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  • Northern Tier Energy (NTI): A Winning Stock 1 comment
    Jan 7, 2014 2:47 PM | about stocks: NTI

    Northern Tier Energy LP, a downstream energy company, is focusing on growing its refining segment after experiencing downtime last quarter. The company's only refining plant, St. Paul Park refinery, in Minnesota, contributes 72% of the company's total revenue. With the advantage of the refining plant's location in the U.S. PADD II region, which includes the Bakken formation of North Dakota, and its total throughput capacity of 89,500 barrels per day, the company is optimistic about this segment. Northern Tier's refinery segment is strengthening its production base with higher crude oil production in the Bakken formation and is in line to meet the guidance for refining throughput of 80,000 to 85,000 barrels per day in the fourth quarter of 2013.

    In December, total crude oil production from the North Dakota Bakken formation was 1 million barrels of oil per day, or Mbopd. Production is expected to increase to 1.02 Mbopd in January. This projected production growth in Bakken will help the company increase its total throughput and also improve the crack spread.

    With production throughput, increased crack spread largely determines a refinery's profitability. Crack spread is the difference between the wholesale petroleum product price and the crude price. A higher spread between the crude price and the wholesale price generates higher refining profits. The price of Bakken crude is a major factor for Northern Tier's Minnesota refinery. The Bakken crude is currently trading at $16 lower per barrel than the U.S. benchmark West Texas Intermediate, or WTI. Earlier, the Bakken crude traded $10 lower than the WTI. The widened spread will help the company improve its margin with lower-priced Bakken crude.

    Along with a widened crack spread, the company also reduced costs in crude oil transportation from North Dakota and Western Canada. It has a 17% interest in a Minnesota pipeline company, through which it accesses crude oil from the Bakken formation and Western Canada directly. The transportation of crude via pipeline is considered less costly, generally around $12 to $15 less per barrel than railroad shipping. This pipeline helps the company receive cheaper Bakken crude in Minnesota through its 300-mile pipeline.

    Besides direct access to the Bakken formation and Western Canada crude oil production through the Minnesota pipeline, the refining plant's location enabled the company to take advantage of the higher demand in refined products in the PADD II region.

    Demand of refined products in PADD II has exceeded the total regional production for the last seven years. To meet the demand, retailers in this region had to import from the coastal region, adding an extra transportation cost. While looking at the opportunity, the company planned for the expansion of its St. Paul Park refinery in the fourth quarter of 2013 to support local demand. Recently, it completed its wet gas compressor project that helps reduce the output of black oil by 2,000 barrels per day and converts it into gasoline, distillate, and liquid petroleum gas (NYSE:LPG). Black oil is used to lubricate a slow-moving machine, and it has less economic value than other refined products. Earlier, the company expanded the sweet crude tower throughput with an additional 8,000 barrels per day. As there are only two refineries in Minnesota, including the company's St. Paul Park refinery, it can capitalize on the growth in demand for refined products in this region.

    Northern Tier's existing and new expansion plans should enable it to keep up with the higher demand of refined products in the PADD II region with its increased throughput in the coming years.

    Acquisition: Growth continues

    To strengthen its refining segment and positioning, the company announced an acquisition agreement with Western Refining (NYSE:WNR). With this agreement, Western Refining acquired 100% general-partner interest and 38.7% of limited-partnership interest in Northern Tier, which was held by previous partners ACON investment and TPG. With this deal, both companies will benefit from refining operations. Northern Tier's total refining capacity is expected to increase by 242,500 barrels per day, including Western Refining's platform, which will be used to fulfill part of the higher demand in the PADD II region.

    This acquisition will help Northern Tier extend its pipeline network to the Permian and San Juan basins. Northern Tier will benefit from the production growth of these two basins. With the current crude discount of $4.75 less than WTI, its refining margin is expected to improve in coming years. Along with the lower-cost crude from these fields, Northern Tier will also take advantage of the integrated retail network of Western Refining's 458 retail stores to distribute in the Southwest, mid-Atlantic and upper Midwest. Moreover, Northern Tier also has a contract with Marathon Petroleum LLC (NYSE:MPC) to supply all of its gasoline and diesel requirements in 90 Marathon convenience stores in the company's marketing area.

    With extensive access to most of the lower-cost-crude fields and a strong retail network, Northern Tier will offset the impact of throughput downtime in the third quarter and will improve the top-line of its refining and retail segments.


    Although Northern Tier's refining segment has suffered downtime in throughput and weaker revenue during the third quarter, its strategic position in the U.S. PADD II region will enable the company to turn around in coming years. Moreover, Western Refining's acquisition of its 100% general-partner interest, along with expansion of its refining plant, will enable it to meet the growing demand of refined petroleum products in the PADD II region. Hence, Northern Tier is expected to improve its refining production and strengthen its top-line in the coming quarters.

    MissionIR provides investor relations services to publicly traded companies in exchange for compensation. This article may be part of our efforts to widen a client's exposure. To read our full disclaimer, visit http://disclaimer.missionir.com

    Stocks: NTI
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  • dhdhoora
    , contributor
    Comments (820) | Send Message


    I like NTI a lot and agree with your generic description of the company. That said, aren't you putting the cart before the horse with your description of the WNR refineries and pipeline as being part of NTI? While this may make sense, I do not believe that there has been any reliable release of information about the co-mingling or integration of WNR assets with NTI. My personal guess is that WNR will take advantage of NTI's MLP structure (why else would the become general partner) with some kind of asset sale to the MLP. But, let's wait for the news!


    All the very best,
    7 Jan 2014, 05:49 PM Reply Like
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