“The Biggest Back-up of Crude in North American History – Paying Out One of the Highest Dividends I’ve Ever Seen” (Keith Schaefer)

By Travis Johnson, Stock Gumshoe, December 5, 2012

Keith Schaefer got some attention from us a few weeks ago when he was teasing a play on natural gas liquids (NGLs), but we’re going back to the well here because we’ve gotten a bunch of questions about his latest tease … and because we’re curious ourselves about what this 33% dividend yield is that he’s pitching.

OK, so that’s the royal “We”. But still, I’m curious. And maybe the dog at my feet is curious too. So what’s Schaefer using as bait now as he fishes for new subscribers to his Oil and Gas Investments Bulletin?

Well, I’ll give you half the answer up front: It’s a refinery stock. And it’s apparently making a helluva lot of money because distillates and refined products are priced off of WTI, but they can buy heavy oil and North Dakota oil much cheaper than WTI because of where they’re located … presumably somewhere in the midwest. And frankly, he gives not so many really precise or helpful clues, so we might have to do some educated guessing to narrow down the Thinkolator’s results.

Here’s how he entices us:

“The Biggest Back-up of Crude in North American History

“It Has Created a Virtual ‘Cash Machine’ – Paying Out One of the Highest Dividends I’ve Ever Seen….

“North America is swimming in oil. Every day I read more stories about how the Shale Revolution is creating new oil plays.

“I live in Canada, and the oil sands production is also booming. Tens of billions in new spending is happening up there every year.

“So with all this new oil supply, simple economics says it should cost a lot less to fill up my tank now.

“Instead, gasoline costs almost as much now, with oil at $85-$90 per barrel, as it did in 2008 when oil was $147 a barrel!

“So I dug in and found out why that’s happening. And I realized this was one of the biggest, long-term trends I have ever seen in the energy patch…

“To the point where I immediately put a quarter million dollars of my own money into my new #1 pick. I even added another $20,000 a month later. I may add more yet.”

This is a story we’ve heard before in a few different ways — it’s basically about how the booming production from the Bakken and from Canada is largely landlocked, not easily connected to export markets or even to the big refining centers on the Gulf Coast. That’s part of the argument for the Keystone Pipeline extension, that we need new infrastructure to move the oil South so it can be refined and put into the pipelines or exported — the infrastructure is largely set up to move imports from Texas and Louisiana up to population centers, not to move it from North Dakota or Alberta down to Oklahoma and Texas.

So that gives pricing advantages to refiners who can buy in North Dakota, create value-added products in their refineries, and ship them to folks who base their pricing on seaborne oil prices. If you’re not familiar with the broader dynamic, West Texas Intermediate, WTI, is the price set on the US futures exchanges for delivery in Cushing, Oklahoma; Brent Crude is the price set on global exchanges for oil that’s tanker-ready, WTI used to trade at a premium when the US was importing more and more and more, now Brent trades at a premium as we need to import less and import demand is higher in Asia and elsewhere.

He’s teasing this refiner that’s in the crosshairs of Canadian heavy crude and Bakken crude, and can refine either and buy it cheap(er), and he says they pay an astounding dividend:

“I expect this company’s dividend to be the single most lucrative payout I’ve ever enjoyed.

“On top of that, a ‘normal’ yield would mean close to a double for the stock.

“You see, the stock now pays an astronomical yield: a staggering 33%. I was paid 8% in my first quarter.

“I figured out the yield – roughly – months ago… before the company released news.

“And – even with the yield this high, I consider this one of the safest—and most transparent – stocks I’ve ever invested in.”

OK, so … safe, transparent, and a 33% yield? Now you see why my dog was so curious.

