Western Refining (NYSE: WNR ) has not been well liked by the market recently. For at least the past several months the company has been the most shorted energy stock on the New York Stock Exchange. But that could all change with the company buying the general partner stake of Northern Tier Energy (UNKNOWN: NTI.DL ) . Is this deal enough to turn Western's haters around? Let's answer three questions to see what this deal means for all parties involved.
1) What does this mean for shareholders in Northern Tier Energy?
Not much, really. Western Refining isn't buying the publicly traded MLP we know as Northern Tier, it's buying the general partner of the company from a couple private equity companies. This will net Western Refining a 38.7% of the shares outstanding of Northern Tier, but the remaining shares will be publicly traded. It is very possible that if the deal turns out to be a great one, then Western Refining could come in and buy up the rest of those shares. But for the time being shareholders will get to keep this variable rate MLP.
The one thing that could change for Northern Tier is its strategy. Since Western will be the sole owner of the general partner, it will have a large say on how the company conducts its business. As part of a larger company, it is very possible that Northern Tier may retain more of its distributable cash for capital expenditures to more closely integrate Northern Tier's operations with Westerns, especially on the wholesale distribution side of the business.
2) What does this mean for Western Refining?
Overall, this is a pretty good deal for Western. It essentially gets operational control of Northern Tier without forking over the cash for an all out buy of the company. If you add Northern Tier's 89,500 barrels per day of refining capacity, it will increase Western's overall refining capacity by 58%. Also, with three refineries on its books instead of only two, the company can better manage its scheduled downtime to mitigate the impact on earnings on a quarterly basis.
The other aspect of the deal is that it will give Western more exposure to advantaged feedstocks such as Bakken and Canadian heavy crudes. Both of these types of oil trade at a discount to the U.S. benchmark price West Texas Intermediate, which makes for better refining margins for Western's portfolio.
Investors who have followed Western for a long time may be worried that this deal could have the same disastrous results as the Giant Industries deal had on the company back in 2007. Western got three refineries out of it, only to sell one and shut down another and put the company of the brink of debt default with a debt to capital ratio at a dangerous 68%. This deal is a much safer play in comparison. Western is funding $245 million of the $775 million deal with cash on hand, and covering the rest with a $550 million loan, which will put the company at a debt to capital ratio of 55%. Some of that debt will be converted to shares in 2014, though, and the increased cash flows from the Northern Tier acquisition should help to cover the increased debt expenses.
3) Does this make a convincing buy case for Western over peers HollyFrontier (NYSE: HFC ) or CVR Refining (NYSE: CVRR ) ?
One advantage that investing in Western Refining has over CVR Refining is that CVR is a variable rate MLP like Northern Tier, so the distribution you receive each quarter varies and will probably be lower with the spread between West Texas Intermediate and Brent being relatively narrow. If you are looking for a more consistent dividend, then probably Western would win that fight over CVR Refining.
In comparison to HollyFrontier, though, it's a little different. Aside from having more refining capacity spread among five refineries, HollyFrontier's assets are in more infrastructure challenged regions of the U.S. This means that HollyFrontier will still probably have better access to discounted feedstocks. The company is also in a more shareholder friendly capital structure with a debt-to-capital ratio of only 12%, and the company has a history of paying out special dividends and buying back gobs of shares.
What a Fool believes
Overall, this deal makes a lot of sense for the two parties involved, and it should put Western Refining in a better position as the company clears up some of its debts and increases earnings through the acquisition. One of the big reasons that the company become one of the most hated energy stocks on the market was because of its debt position, so we shall see if this deal changes anyone's mind about the company.
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