Bryan Perry runs the Cash Machine newsletter, looking for high-yielding investments — and recently a lot of those investments have been MLPs or similar equity investments in the oil and gas business. We sleuthed out his “top pick for 2013” back in December and that turned out to be a pretty nice pick so far, up better than 25% with what looks like a continuing yield of about 10%, so what’s his “secret” number one pick this time?
Oh, that one back in December was Niska Gas Storage Partners (NKA), by the way — our article from six months ago is here if you’re curious.
This latest pick of his is in the refining sector, which has yielded quite a few high-income picks of late — particularly as companies have spun off their refining operations to call attention to their solid current profits and “unlock value.”
He’s not the only one sniffing around this sector, of course — Keith Schaefer has been touting the small refiner Northern Tier Energy (NTI) for more than six months as well (that one’s been up and down, but also has a high yield), and there’s been a lot of attention paid to pretty much all refiners over the past (very profitable) year for them that has yielded high-profile refinery spinoffs from Marathon and ConocoPhillips and new (post-crash) highs for old refining standbys like Tesoro (TSO) and Valero (VLO).
With Master Limited Partnerships (MLPs) becoming incredibly popular among investors, the trend has been for companies to spin off partnerships with high income yields and appeal to the yield-starved individual investors who have few other places to turn for current income. And it’s just such a situation that Bryan Perry is teasing … so which one is it?
Here’s a taste from the ad:
“I’ve discovered a brand-new oil refinery partnership, with operations smack dab in the middle of Oklahoma’s new oil industry—and it’s making HUGE amounts of money.
“This small, undiscovered company has the one thing all the big oil producers need: refineries!
“In the short time since it went public in late January, its reported profits of $197 million for the quarter, paid out its first quarterly dividend on May 17 and is projecting an annual yield as high as 21%… and is likely to KEEP that yield for the foreseeable future! …
“This is one of the best opportunities I’ve ever seen in my more than 20 years writing about, and investing in, income investments.
“With Carl Icahn as the largest shareholder in this investment, I’m confident that he will continue to make proactive changes that will benefit shareholders in the months ahead.”
OK, so putting together the newness and the Carl Icahn connection means we needn’t even really drag the Thinkolator out of the garage for this one … but just in case, here are a few more clues:
“Headquartered in Texas, this MLP owns an 115,000 barrel-per-day (BPD) crude oil refinery in Kansas and another 70,000 BPD refinery in Oklahoma.
“Having a refining capacity like that is virtually a license to print money!
“The partnership’s subsidiaries also operate supporting logistics assets including approximately 350 miles of pipelines… more than 125 crude oil transports… a network of strategically located crude oil gathering tank farms… and more than 6 million barrels of owned and leased crude oil storage capacity.
“In other words: It has the whole enchilada. It won’t take much to drive this stock from $30 a share to as high as $60.”
OK … so who is it? This is CVR Refining (CVRR), the company recently spun off by the Carl Icahn-controlled CVR Energy (CVI) after he failed to find a buyer for the refineries last year. CVR Energy controls two partnerships, CVR Partners (UAN), which is primarily a nitrogen fertilizer producer, and now CVR Refining (CVRR), which is a downstream and refining business that is focused on two refineries, one in Kansas and one in Oklahoma, and on the pipelines and transport and storage networks associated with those refineries.
CVR Energy (CVI) owns the general partner and a controlling stake in both MLP subsidiaries. The IPO was not to raise money for the refineries, but to reward CVR Energy shareholders by helping to boost the perceived value of this asset, and they will probably continue to sell down that stake in public offerings if the share price climbs (they most recently sold some around $30).
And yes, CVR Refining does indeed pay a very large dividend — much like NTI that I mentioned near the top. In CVRR they’ve only been around to pay out one dividend so far, and (like NTI) they are not guaranteeing a steady payout, which probably leads investors to be a bit skeptical and keep the share price relatively low, but at $1.58 for the first quarter an annualized yield would be now almost 24%. That payout exceeded the first quarter outlook the company had given for the IPO and reflected a strong, high volume quarter at the refineries according to their press release.
Their estimated distribution for calendar year 2013 was $4.72 back when they were making investor presentations early in the year, and the shares are just over $30 now, so if they do roughly that well that would be a distribution yield for the balance of this year (not annualized) of a bit over 10% (that’s just subtracting the first quarter payout from that $4.72). Not bad, though after this first quarter report it sounds like they were sandbagging a bit and aiming low so they could beat the numbers and keep the price rising throughout the year. Or maybe they were just being conservative, who knows — it’s a volatile business (no pun intended), and returns vary greatly as crack spreads wax and wane.
(You hear a lot about crack spreads when you’re looking into refineries, that’s what creates their profit margin — the difference between the refined products they sell and the price of their feed stock of crude oil … with oil supply strong in the mid-continent CVR Refining probably get input prices as good as or better than WTI Crude pricing, which is much lower than international Brent crude, and refined products can be exported so sometimes receive international pricing that’s substantially higher).
The parent also has a decent yield thanks, in part, to the shares of UAN and CVRR that they’ve been selling — CVI just announced a special dividend of some of the funds they gained by selling shares of those MLPs, so you’ll see CVI with an indicated yield of 5% based on their indicated 75-cent quarterly dividend but that doesn’t include the $12 they’ve paid out this year in special dividends (so far). Don’t know whether they’ll continue selling down those stakes and paying those special dividends, but Carl Icahn has certainly had a great year from these assets (helping his own publicly traded MLP, Icahn Enterprises (IEP) to a nice year again … though it can be a bumpy ride).
I have not participated in this bull run for refineries over the last year or two, but almost all of them have done very well — rising crude supplies in the US and a lack of refinery capacity mean there’s abundant opportunity for profit (no one likes to have a refinery near them, there was one small one built in Wyoming about five years ago but the last big, modern one to be built was in the 1970s … many others have been meaningfully expanded or modernized since then, of course, mostly on the Gulf Coast and in Alaska, but with crude output climbing it doesn’t seem that refining capacity is keeping up).
From my quick glance today, I’d be inclined to give CVR Refining a chance and research it up if you’re inclined to look for high-yielding MLPs — I like it better than Northern Tier Energy (NTI) which has a similar implied yield, though both will have variable payouts, because NTI is reliant on just one refinery. There may be pressure on the stock as additional shares are sold by Icahn and his controlled entities, but if they can keep the payout even close to this current range and the business operates well (as they seem to indicate it will in their presentations — though there’s no reason they’d be motivated to say otherwise), then investors will probably keep snapping up the shares for that substantial dividend.
It is a MLP and they haven’t been public for long so we don’t know what the tax treatment will be (earnings versus return of capital), but we can probably expect the typical MLP tax benefits (deferral, mostly) and record-keeping/filing obligations that this structure typically provides.
So what do you think? Does CVRR make you sit up and take notice with a likely yield of somewhere between 15-25%? Think the ebullient refinery sector has more “room to run?” Let us know with a comment below.
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