2 Undervalued Refiners With Double-Digit Yields

Refiners had a poor 2013, that's no secret. 2014 is already shaping up to be a good looking year for the sector, however. Two opportunities I'm looking at are Northern Tier Energy (UNKNOWN:NTI.DL) and CVR Refining (NYSE:CVRR).

Shareholder benefits
Both Northern Tier and CVR are variable distribution partnerships, so they pass most of their income on to unit holders. 

Unfortunately, during the second half of 2013, the variable nature of these partnerships meant that their distributions took a hit as refining margins collapsed. In particular, Northern Tier paid out $2.5 per unit during the first half of 2013 but only $0.99 during the second half. CVR only came to the market during the first half of 2013, but its first two distributions totaled $2.93 per unit. The next two only totaled $0.75.

Still, during the first half of this year, refining margins have been expanding. CVR recently announced a distribution for the first quarter of $0.98 per unit, up 118% from the previous quarter. Northern Tier announced a distribution for the quarter of $0.77 per unit, up 88% from the previous quarter.

A year of change
Northern Tier entered 2014 primed for growth. The partnership spent most of 2013 maintaining its operations and completing a major turnaround, designed to increase the partnership's refinery capacity by 10%. The partnership only owns one refinery located in a suburb of St. Paul, MN.

There was a small fire at Northern's refinery last September, but damage was minimal and the partnership managed to leverage its downtime to get on with some essential maintenance. Damage from the fire cost the partnership around $10 million.

Surprisingly, even with the downtime to increase capacity and the unplanned fire, Northern's revenue actually increased to $5 billion during 2013, from $4.7 billion reported for 2013.

Firing on all cylinders 
CVR Refining entered 2014 firing on all cylinders after a poor 2013.

CVR owns a crude oil refinery in Coffeyville, KS, that can handle 115,000 barrels of oil per day and a smaller facility in Wynnewood, OK, with daily capacity of 70,000 barrels. Additionally, CVR Refining owns 350 miles of pipelines and more than six million barrels of oil storage capacity.

The partnership's first quarter earnings report showed that the throughput of crude through CVR's refineries was up 4.6% year on year and net sales were up 4.4%. That said, the partnership's refining margin per barrel of oil was $15.98 in the 2014 first quarter, compared to $26.44 for the same period in 2013. Direct operating expenses per barrel sold, exclusive of depreciation and amortization, for the 2014 first quarter were $5.08, compared to $4.64 in the first quarter of 2013.

Lower margins hit operating income by 51%. However, the partnership has hedged some production and derivative gains ensured that net income only declined 3.6%. Cash available for distribution during the quarter was $144 million, down 38% year on year. While these figures appear bad based on comparable 2013 figures, if we compare them to fourth quarter 2013 figures then a completely different picture emerges.

The partnership's refining margin per barrel of oil was $11.48 in the fourth quarter of 2013. Direct operating expenses per barrel sold, exclusive of depreciation and amortization, for the same quarter were $4.27. Net loss was $110 due to derivative losses. Cash for distribution was $67 million.

With cash for distribution almost doubling, CVR was able to increase its distribution to $0.98 for the first quarter. This makes for an annualized payout of $3.92 per share, which has an implied distribution yield of just under 16%.

Foolish summary
After a poor 2013, Northern Tier and CVR both look to be primed for growth and cash generation throughout 2014. What's more, as the partnerships pay out the majority of their income to unit holders, investors should be able to reap the rewards from rapidly rising profits.