Northern Tier Energy LP (NTI), Alon USA Partners LP (ALDW), Calumet Specialty Products Partners, L.P (CLMT): This Sector’s Pullback Has Exposed The Market’s Deepest Value

Page 1 of 2

For the past few years, there’s been an anomaly in the global oil industry.

Brent crude oil, which comes from the Middle East, Africa and Europe, has been far more expensive than West Texas Intermediate (WTI) crude, which is drilled right here in the U.S. Both Brent and WTI are known as light, sweet crude, which means they are easily processed into gasoline, diesel and other distillates.

So why had Brent been trading for up to $20 more per barrel than WTI? Blame it on geography.

Although the U.S. has tapped into a mother lode of oil in the past few years, much of the produced oil had nowhere to go. Storage hubs were filled to capacity as a lack of pipelines kept all of the oil from flowing to U.S. Gulf Coast, the West Coast and the East Coast, where many oil refineries are located.

All that has changed. The opening of many new pipelines in recent quarters has enabled the oil to start flowing more quickly, and as refiners boost demand for WTI crude and seek less Brent crude oil, we’re seeing the price for these two types of crude oil converge.

Trouble is, gasoline and diesel are globally fungible, so refiners haven’t been able to hike wholesale gas and diesel prices as quickly as their own costs are rising. As a result, refiners’ profit margins have fallen sharply in recent months, taking their share prices with them.

The pullback means that the major oil refiners are now among the cheapest stocks in the market.

undefined

Before we go any further, you’ll note that three of these stocks sport especially high dividend yields.

Northern Tier Energy LPĀ (NYSE:NTI)

Alon USA Partners LP (NYSE:ALDW)

Calumet Specialty Products Partners, L.P (NASDAQ:CLMT)

They are structured as master limited partnerships (MLPs), so they pay out almost all of their cash flow in the form of dividends. (The rest reserve much of their cash flow for capital spending and growth initiatives.)

You’ll also note that the super-high yields for these MLPs are too good to be true. The decline in refining margins means the dividend needs to be reduced, but these should still be solid yields, even after the dividend cuts take place. For example, analysts at Citigroup expect Alon USA Partners LP (NYSE:ALDW)’ dividend falling from $2.74 per unit in 2013 to just 88 cents per unit, before rebounding to $1.74 per unit in 2015.

Yet the fact that most of these refiners now trade for less than 10 times projected 2014 profits should draw your attention. More importantly, the pullback in margins, as painful as it is, doesn’t signal that profits have peaked.

Instead, look at these refiners in the context of the energy boom that is now underway. As the U.S. produces ever-higher amounts of crude oil over the next five years, these refiners will be able to generate much higher volumes of refined products, eventually displacing much of the imported gasoline, diesel and other distillates now coming to the U.S. from elsewhere.

Also, as oil production keeps rising, it should eventually push prices down, opening up the spreads these refiners had been profiting from. The Energy Information Administration (EIA) sees U.S. oil production rising 30% between now and the middle of 2015, though the rising output should alter refining dynamics well before then. Goldman Sachs anticipates “the effective elimination of light crude oil imports to the Gulf Coast, which we expect to occur around year-end 2013.” Analysts at Merrill Lynch add that “growth in regional production in the Eagle Ford and Permian basins will likely ‘back out’ light sweet crude imports within a year.”

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!