the sharp investor, we can duplicate this with multiple companies using the same technique and their quarterly cycle.
For the purpose of brevity, here are 2 additional MLPs I like and track using the same investment model. Northern Tier Energy LP (NTI) and Alon USA Partners, LP (ALDW) run a similar cycle. NTI will release its quarterly statement on May 5, and ALDW will release their quarterly report on May 6, 2015.
Both of these companies posted a higher distribution last quarter than CVRR, both companies paid their distributions on February 12, 2015 with NTI paying $0.49, and ALDW paid $0.70. Both are expected to increase their distribution this quarter, based on the positive market activity discussed with CVRR. Although we don't expect both of these to double their distributions, we do anticipate a healthy increase. These results will drive the unit prices up for an excellent profit taking point in our investment cycle.
