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MLP versus C-Corp Refiners

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Master Limited Partnerships (MLPs) have become a popular investment vehicle and structure for businesses over the last few years. MLPs offer a number of accounting and tax advantages, but are required to distribute profits annually for tax purposes. Citi Research published a report yesterday focusing on the prospects of the refining sector, and in particular refiners who operate as MLPs.

Citi analysts Mohit Bhardwaj and Faisel Khan suggest that although there has not been much of a price premium between MLPs and C-Corps in the refining sector over the last couple of years, that might change in late 2014 and beyond. The analysts recommend the popular Northern Tier Energy LP (NYSE:NTI) as a Buy in the sector.

Projections for MLP distributions

The Citi report projects another strong year for MLP refiners, and anticipates an average of close to 15% profit distributions to partners in 2014: “We estimate Alon USA Partners LP (NYSE:ALDW) will make a distribution of $1.89 p/u (13.2% yield), CVR Refining LP (NYSE:CVRR) a distribution of $3.40 p/u (15.9% yield) and NTI a distribution of $3.67 p/u (14.8% yield) in 2014.”

MLP versus C-Corp refiners

The analysts point out that 2013 was a record year for cash yield for refining sector C-Corp shareholders and that this kept a lid on a possible pricing premium for MLPs despite even higher cash yields via distributions.

C-Corp refiners returned a record amount of cash to shareholders. We estimate that in 2013, C-Corp refiners had a total cash yield (share buybacks and dividends) of 9.1% vs. a distribution yield for the MLPs of 14.4%. As a result, there was not a significant difference in valuation between the MLPs and C-Corps. The C-Corp refiners also have the advantage of diversified cash flow streams and multiple refineries, while the MLPs are tied to 1 or 2 refineries and therefore are more susceptible to temporary disruptions. We, however, believe that as C-Corp refiners spend more capital in 2014 and beyond, we may see a valuation difference between the MLPs vs. the C-Corps on a cash flow basis.”

Citi MLP refining sector recommendations

Bhardwaj and Khan argue that minimal exposure to crude differentials — the difference in price for different types of crude oil — is what sets Northern Tier Energy LP (NYSE:NTI) apart from its MLP refiner peers.



“The refining MLPs remain tied to Midcontinent differentials and have significant leverage to US vs.international crude differentials. We estimate these crude differentials will remain range-bound at lower levels then they have over the last three years as the US Midcontinent gets connected to the US Gulf Coast. CVR Refining LP (NYSE:CVRR) and Alon USA Partners LP (NYSE:ALDW) are most affected by this dynamic. We anticipate that every $1/Bbl change in the Brent-WTI differential affects ALDW’s distribution by $0.30 p/u and CVRR’s distribution by $0.50 p/u. NTI’s sensitivity to the Brent-Bakken differential is $0.20 p/u. We recommend NTI over CVRR and ALDW.”

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