UPGRADING to OUTPERFORM (from Neutral) vs MLP Peers on Attractive 2013 Yield; Raising Ests & TP to $34 (from $32)
Bottom-line: "We raise our 2013 distribution forecast to $6.15/unit (vs. company guidance of $5.30-$6.30/unit) to account for 1Q13 guidance as well as our revised margin forecasts. Owners of CVRR benefit from a c19% 2013 yield (vs median MLP peer average of 13%) and a c10% mid-cycle yield based on WTI-Brent spreads that could prove conservative (industry consensus is $7-12/bbl in the long term). CVRR has self-help projects to boost mid-cycle distributable cash flow over time, logistics assets which could form the basis of a higher-multiple MLP within CVRR and the possibility of making refining acquisitions (i.e. while an acquisition could be deemed dilutive to a C-Corp refiner, the premium MLP multiple of CVRR allows for deals to be viewed as being accretive). We raise CVRR to Outperform (from Neutral) relative to the MLP universe."
Valuation: "We value CVRR using a Distribution Discount Model ( DDM ). Using an 11% cost of equity and mid-cycle EBITDA that is just 55% of the "supernormal" 2012 earnings, we arrive at $32/unit plus a $2/unit uplift for logistics. This could prove conservative if WTI-Brent settles out at a wider level than our $8/bbl forecast or if CVRR drives harder in the logistics MLP formation. We raise our TP to $34 from $32. We are raising our 2013/2014/2015 EPS estimates to $6.97/$3.40/$2.99 (from $6.03/$3.29/$2.93) respectively."
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