Bryan Perry’s “#1 recommendation pays over 20%”

by Travis Johnson, Stock Gumshoe | June 11, 2013 4:25 pm

Sniffing out a high-yielding refiner from the Cash Machine newsletter teaser ad

Bryan Perry[1] runs the Cash Machine[2] newsletter, looking for high-yielding investments — and recently a lot of those investments have been MLPs or similar equity investments in the oil[3] 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)[4], 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[5] 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[6]), 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[7] from Marathon and ConocoPhillips and new (post-crash) highs for old refining standbys like Tesoro (TSO) and Valero[8] (VLO).

With Master Limited Partnerships[9] (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[10] 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)[11], the company recently spun off by the Carl Icahn-controlled CVR Energy (CVI)[12] after he failed to find a buyer for the refineries last year. CVR Energy controls two partnerships, CVR Partners (UAN)[13], which is primarily a nitrogen fertilizer[14] 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[15] 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[16].

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[17] (so far). Don’t know whether they’ll continue selling down those stakes and paying those special dividends[18], but Carl Icahn has certainly had a great year from these assets (helping his own publicly traded MLP, Icahn Enterprises (IEP)[19] to a nice year again … though it can be a bumpy ride).

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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.

Endnotes:
  1. Bryan Perry: https://www.stockgumshoe.com/tag/bryan-perry/
  2. Cash Machine: https://www.stockgumshoe.com/tag/cash-machine/
  3. oil: https://www.stockgumshoe.com/tag/oil/
  4. Niska Gas Storage Partners (NKA): http://stockgumshoe.com/reviews/25-cash-machine/my-top-stock-for-2013-bryan-perry/
  5. Keith Schaefer: https://www.stockgumshoe.com/tag/keith-schaefer/
  6. high yield: https://www.stockgumshoe.com/tag/high-yield/
  7. spinoffs: https://www.stockgumshoe.com/tag/spinoffs/
  8. Valero: https://www.stockgumshoe.com/tag/valero/
  9. Master Limited Partnerships: https://www.stockgumshoe.com/tag/master-limited-partnerships/
  10. Carl Icahn: https://www.stockgumshoe.com/tag/carl-icahn/
  11. CVR Refining (CVRR): https://www.stockgumshoe.com/tag/cvrr/
  12. CVR Energy (CVI): https://www.stockgumshoe.com/tag/cvi/
  13. CVR Partners (UAN): https://www.stockgumshoe.com/tag/uan/
  14. fertilizer: https://www.stockgumshoe.com/tag/fertilizer/
  15. IPO: https://www.stockgumshoe.com/tag/ipo/
  16. according to their press release: http://phx.corporate-ir.net/phoenix.zhtml?c=251539&p=irol-newsArticle&ID=1814408&highlight=
  17. dividends: https://www.stockgumshoe.com/tag/dividends/
  18. special dividends: https://www.stockgumshoe.com/tag/special-dividends/
  19. Icahn Enterprises (IEP): https://www.stockgumshoe.com/tag/iep/

Source URL: https://www.stockgumshoe.com/reviews/25-cash-machine/bryan-perrys-1-recommendation-pays-over-20/


28 responses to “Bryan Perry’s “#1 recommendation pays over 20%””

  1. I have both and have been watching them closely and will continue to do so. IF I can hold them for a few years at those rates I’ll do well IF they atart toi go below my 15-20% loss decision making line thn I’ll sell them and break evern. That being said with a conservative mainly portfolio of dividend growth stocks I like to add a bit of adventure once in a while to see if I can increase my portfolio worth a bit. AT my age there aren’t a lot of years left to sit it all out all the time.

  2. Lorne Cutler says:

    Does anyone know the tax implications of investing in MLPs for those of us living in Canada, particularly if we do it in a Registered Retirement Savings Plan?

  3. danielj1960 says:

    I noticed that both of their refineries are located in tornado country one in Coffeeville, KS and the other in Wynnewood, OK. Does anyone think this adds considerable risk ?

