What Investors Need to Know About Western Refining Buying Northern Tier Energy

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. 

Northern Tier's St. Paul Refinery (Source: Northern Tier Investor Presentation)

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.

Don't hate energy stocks, love them
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  • Report this Comment On November 16, 2013, at 2:27 PM, sklarb wrote:

    Western refining sucks, BLM corrupt

    November 2013

    Pipeline safety issues continue to concern residents

    —Signpost Staff

    Pressure is mounting to put the 57-year-old Tex/New Mex pipeline back in service. You may have seen the recent construction activity at the Western Refining pumping station on Camino de las Huertas, and on Tecolote Road in Placitas. Chris Frye of the Las Placitas Association contacted Western Refining by phone and was directed to their right-of-way contractor Sharon Kennedy. Here’s what he learned from her:

    Western is in the process of re-activating their 16-inch, crude-oil pipeline through Placitas, that runs westward across Tecolote Road, along Camino de las Huertas (passing six-hundred feet from Placitas Elementary School), through the Open Space, and westward to the San Ysidro pumping station. Their entire 325-mile pipeline is being hydrostatic (water pressure) tested in segments, as required by the U.S. Department of Transportation.

    The pipeline will carry crude oil from wells in the Carlsbad area to Western’s refinery in Gallup. The refinery has a capacity of 23,000 barrels (966,000 gallons) per day, but Kennedy was unable to provide the actual daily flow through the pipe or its operating pressure.

    Western also installed “smart pig” launch and retrieval tubes at their pumping station on Camino de las Huertas. These pigs are electronic inspection devices that travel inside the pipeline to spot pipe defects.

    Western’s pipeline was constructed in 1956 by the Texas-New Mexico Pipeline Company and has passed through the hands of Shell, Equilon, and Giant Oil, before being acquired by Western Refining in their purchase of Giant Oil in 2008. Kennedy said the engineer told her that the pipeline in Placitas had never formally gone out of service and that Western had kept up with monthly maintenance, including the cathodic protection (CP). CP technology induces a small electric current in the pipe to reduce natural corrosion.

    The Signpost has been covering the Tex-New Mex since 2001 when the Shell Pipeline Company, LLC, proposed to reactivate the pipeline for the transport of refined petroleum products, including gasoline.

    The Bureau of Land Management (BLM) oversaw the required Environmental Impact Study (EIS). A BLM representative said at the time that, among other things, the age of the pipeline was being looked at very critically. In April of 2003, the BLM released a Draft EIS, which consisted of two large volumes, containing information about the proposal and the existing pipeline, as well as a summary of potential impacts and alternatives for actions that might be taken by the BLM in the regulatory process.

    Shell sought to reverse the direction of flow and to transport gasoline, diesel, and jet fuel. Population has shifted closer to the pipeline over the years, especially in the East Mountains, Bernalillo, and Placitas. The pipeline would initially transport thirty thousand barrels a day; it has the capacity to transport eighty-five thousand barrels per day. The pipeline was originally part of the Aspen Pipeline Project proposed to terminate in Salt Lake City, but Shell modified the proposal to terminate in Farmington, presumably to streamline the regulatory process. The project could be expanded later to supply a large part of the Intermountain West.

    Later in 2003, a public meeting held at the Bernalillo High School Gymnasium was attended by about seventy-five residents who came to express their concerns and ask questions about the DEIS. Upon arrival at the gymnasium, they were disappointed to find that the BLM had chosen a “hearing” format, which would include no dialogues, questions, answers, or any spontaneous speaking whatsoever. Those wishing to speak were required to sign up in advance and limit their comments to five minutes. No elected officials or representatives from Shell were present.

    L. Duran Nestor, speaking for the Bernalillo School District, said that the district was “against any kind of pipeline near any school or public facility. The EIS is seriously flawed. Public safety is compromised because it presents the best-case scenario rather than the worst.”

    Carol Parker, president of the grassroots group Citizens for Safe Pipelines (CSP), called the EIS “fatally flawed,” and “an insult to the public.” She said that the BLM had minimized the impact of pipeline spills, had not considered Shell’s poor safety record, and had presented misleading information about the safety of new vs. old pipelines. She said, “If you had done your homework, you would know that weld failures in old pipeline, such as this, account for one-third of damages caused by ruptures.” She said that the time required to shut down a leaking pipeline was far underestimated and that an accident could cause hundreds of deaths and hundreds of million dollars worth of damage to property.

    Roger Likewise, also of CSP, commented that among the photographs included in the EIS, there were none showing the proximity of the pipeline to residential areas. “If a picture tells a thousand words,” he said, “it seems to me that you left out several thousand words.”

    Several members of the Placitas Volunteer Fire Brigade stated that the danger of this proposal could not be overstated and the limited response capability of their small brigade would be further compromised by the fact that the pipeline bisects the community, and that they would not be able to access many parts of the community in the event of a spill or explosion.

    Tony Lucero, president of the San Antonio de las Huertas Land Grant (settled in 1765), voiced his concern about potential destruction of ancient acequias and cemeteries if a leak occurred anywhere over the one-thousand-foot drop to the bottom of the canyon. “But I’m most concerned about the living,” he said.

