Refiners were in demand with investors last yea. As a low oil prices pushed profit margins wider, investors reaped the benefits through special dividends and rising share prices.
Now the market has cooled down, and for the bulls it could be a good time to jump back in. But the question is, where to invest?
An MLP with a high yield
What is interesting about Northern Tier Energy LP (NYSE:NTI) is that the company is not just a refiner; in fact it is hardly a refiner at all. The company has a retail division, which operates 166 convenience stores and 67 franchised convenience stores, primarily in Minnesota and Wisconsin, under the SuperAmerica brand name; in comparison, the partnership has only one refinery.
On an income basis, during the first quarter of this year the company’s refinery generated income of $141.8 million, up around 80% from the same period in the previous year. Refining margins were $25.80 per barrel, up 46% from the previous period. However, Northern Tier Energy LP (NYSE:NTI)’s retail segment seriously underperformed, generating income of only $600,000 during the first quarter of the year, although this was up from a loss of -$400,000 in the same period last year.
Northern Tier Energy LP (NYSE:NTI)’s only refinery is located within easy access of the Minnesota Pipe Line, a 455,000 bpd crude-oil pipeline system that transports Western Canadian and North Dakota crude oil giving the company easy access to North American low-price shale oils. Northern Tier also hold 17% of the Minnesota Pipe Line Company.
With its close proximity to the Minnesota Pipe Line, the partnership is able to achieve wide profit margins on low cost crude from Canada and North Dakota, which translates into shareholder returns far above that of the company’s peers. Indeed, the firm has a historic dividend yield of 19% and I believe this is set to continue as more cheap crude flows through the US. Furthermore, the company has notified investors that it is fully compliant with potential emissions regulations that are haunting the industry.
A value investment
HollyFrontier Corp (NYSE:HFC) is potentially one of the best value investments available in the market right now.
HollyFrontier Corp (NYSE:HFC) has been sold off after it missed EPS estimates for Q1 this year. The company reported EPS of $1.63 compared to estimates of $1.76, which was entirely down to the company’s lower utilization rate of 90% for the quarter compared to estimates of 95%. In contrast, most of the company’s peers beat estimates
HollyFrontier Corp (NYSE:HFC)’s utilization rate was lower due to unforeseen refinery shut-downs that should not be an issue moving into Q2.
Additionally, like Northern Tier, the company is also well positioned to take advantage of cheaper oils from shale fields in the US as well as Canadian crude, which are priced on the WTI benchmark currently offering around a $9 discount to Brent.