by Aaron Levitt | February 19, 2013 11:46 am
If you’re looking for yield, you’re in the right place. And I don’t just mean any yield — I mean truly high yield.
See, master limited partnerships (MLPs) were originally created as a way to spur energy infrastructure improvements in the U.S. and offer high tax-deferred distributions for investors, as well as a host of benefits for the sponsoring firms. Overall, the combination of these distributions and investor interest could make MLPs the sector du jour for 2013.[1]
The bulk of the MLPs engage in the transport and storage of oil and natural gas[2]. These firms act like toll roads and collect steady, long-term fees based on the amount of product flowing through their systems.
As the IRS has issued more private letter rulings[3] over the last few years, though, many firms have been able to tuck other assets into the tax structure. Because of this, several partnerships base their dividends on what they produce and at what price. These variable distribution MLPs are very different animals than traditional pipeline partnerships and carry significant commodity price exposure.
Currently, one of the best examples of this is MLPs that directly own refineries. We’ve covered downstream partnerships[4] like Tesoro Logistics (NYSE:TLLP[5]) before, but these are still very much pipeline-related firms. The new thing to do is directly place these assets inside the tax-structure … and those assets have been rocking as of late.
As these downstream[6] firms have been able to take advantage of lower-priced WTI crude oil, crack spreads for refined products remain at highs. The wider the spread between crude oil and refined products, the more profitable refiners are. Add that increased profitability to MLP’s pass-through tax structure and you have a recipe for some very very big dividends — in the neighborhood of 20%.
While I wouldn’t bet the whole farm on these refinery variable distribution MLPs, they can provide some spice to an income portfolio starving for extra “oomph.” With that in mind, here are three to consider:
Formerly part of Marathon Oil (NYSE:MRO[7]), Northern Tier Energy (NYSE:NTI[8]) owns and operates a 74,000-barrel-per-day refinery in St Paul, Minn., as well as a retail network — called SuperAmerica — and a 17% stake in a pipeline that feeds the refinery. The icing on the cake is that strategic location of NTI’s facility allows it direct access to abundant supplies of advantageously priced crude oils[9], many of which have historically priced at a discount to WTI. All of Northern Tier’s production is tied to these priced crudes.
That feedstock cheapness has resulted in some pretty juicy crack spreads and distributions for investors. Based on its last announced payout of $1.27 per unit, Northern Tier is currently yielding a huge 16.9% at current prices. While that payout is smaller than the previous quarter, that has more to due with the fact that MLPs generally prorate their distributions when they IPO. NTI went public back in July.
There are planned Bakken crude pipelines[10] in the works, which could help raise the price of oil produced in the region. These will take time to build, but investors should continue to see higher distributions in the near future.
Unlike other refiners, Calumet Specialty Products Partners (NASDAQ:CLMT[11]) doesn’t just make gasoline; it produces products such as naphthenic and paraffinic oils, aliphatic solvents, white mineral oils, petroleum waxes, petrolatum and hydrocarbon gels. Its products find their ways into various industrial applications as well consumer products like Turtle Wax and Goo Gone. That focus puts it into a unique position versus many of its peers.
The company continues to expand that position as big-time purchaser of other firms’ specialty products operations. Over the last 16 months, Calumet has added three refinery operations to its portfolio, including associated operating assets of Murphy Oil’s (NYSE:MUR[12]) Superior Refinery.
Like Northern Tier, many of CLMT’s facilities are positioned to take full advantage of Bakken and WTI fuel prices.[13] While Calumet yields less than Northern Tier — currently 7.3% — that yield is more stable given its breadth of products.
It seems that activist investor Carl Icahn may get the last laugh in it his fight with CVI Energy (NYSE:CVI[14]). Looking to take advantage of crack spreads and lower taxes, the company has rolled out its refining business into a new MLP[15] — CVR Refining (NYSE:CVRR[16]).
Both of the firm’s refineries are within 130 miles of oil storage terminals in Cushing, Okla. That proximity to the facilities in Cushing provides CVRR with the ability to buy more than two-thirds of its feedstock needs at a discount to already discounted WTI crude.
CVRR hasn’t made any distributions yet, but the newly IPO’d firm expects to pay out $4.7215 per common unit in the full year. At today’s prices that equates to a 15.41% yield.
As of this writing, Aaron Levitt did not own a position in any of the aforementioned securities.
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