    The project was put on hold until August of 2005 when the Signpost reported that the governor’s office had announced that the long-dormant Tex-New Mex might be revived to carry crude oil.

    “That sleeping giant is awake again,” said Bert Miller, then president of CSP. “I’m not surprised. Shell is not going to let that asset sit on its books without doing something.”

    Giant Industries confirmed it was in negotiations to buy the Shell Pipeline Company line. “Crude in the San Juan Basin has declined strongly in the last ten years,” Giant executive vice president Leland Gould told the Signpost. “We need a crude source for our refineries in Bloomfield and Gallup. Both are running at 55 to sixty percent of capacity. The governor’s office got involved because closing the Bloomfield refinery, beyond driving up area gasoline prices, would cost hundreds of jobs and millions of dollars in tax revenue.”

    In June of 2006, pipeline workers who came to Placitas to pressure-test the old Tex-New Mex that had now been bought by Giant Petroleum. The pipeline was exposed to the elements in three hundred places over four hundred miles where it had to be buried or lowered. This entire process was expected to take months to years to complete.

    A resident on Camino de las Huertas refused to allow pipeline personnel on his property. Giant field representative Brad Ray said that people encroach upon the easement when they forget that the pipeline right of way exists. Many residents bought property under the impression that the abandoned pipeline would remain abandoned.

    CSP had, by this time, struggled for years to convince industry and government powers to leave the pipeline abandoned. They argued that the fifty-year-old pipe was made with outdated and unsafe technology, had not been maintained properly, and passed through a high-consequence area. Spills, fires, or explosions could be devastating to the village, the community center, and the nearby elementary school. Residents throughout the entire area would be devastated if a leak were to contaminate the aquifer.

    CSP proposed a number of measures to mitigate the danger, including moving the pipeline to the pipeline corridor just to the north, or, at least, using new pipe and safety technology in high-consequence areas. CSP founding member Carol Parker said, “Safe operation is vastly cheaper in the long run than legal settlements and environmental cleanups.” These proposals were “taken under advisement.”

    Brad Ray told the Signpost on May 25, 2006, that hydrotesting in the Placitas area was successful and complete. He said that only one leak had been detected.

    After that, Citizens for Safe Pipelines called it quits as an organization. Some former members continued being active as individuals, and the Las Placitas Association promised to become more involved in the issue.

    The Signpost staff erroneously assumed at that time that the pipeline was put into service. Seven years later we know different.

    Another pipeline project may also threaten this area. Chris Frye wrote in the June 2013 Signpost that Enterprise Products Partners of Houston, Texas, planned to increase the flow in its Natural Gas Liquids (NGL) pipeline that runs through Placitas, to a capacity of ten-million barrels per month:

    This 233-mile-long pipeline connects natural gas fields in Colorado and the Farmington area with refineries in west Texas, and carries NGL, a heady brew of propane, butane, and liquid petroleum products at pressures of well over one-thousand pounds per square inch.

    Much of the pipeline expansion project will require the burial of new pipes, but no new construction is planned for the Placitas area. The local pipeline (actually two parallel 16-inch pipes) would experience an increase in pressure necessary for the higher flow rate.

    Since this three-hundred-million dollar pipeline upgrade is a Federal project, the Bureau of Land Management (BLM) is required to complete an Environmental Assessment to permit the project to proceed. BLM’s draft environmental document does a nice job analyzing the effects on the usual things like wildlife, archaeological resources, and weeds, but completely ignores public safety.

    BLM has typically excluded safety considerations from their environmental permitting process, although Federal laws require them to do so. California ordered BLM to include human safety aspects of projects in their environmental permitting process. Based on that court order, the Las Placitas Association (LPA) and the Eastern Sandoval Citizens Association (ES-CA) have formally challenged BLM’s Environmental Assessment for this pipeline project, since their Environmental Assessment does not include any public safety aspects.

    Six months later, the Feds have not provided LPA and ES-CA a single scrap of safety information about this pipeline over its decades of operation, despite repeated letters and even a formal Freedom of Information Act (FOIA) request for safety records.

    Many residents here recall the summer flood of 2006, which scoured out and exposed the pipelines in Las Huertas Creek, something that is never supposed to happen to a hazardous material pipeline. This event is proof of a pipeline safety failure that could not be hidden. Was the pipeline properly armored after the accident to prevent another excavation? LPA and ES-CA have repeatedly asked the Federal agencies this and other questions—only to be met with stony silence.

    Dozens of similar pipelines have ruptured and exploded over the past twenty years, causing deaths, hundreds of injuries, wildfires, hundreds of millions of dollars in environmental and property damage, and contamination of groundwater. All of these pipelines were subject to Federal safety regulations, but every one of the failures were due to the operator not complying with these safety rules. So, rules alone are not enough—only carrying out those safety regulations makes pipelines safer.

    To keep abreast of the latest developments, go to the Las Placitas Association’s website at The pipeline issue will also be discussed at ES-CA’s general meeting, on November 2, at 2:00 p.m., at the Placitas Community Center.

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