Northern Tier Energy: Yet Another Risky Oil and Gas MLP

With more than 5,400 stocks to choose from, the universe of investment possibilities is enormous, so looking for stocks based on what you already know and own might be a path to pursue.

Motley Fool CAPS, the 180,000 member-driven investor community that translates informed opinion into stock ratings of one to five stars, helps you focus your attention by providing you with a personalized Stock of the Day. Using its supercomputer, it looks at stocks currently in your active pick list and then scans stocks picked by highly rated players with lists similar to yours, as well as industries in which you currently have active picks, and targets areas in which you already have an interest.

By pairing up the opinions of some of the top investors in the CAPS community, CAPS provides you with a handful of companies on which to begin your own due diligence and research.

Buy what you know
No doubt based on my having weighed in on companies such as HollyFrontier, McMoRan Exploration, and Cheniere Energy in the broad oil, gas and consumables sector that I rated to outperform the market averages, the CAPS supercomputer thought I also might be interested in Northern Tier Energy (NYSE: NTI), an independent downstream energy master limited partnership with refining, retail, and pipeline operations serving the PADD II region of the U.S., districts created during World War II to ration fuel but still used today for data collection purposes.

It was one of five Stocks of the Day it offered up for my consideration this week, and though it offers a tempting dividend that currently yields 16%, just remember that as smart as the CAPS algorithm may be, it's still just an algorithm. So be sure to look before you leap on any of its suggestions.

Northern Tier Energy snapshot

Source: FinViz.com. N/A = not available. Northern Tier Energy had its IPO on 7/26/12.

Pipeline to profits
Because of their high divided yields, master limited partnerships continue to be popular with investors looking for an easy way to generate income, particularly during periods like now, when the Federal Reserve is implementing monetary policy hat keeps interest rates artificially low. It almost seems too good to be true: The MLPs make a ton of cash every quarter, and they distribute it all to their unitholders. Wash. Rinse. Repeat.

For certain MLPs it is a very repeatable business model. Their origins lie in fixed assets like oil and natural gas pipelines and storage facilities, where a Kinder Morgan (KMI -0.27%) or Plains All-American (NYSE: PXP) essentially collect a toll for every barrel of oil equivalent transported through their pipeline system. These MLPs work because they needn't rely on the price of the underlying energy source, instead collecting revenues based upon long-term contracts. Whether oil's $100 a barrel or $75 a barrel, the toll must be paid.

Horse of a different color
Yet other MLPs are might be what you'd call hybrids. On the surface they use the same model as the pipeline operators, but their business is highly dependent on the price of energy or on other factors. Hi-Crush Partners, for example, bases its payout on the production of fracking sand. That's really a different animal altogether, and Northern Tier Energy is of this latter sort as well.

NTE operates in two segments, refineries and retail -- a string of 166 SuperAmerica brand convenience stores and 68 supported franchised convenience stores. Unlike other MLPs, NTE doesn't guarantee its payout because of the risks inherent in refining. That's similar to the approach taken by Alon USA Partners (NYSE: ALDW), which also operates a refinery in Big Spring, Texas, and markets its output through some 600 7-Eleven branded convenience stores that are owned by Alon Energy.

That makes an investment in them much more risky than those founded on the toll-road model. Refining is a cyclical business, and while it might be in favor now, margins could quickly slide, and those tempting yields NTE offers could evaporate rather quickly. Although some MLPs may be good investments, I'm not keen on these new breeds, and the industry's separate and complex paperwork requirements make tax time an especially agitation-inducing period.

These hybrids have become all the rage, but investors need to go in with their eyes wide open. I'm not ready to rate this MLP as being ready to maintain its outperformance over the long haul, but let me know below whether you are.