It's not only energy companies thatprofit from rising U.S. oil
production. An often-overlooked energy sector that is also
quietly raking in record profits is oil and gas refining.
Only a handful of pure-play refineries are left in the United
States. Many have either merged into bigger players or were
forced out of business in the 1980s by increased regulation and
obsolete equipment. The few that remain are enjoying a boom,
thanks to rising domestic oil production and widening crack
Converting crude oil into fuel is a complex process that
requires expensive equipment, but determining refinery profits is
simple. Profits are determined by the crack spread, which is the
difference between the selling price of gasoline and other
refined products and the cost the refiner pays for crude oil.
At present, refineries that obtain crude oil from the
midsection of the U.S. or from Canada pay much less for crude
supplies than refineries on the East or West coasts. However,
selling prices for gasoline are fairly uniform across the United
States, which means well-located refineries earn larger crack
spreads and profits.
In the April edition of
, my colleague Carla Pasternak looked at two high-quality
refineries that are expected to post near-record profits thisyear
. Carla also tooknote of several recent refinery IPOs that may
still be flying under the radar. Let's look at two recent
high-yield refinery offerings.
Alon USA Partners (
Alon went public in November as a spin-off from
Alon USA Energy (
The company's mainasset is a refinery that is capable of
processing 70,000 barrels of crude oil a day. Located in the West
Texas city of Big Spring, this refinery was essentially rebuilt
from the ground up after a fire in 2008, making it among the most
modern in the industry.
Another big advantage for this refinery is its ability to runsour
crude , which is more difficult to process (but cheaper to
purchase) because of its greater levels of impurities. Roughly
80% of Alon's production comes from sour crude.
Alon's refinery is near the Permian Basin, which provides a
second crude pricing advantage. According to the Energy
Information Administration, daily production in the Permian Basin
is forecast to rise from 1 million barrels in 2011 to 1.55
million barrels by 2014 and 2 million barrels in 2015. A lack of
pipeline infrastructure limits the movement of Permian crude out
of the area, allowing Alon to purchase crude supplies at a
In addition, Alon also benefits from a captive distribution
system for its gasoline, which is marketed at 650 retail sites
under the Alon brand.
Alon nearly doubledearnings to $93.5 million or $1.50 a share,
in the first quarter of 2013 from $48.1 million a year
earlier.Cash flow improved 66% to $116 million.
Strong profit growth was mainly due to widening crack spreads:
Alon's refinery operating margins have soared 89% to $28.76 per
barrel compared with a year ago. Profits improved despite the
fact that throughput that was 14% lower than last year due to
scheduled maintenance and downtime during the quarter. Alon
expects daily throughput to rise 21% to 72,000 barrels between
March and June.
Alon announced a first-quarter distribution in April of $1.48
per unit. At an annualized rate of $5.92, Alonshares would yield
a phenomenal 25%. Although this high payout rate is likely
unsustainable, Alon shares have risen 27% since theIPO ,
indicating that investors anticipate more big quarterly
CVR Refining (
CVR Refining debuted in January as a spin-off from
CVR Energy (
. The formerparent company retains a more than 80% stake. This
company owns two refineries in Kansas and Oklahoma with a
combined processing capacity of 185,000 barrels per day. CVR also
owns and operates 350 miles of pipeline, 125 crude oil transports
and 6 million barrels of crude oil storage.
Due to the locations of its refineries, CVR Refining can take
advantage of low-cost crude supplied from the mid-continent and
Bakken regions, as well as Canada. In addition, CVR Refining
enjoys favorable supply and demand dynamics in its key markets of
Kansas, Oklahoma, Missouri, Nebraska and Iowa. In the past five
years, demand in that region has exceeded production by an
average of 17%.
As a result of increased throughput and refining margins,
CVR's cash flow more than doubled in the first quarter, to $310
million from $143 million a year earlier. Earnings vaulted to
$275 million from a loss of $37.4 million last year. Throughput
was 32% higher at 204,590 barrels per day, and refining margins
were 42% higher at $26.44 per barrel.
CVRwill pay an initial distribution of $1.58 per share this
month. At the time of its IPO, the company expected distributions
totaling $4.72 this year, but management has since raised
itsguidance and now expects to pay between $5.50 and $6.50. Even
at the lower end of the range, the revised payout implies a rich
17% yield. These shares have gained 29% since the company went
public in mid-January.
Risks to Consider:
The Environmental Protection Agency has proposed clear air
standards that would force refineries to buy expensive equipment
to reduce the sulfur content of gasoline by more than 60%.
However, CVR Refining says its current equipment can handle the
change, and Alon estimates the upgrades will cost less than $10
Action to Take -->
Both of these refinerylimited partnerships are great high-yield
plays on rising domestic oil production and widening crack
spreads. At aprice-to-earnings ratio (P/E ) of only 6, CVR
Refining looks like a better bargain than Alon, which trades with
a P/E of 18.
With that said, investors should be aware that distributions
are likely to vary from quarter to quarter, depending on
feedstock and refined product prices. However, while cheap crude
oil is available, both of these partnerships should continue
tooffer generous distributions.
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