The three downstream, crude oil refining MLPs offer a unique play on energy prices, both crude oil and refined fuels. Refiners, including both corporations and the MLPs discussed here, generate gross profits based on the difference between what they pay for crude oil and the prices they get for the refined gasoline, diesel and other fuels and petroleum by-products produced in the refining process. The refinery MLPs all have the policy of paying out 100% of distributable cash every quarter. The result is investments that mirror the quarterly profits of the refining sector.
If you are not familiar with the crude refining MLPs, I covered each in more detail in the first article of this ongoing series: Data Metrics For The Refinery MLPs - Alon USA Partners LP, CVR Refining LP, Northern Tier Energy LP. It's a quick read, so go take a look.
Fourth Quarter Recap
The 2014 Q4 was a tumultuous period in the energy sector. Both crude oil and refined fuels priced dropped steadily and rapidly through the quarter. Somewhat surprisingly, the crack spread I calculate using weekly EIA data stayed very steady through the quarter and was basically the same as the Q2 and Q3 spread numbers. Final average was $18.62 per barrel for the quarter. The question was how the changing energy prices would affect the actual results realized by the refineries. Here are the pertinent Q4 numbers for each of the three MLPs.
Northern Tier Energy LP (NYSE:NTI) generated over $1.00 per unit in free cash flow on a $20 per barrel operating margin. However, the company elected to set aside $55 million as a cash reserve to provide liquidity in a volatile energy market. NTI declared a $0.49 per unit distribution, compared to $1.00 paid for the 2014 third quarter. I covered NTI's results here.
Alon USA Partners LP (NYSE:ALDW) had an uneventful fourth quarter, but realized a $15.12 per barrel gross margin, compared to $19.98 for Q3. Investors earned a $0.70 per unit distribution, down from $1.02 paid after the third quarter. Alon increased the refinery's operating efficiency with several capital improvement projects during 2014.
CVR Refining LP (NYSE:CVRR) reported a Q4 operating margin of $11.28 per barrel, compared to $$13.16 for the third quarter. A $0.37 per unit distribution was paid compared to $0.54 for Q3. The operating margin reported by CVRR for the second half of 2014 was significantly lower than the company's and my benchmark crack spreads. Net cash flow available for distributions was about half the amount generated in the first half of last year. I have yet to figure out why this has occurred with the two CVR refineries.
First Quarter Energy and Unit Price Metrics
The crack spread I calculate from EIA energy price data started January with spreads in the $14 to $15 range, down quite a bit from Q4. The spread started to increase in February and has been above $24 per barrel since about February 20. As you can see in the chart below, my crack spread average for Q1 to date is above $20 per barrel.
The unit prices of these three MLPs swing significantly as energy prices and distribution amounts change over time. It a perfect world we would buy in near the 52-week or quarterly lows to either accumulate units or to sell when prices swing higher. Unit prices did hit attractive for buying lows in late December, but have been up or stable since the start of the year. ALDW has been especially strong, up 60% in the last three months. All three still show low teens yields based on the trailing four quarters of distributions.
Based on crack spread calculations so far, the 2015 first quarter should come in very good for all three refining MLPs. The NTI share price seems to have stabilized at about $25, plus or minus a buck ($1.00). It seems very possible that Northern Tier could pay close to $4.00 in distributions over the next four quarters if energy prices do not vary drastically. The significantly higher unit price indicates the market may be looking for close to $1.00 from Alon USA Partners with its next distribution. ALDW has been the most volatile of the three for both unit prices and quarterly distributions. If CVR Refining can get its gross refining margin back up closer to the benchmark spreads, CVRR may provide the biggest positive surprise with its first quarter distribution. From the overall crack spreads for Q1 to date, all three have the potential to pay close to a $1.00 or higher for the first quarter. Each is dependent on crude oil and fuels pricing in its own markets, but all should surpass their Q4 distribution rates, at least.
Disclosure: The author is long NTI.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.