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

Industry

Oil, Gas, and Consumable Fuels

Sector

Energy

Market Cap

$2.9 billion

Revenues (TTM)

$4.5 billion

1-Year Stock Return

N/A

Return on Investment

N/A

Estimated 5-Year EPS Growth

25%

Dividend & Yield

$5.08/16.5%

Recent Price

$30.76

CAPS Rating

****

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 (NYSE: KMI  ) or Plains All-American (UNKNOWN: PXP.DL  ) 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.

Refined tastes
It's easy to forget the necessity of midstream operators that seamlessly transport oil and gas throughout the United States. Kinder Morgan is one of these operators, and one that investors should commit to memory because of its sheer size -- it's the fourth largest energy company in the U.S. -- not to mention its enormous potential for profits. In The Motley Fool's new premium research report on Kinder Morgan, our top energy analyst breaks down the company's growing opportunity, as well as the risks to watch out for, to uncover whether it's a buy or a sell. To determine whether this dividend giant is right for your portfolio, simply click here now to claim your copy of this invaluable investor's resource.

 


Read/Post Comments (4) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 10, 2013, at 7:23 AM, skat5 wrote:

    Refiners are painfully cyclical as anyone has followed the price of Valero can tell you, and have other risks as seen on those newscasts of refinery fires. However one should perhaps mention the current advantage some refineries have in their location over others due to infrastructure limits. One can see this in the difference in oil price between Brent and Texas crude, over 10%. Refiners who pay that lower price are located near the new production in mid-America. This advantage will not last forever, nor will the huge backorder for rail oil tanker cars, work on expanding pipeline capacity (and direciton of flow) from Cushing, and other benefits of the Dakotas oil boom. But nothing lasts. Meanwhile, take the payouts and slowly cash out on the price appreciation. These "moats" are like a surfer's good wave: you take it if you can.

  • Report this Comment On March 10, 2013, at 11:56 AM, budsauce wrote:

    I think cvrr should be looked at there are no retail stores involved there just oil. refinery transport and pipelines. ya don t have to have little timmy selling tater chips and pay his insurance and make sure he ain t rippin ya off. anyway cvrr seems to be a pure play.

  • Report this Comment On March 12, 2013, at 10:45 PM, DrGoldin wrote:

    "Unlike other MLPs, NTE doesn't guarantee its payout because of the risks inherent in refining."

    Please tell me the name of an MLP that guarantees its payout. If you want a guaranteed payout, you're looking at Treasuries. I don't think anyone is investing in NTI (the ticker symbol isn't NTE) with the notion that its payouts are guaranteed.

    And I have a question. Everybody keeps saying that the refinery boom won't last forever. OK, nothing lasts forever. But why won't the refinery boom last, ummm, a very long time? The unarticulated reasoning seems to be that the spread between WTI and Brent will have to close. And I'm really not understanding why that has to happen anytime soon. I'm seeing nothing but indications that WTI will remain low. Please explain what I'm missing.

  • Report this Comment On March 13, 2013, at 3:35 PM, rtaliano wrote:

    That you Dr. Goldin. Honestly it is getting to the point where I won't even click on a Fool story...and I am a subscriber to one of their newsletters. These stories rarely ever state anything beyond the obvious. Risk is relative and if someone buys a refinery MLP without understanding how such securities differ from more typical midstream MLP's and even upstream MLP's then he or she shouldn't be buying. If you don't understand why Brent-WTI spreads should stay strong....... you shouldn't be buying these. These are not buy and hold stocks. Refiners are cyclical but such cycles will be be from a higher base given that there is no reason to suggest that Brent WTI spreads will plummet. Transportation issues will continue to depress WTI and the continued improvement of the world economy in general (save Europe) will prop up Brent.

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