Searching for high yields is a great way to discover new stock ideas. Sometimes, however, a high yield is only a temporary pop over the lifetime of an investment. Evaluating the sustainability of a yield is very important, but if you’ve discovered a young stock with little financial history, it can be a bit tougher. Today we’ll examine the business models of three relatively young master limited partnerships with high yields to try and determine whether the businesses lend themselves to a lifetime of high payouts.
1. CVR Refining LP (NYSE:CVRR) — 22.5% yield
As its name suggests, CVR Refining LP (NYSE:CVRR) is a downstream master limited partnership in the CVR Energy, Inc. (NYSE:CVI) family. It controls two refineries, one in Kansas and one in Oklahoma, as well as a pipeline and storage network.
Right off the bat we can identify two potential problems CVR Refining LP (NYSE:CVRR) might have maintaining its astronomical yield. First, though its pipeline and terminal network could in theory provide stable cash flows, if one or both of its refineries were to shutdown for any reason, it would dramatically affect revenue. This is a risk for all small, independent refiners, regardless of business structure. Second, unlike pipeline MLPs that generate revenue from fee-based contracts, a refinery’s success is tied very much to fluctuating oil prices, and the Brent-WTI spread.
2. Northern Tier Energy LP (NYSE:NTI) — 20.4% yield
Like CVR Refining LP (NYSE:CVRR), Northern Tier Energy LP (NYSE:NTI) is also a downstream MLP. It operates a former Marathon Petroleum Corp (NYSE:MPC) refinery in St. Paul, Minn., as well as 166 SuperAmerica-branded gas station convenience stores, and SuperMom’s bakery, which provides goods to the convenience stores.
Much like CVR Refining LP (NYSE:CVRR), the company will have a major problem if there is an unplanned incident at its refinery, but what about the retail/bakery side of the business? Surely that’s more dependable income.
To qualify for MLP status, 90% of a partnership’s income has to come from an approved business: real estate, natural resources, or minerals. All this means is that not only does the SuperMom bakery not bring in a significant amount of cash, but it can never bring in a significant amount of cash if Northern Tier Energy LP (NYSE:NTI) wants to maintain its MLP status. Operating income for the refining segment was $141.8 million in the first quarter of this year, compared with $0.6 million in the retail segment. We have to assume that if Northern Tier Energy LP (NYSE:NTI) wanted to be a bakery it would have done so by now, and the cash generated by SuperMom is just icing on the income cake, so to speak.