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Based in Ridgefield, CT, Northern Tier Energy LP (NTI) has scheduled a $326 million IPO with a market capitalization of $1.8 billion at a price range mid-point of $20, for Thursday, July 26, 2012.

Seven other IPOs are scheduled for the week of July 23. The full IPO calendar is available here.

NTI filed an updated [S-1] July 16, 2012.

UNDERWRITERS
Manager, Joint Managers: Goldman; Barclays; BofA Merrill Lynch
Co Managers: Credit Suisse; Deutsche; UBS; J.P. Morgan; Macquarie Capital

SUMMARY
NTI is an independent downstream energy company with refining, retail, and pipeline operations that serves the PADD II region

NTI is a carve-out from Marathon Oil (MRO), market capitalization of $19 billion. The deal happened in 2010, and was engineered by Goldman Sachs.

The petroleum industry is usually divided into three major components: Upstream, midstream and downstream. Midstream operations are usually included in the downstream category.

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

12 months ended March '12

Cap (MM)

Sales

Earnings

BookValue

TangibleBV

in IPO

Northern Tier Energy LP (NTI)

$1,840

0.46

-2

7.5

8.8

18%

Glossary of financial terms

CONCERNS
(1) 20% of the outstanding stock is "paid in kind" to senior management and the partnership.

NTI's partnership authorizes NTI to issue an unlimited number of additional units, including PIK units.

(2) NTI incurred a $92 million recent derivative loss, and the company wants to re-compensate the loss through the IPO proceeds. According to its S-1, NTI will "pay $92 million to J. Aron & Company, an affiliate of Goldman, Sachs & Co., for losses incurred during the three months ended June 30, 2012 as a result of resetting the price of certain derivative contracts."

That's reason enough to avoid the NTI IPO.

(3) Also, there is no expected payout, although NTI does forecast generating $245 million in cash from operations for the 12 months ended June 30, 2013. If all the $245 million were paid out, the return at the price range mid-point would be 13%, but don't count on it for at least three reasons

  • See "Proposed Pipeline Initiative" below. This could eat up a lot of cash.
  • $85 million liability to be recorded post-IPO. See "CONTINGENT CONSIDERATION ARRANGEMENT" below
  • Profit margins appear to be temporarily high; therefore, NTI's cash flow forecast might be unduly optimistic.

More recently, during the second quarter of 2012, the discount to which NYMEX WTI trades relative to Brent has narrowed due to a number of factors, including recently announced changes in the pipeline infrastructure serving Cushing, Oklahoma. The narrowing of this margin may affect the prices at which we sell our refined products relative to our cost of crude oil and may therefore cause a reduction in our refining margins.
Source: NTI's S-1, page 95

(4) Compared to mid-stream partnerships (downstream is usually included in mid-stream), NTI appears overvalued in terms of price-to-book at 7.5 times book value, and the company doesn't commit to a distribution payout range. From the S-1:

Unlike most publicly traded partnerships, we will not have a minimum quarterly distribution or employ structures intended to consistently maintain or increase quarterly distributions over time.

HISTORY
NTI began operations in December 2010 through the acquisition of the St. Paul Park, Minnesota refinery, a 17% interest in the Minnesota Pipe Line Company and in MPL Investments, convenience stores and related assets from Marathon for $554 million. The transaction also included cash and the issuance to Marathon of $80 million of a noncontrolling preferred membership interest in NTI's parent, Northern Tier Holdings.

Marathon Oil has a market capitalization of $19 billion.

Northern Tier Energy, Inc., was incorporated in October 2011. Northern Tier Energy, Inc. was converted to Northern Tier Energy LP in June 2012.

BUSINESS
NTI is an independent downstream energy company with refining, retail, and pipeline operations that serve the PADD II region of the United States.

The business is operated in two business segments: refining business and retail business.

Refining Business
The refining business primarily consists of a 74,000 bpd (84,500 barrels per stream day) refinery, located in St. Paul Park, Minnesota.

As mentioned above, NTI's refining business also includes a 17% interest in the Minnesota Pipe Line Company and MPL Investments, which owns and operates the Minnesota Pipeline, a 455,000 bpd crude oil pipeline system that transports crude oil (primarily from Western Canada and North Dakota) for approximately 300 miles from the Enbridge pipeline hub at Clearbrook, Minnesota to NTI's refinery. The Minnesota Pipeline has historically transported the majority of the crude oil used and processed in NTI's refinery.

Retail Business
The retail business operated 166 convenience stores under the SuperAmerica brand, and also supported 67 franchised convenience stores, which are also operated under the SuperAmerica brand. These convenience stores are located primarily in Minnesota and Wisconsin.

NTI's refinery supplied substantially all of the gasoline and diesel sold in NTI's company-operated and franchised convenience stores for the three months ended March 31, 2012 and the year ended December 31, 2011.

MARGINS NARROWING
During the second quarter of 2012, the discount to which NYMEX WTI trades relative to Brent has narrowed due to a number of factors, including recently announced changes in the pipeline infrastructure serving Cushing, Oklahoma.

