Back in November, I highlighted AlonUSA Energy (NYSE:ALJ), one of the smallest refining companies in the country. As I said in the original piece, I think this is a company to watch due to experienced management, excellent growth prospects, and a strong balance sheet.
Thursday, the balance sheet became even stronger when the company announced that it had prepaid a $100 million term loan that carried a hefty interest rate of 10.6%. This move will result in $6 million in interest savings starting in 2007. There will be little cost savings this year because (1) the company will fully expense the $3.9 million in fees associated with securing the loan (normally such fees would have been amortized over the remaining three years of the loan); and (2) the loan agreement included a prepayment penalty of $3 million for paying the loan off early. Nevertheless, after prepaying the loan, the company coffers will have nearly $200 million of cash and equivalents vs. only about $33 million in total debt outstanding.
During Alon USA's presentation at the Lehman Brothers Energy and Power Conference in September, management indicated that it intends to pay a dividend. To date, a dividend hasn't been declared. However, with the high-interest debt prepaid and cash piling up on the balance sheet, I wouldn't be surprised to see Alon USA declare a dividend when it reports its fourth-quarter results. The company hasn't yet announced what day it will be reporting, but it should be around the second week of February.
Even without a dividend, it is fairly clear to me that Alon USA is undervalued and flies below the radar of Wall Street's analysts. The company's market cap of $1 billion includes nearly $200 million in cash and equivalents, a 70,000 bpd (barrels per day) refinery capacity, more than 160 convenience stores, pipelines, three product terminals, and two asphalt terminals. Last year, Valero Energy (NYSE:VLO) purchased Premcor and its 790,000 bpd of capacity for $8 billion -- just over $10,000 per bpd. This suggests that Alon USA's refinery alone is worth around $700 million (70,000 bpd times $10,000 per bpd). In other words, Alon USA's refinery and cash balance account for about 90% of its current market cap of $1 billion.
With demand for gasoline increasing, muscle cars being the highlight of the Detroit Auto Show, and no new refineries on the horizon, refining companies should maintain their record profits for the foreseeable future. Investors looking for a growing company selling for a reasonable price could do worse than running the numbers on Alon USA.
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Fool contributor Robert Aronen owns shares of none of the companies mentioned.