  4. friepen says:

    Re: CVI and CVRR – Playing along side a corporate raider can perhaps be lucrative – and also risky. Icahn has unlocked cash flow and perhaps value here which prior management seemed unable or unwilling to do. Yet, we’ll not know Icahn’s next move, made certainly for his own benefit and not necessarily ours, until after we see the resulting market value changes in our shares. I own CVI and NTI – both half positions, both considered quite speculative moves. Frankly, I wish I’d sold CVI right after the last special dividend was announced. Now – the fear starts, as a 10% annual yeild gets much less tasty when the stock price suddenly crashes 25%.
    Travis – any follow up comments would be appreciated.
    Fr

  5. bruce says:

    i like these 2 and ALDW and CLMT too. obviously more risk than a 4% div stock so you go in with your eyes open. CLMT has been around for a while

  6. shredder says:

    CDN’s get raped holding MLP’s in non-registered accounts and why would you want to put them in a RRSP….? MLP’s are designed to flow $$ to shareholders….remember Income Trusts that Harper promised would never be taxed..and then he did just that.

  7. barndoor says:

    CVRR and ALDW are my favorites. Be prepared to sell though. Crack spread could easily halve, dividend halve, and stock plummet. You could keep a stop loss order behind them if you want but remember to adjust it the day before a dividend ex date. You won’t have much time to notice.–CVRR’s notice date was May 2nd after close and the ex date was May 10th. I think ALDW actually gave no notice–i.e. they announced (after market) that today’s shareholders would get the dividend. I’m not aware of any broker that would not transact your limit order (stop loss) under these circumstances.
    LP’s like this have nice tax advantages too. In my case the extra tax filing issues are minimal.
    I don’t actually own CVRR right now. I keep buy-writing it and 35ish days later the price is indeed 3.5% higher so I take my $1, go home, and try again. Sigh, the tribulations of a rising market. But I will try again in the next few days… I don’t let my calls (the ‘write’ part of buy-write) straddle a dividend announcement–and I want to be long for the dividend because it’s largely ‘return of capital’–no taxes!

  8. baygreen says:

    HFC and HEP will be a good play on dips and there shut down is 2 1 /2 weeks from back online 100% , they take care of there share holders and there clients . CVI/CVRR good play but Holly shines when all cylinders are running just a local preference that I have always been lucky enough to get in and out at right time. The Warren/Obama Oil Train does not affect them as much as the other refineries. Get some PBKEF while it is still low it might dip back to $7’s but there will be a 1 in front of that 7 by the end of the year and you even get a monthly divy of .08 that has been 30 + weeks straight, they are on the China shopping list but they are old school but everyone has a number and the rental cars have been at there corporate not just for coffee they want some Bakken. Either way you have more to gain than loose and they have management / loyalty/integrity. Just a small cap thought.

  9. B. J. Italian says:

    I am US citizen and The MLP yields sound VERY attractive BUT!!!??? I CANNOT understand the tax implications of owning MLPs. What does the $1000 limit mean? What is this I read about having to file tax returns in every state the MLP does business in? HELP!!!

  10. B. J. Italian says:

    Thank you both, P. Fischer and Paul Schmitt!
    Any difference in tax treatment for holdings in a ROTH IRA?
    I have a Savings and Loan variable rate conventional CD IRA paying a MINIMUM of 3%!
    I use this account to take my RMDs for all my IRAs instead of selling stock and bond holdings in my other IRAs. I have enough cash in the S&L CD to pay my RMDs for probably 10 years. In order to get a better yield would it be a good idea to transfer some of that cash into a conventional IRA holding MLPs? I am retired and 74 so could I do that according to the IRA regulations? If I can do it what are some relatively safe MLPs I could buy?
    THANKS AGAIN!
    Bill

  11. LAYNE says:

    IT IS GENERALLY NOT A GOOD IDEA TO USE A TAX SHELTER TO BUY A TAX SHELTER, BUT IT IS LEGAL. IF YOU HAVE TOO MUCH UBTI IN A SHELTER (IRA/401K) IT MAY HAVE TO FILE A TAX RETURN AND PAY A TAX. TX CPA

  12. Paul Hay says:

    To Lorne Cutler,

    Unfortunately MLPS do have the witholding tax applied in RSPs. As you correctly state regular dividends from U.S. stocks do not.

    See this Globe and Mail article for more info: http://m.theglobeandmail.com/globe-investor/investor-education/answers-to-your-tangled-tax-questions/article1372575/?service=mobile

  13. Caulker says:

    High yields and then lose big on the stock. Won’t be renewing my subscription.

  14. baygreen says:

    I am sorry for letting something get in our way I guess one of those nights accept my apology please! Subhash Garg

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