The narrowing of this margin may affect the prices at which NTI sells refined products relative to NTI's cost of crude oil and may, therefore, cause a reduction in our refining margins.

PROPOSED PIPELINE INITIATIVE
On June 22, 2012, consistent with NTI's strategy to optimize its crude oil supply and sourcing advantage, the company entered into an exclusivity agreement with Saddle Butte Pipeline, LLC ("Saddle Butte") and its wholly-owned subsidiary, High Prairie Pipeline, LLC ("High Prairie"). This agreement sets forth a proposed non-binding shipping commitment and equity investment by NTI in a 150,000 bpd pipeline spanning from McKenzie County, North Dakota to Clearbrook, Minnesota. The pipeline will be constructed and maintained by High Prairie.

NTI's proposed commitment contemplates a 10-year, 50,000 bpd shipping commitment on the High Prairie pipeline at a tariff of $2.49 per barrel (or as otherwise approved by the Federal Energy Regulatory Commission ("FERC") and an equity investment in High Prairie proportional to NTI's throughput commitment as a percentage of total commitments on the High Prairie pipeline. Saddle Butte and High Prairie have granted certain exclusivity rights to NTI with respect to the High Prairie Pipeline project. From the S-1:

Upon satisfaction of certain conditions, we have agreed to grant exclusivity rights to Saddle Butte and High Prairie during the negotiation of definitive agreements. There can be no assurance that definitive agreements with Saddle Butte and High Prairie will be reached regarding the proposed shipping commitment and equity investment.

IPOdesktop note: the above pipeline deal could very well consume cash, which would limit NTI's short-term cash payout.

CONTINGENT CONSIDERATION ARRANGEMENT CREATES $85 MILLION LIABILITY
In connection with the Marathon acquisition, NTI entered into a contingent consideration arrangement with Marathon.

This arrangement would have required earn-out payments if NTI's annual consolidated EBITDA, adjusted for certain agreed items exceeded $165 million during any year in each of the eight years following the Marathon acquisition.

Specifically, NTI would have been required to pay Marathon 40% of the amount by which the Agreement Adjusted EBITDA exceeded $165 million, subject to certain reductions, in any year in the eight years following the Marathon acquisition. Total payments to Marathon under this agreement could not have exceeded $125 million over the eight years following the Marathon acquisition.

Conversely, Marathon would have been required to make margin support payments to NTI of up to $30 million per year if the Agreement Adjusted EBITDA was less than $145 million, subject to certain reductions, in either of the 12-month periods ending November 30, 2011 and 2012.

Disputed payments
As of December 31, 2011, NTI recorded a receivable of $30 million relating to the margin support component of the contingent consideration arrangement for the twelve months ended November 30, 2011.

Marathon disputed $12 million of this amount. In connection with the resolution of this dispute, NTI entered into a settlement agreement with Marathon on May 4, 2012.

Under the terms of this settlement agreement, Marathon will receive $40 million of the net proceeds from this offering, and Northern Tier Holdings will redeem Marathon's existing preferred interest with a portion of the net proceeds from this offering and issue Marathon a new $45 million preferred interest in Northern Tier Holdings in consideration for relinquishing all claims with respect to earn-out payments under the contingent consideration agreement.

At March 31, 2012, in addition to the $30 million receivable discussed above, NTI recorded at fair value, an asset of $2.8 million related to the margin support component for the 12 months ended November 30, 2012 and a liability of $79.2 million related to the earn-out component.

Upon the consummation of this offering, NTI will reverse any amounts recorded for the margin support and earn-out arrangements and record a liability of $85 million.

DISTRIBUTION POLICY
Unlike most publicly traded partnerships, NTI will not have a minimum quarterly distribution or employ structures intended to consistently maintain or increase distributions over time

NTI's quarterly distributions, if any, will not be stable and will vary from quarter to quarter and year to year as a direct result of variations.

The board of directors of NTI's general partner will adopt a policy pursuant to which distributions for each quarter (including the distributions of additional PIK (payment in kind) units on outstanding PIK units) will equal the amount of available cash NTI generates in the quarter.

USE OF PROCEEDS
NTI expects to receive $288 million from its IPO. The IPO money, plus $41 million of cash on hand, is allocated to the following:

  • Redeem $29 million of senior secured notes at a redemption price of 103% of the principal amount thereof, for an estimated $30 million
  • Pay $40 million to Marathon, which represents the cash component of a settlement agreement entered into with Marathon related to a contingent consideration agreement (see above)
  • Pay $92 million to J. Aron & Company, an affiliate of Goldman, Sachs & Co., for losses incurred during the three months ended June 30, 2012 as a result of resetting the price of certain derivative contracts
  • Distribute $167.2 million to Northern Tier Holdings, of which $92.2 million will be used to redeem Marathon's existing preferred interest in Northern Tier Holdings and $73.1 million will be distributed to ACON Refining and TPG Refining (Goldman Sachs-related "sponsors")
  • $1.9 million will be distributed to entities in which Mario E. Rodriguez and Hank Kuchta have an ownership interest
Source: IPO Preview: Northern Tier Energy LP (NTI)