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Here’s a bit more:

“Here are the 4 key facts I’ve learned so far in my research:

  • North America is producing so much oil that its benchmark price, WTI, now trades at a $10-$15 discount to international prices—called Brent.
  • But within North America, Bakken oil and Canadian heavy oil are even cheaper—sometimes it’s as little as half the Brent price!
  • The rest of the world is willing to pay Brent prices for our cheap energy. And we’re exporting lots of it—more and more every year.
  • That’s raising the price of U.S. distillates, forcing American consumers to pay higher prices to fill up our cars and heat our homes.

“These 4 big trends have me convinced one company will benefit as much or more than any other….

“This company doesn’t own and operate oil wells … they own and operate an oil refinery.

“A few special refineries are making money hand over fist.

“You see, the cheaper refineries can buy crude, and the more money they can sell their refined products for, the more profits they make.

“It’s a simple, age-old, common-sense formula for making money: ‘buy low, sell high.’

“Right now, this refinery company is buying crude at about the lowest prices you can get.

“That’s because of their location, which allows them to purchase and refine the cheapest crude oil in the world….

“It’s Where 2 Massive ‘Rivers of Oil’ Meet—Canadian Heavy Oil and Bakken Light Oil….

“This junction is the perfect place—the best spot in all of North America—for my high-yielding investment.

“Several refineries in this sector are unbelievable cash machines right now.”

It’s all a very nice story, but we don’t get many clues — there are, after all, quite a few refineries out there in the middle of the country or thereabouts. Can we glean enough data to feed to the Thinkolator?

Here’s a bit more:

“It Is a Free Cash Flow-Generating Machine….

“The stock is up 20% since I bought it a few weeks ago. But I think it has a LONG way to go….

“Now, The Street says refineries will become a lot less profitable as new pipelines are built to deliver all the new oil.

“They say all those new pipelines will relieve the pressure of the oil backup that is now happening at Cushing, Oklahoma—the largest oil storage hub of the US.

“But their predictions about oil prices have been less than accurate….

“The Street said the WTI-Brent spread would lessen when the Seaway — the 669-mile pipeline from the Gulf Coast to Cushing, carrying crude oil from South Texas — reversed the direction of its oil flow in early 2012.

“Instead, the spread got bigger….

“There isn’t a lot of refinery capacity for light oil. But my #1 refinery stock can handle it and heavy Canadian crude….

So … enough for the Thinkolator? I think so, but just barely — we have an answer, and I’m pretty sure it’s correct, but I can’t tell you that it’s 100% certain. Schaefer must be teasing … Northern Tier Energy Limited Partners (NTI), which is a newly public MLP.

And … I have to leave you with just a few thoughts on NTI for today, so you can do some cogitationizing on it for yourself. This is a venture-backed MLP that went public earlier this year at a price far below what they expected (around $14, they had been shooting for $20). They own a refinery and gas station/retail outlets — they own one refinery, in Minnesota, and a chain of convenience stores across Minnesota and Wisconsin. The convenience stores are almost immaterial at this point, but must provide some decent cash flow at times when refining is a lousy business (ie, when the crack spread is low). They have not guided on what their dividend will be going forward, but their first dividend, for the third quarter, was a massive one of $1.48 — which does indeed annualize out to a huge yield of almost 25% now (it would have been 33% if Schaefer bought during the initial run up after the IPO, which he could certainly have done a few months ago). They seem to be paying out the cash as it comes in, not trying to annualize their expected cash flow, so it looks like most analysts must be expecting the full year dividend to be well below the $6 that the first payout would indicate — I guess Schaefer’s argument is probably that the crack spread for their product is so good, with their cheap oil input price, that they’ll maintain an extremely high payout to unitholders.

So there you have it — it’s an MLP, which creates its own issues when it comes to taxation and regulation, which we’ve talked about before, and requires some additional recordkeeping, and it pays out a lot of cash. The big picture argument, that some midwestern refiners are generating huge profit margins (big “crack spreads”, as they say) is a reasonable one, but I don’t know much about this new venture-controlled MLP. They are very small, with the one refinery generating essentially all of their cash, they are controlled by TPG (the venture fund that bought the refinery and other assets from Marathon Oil a couple years ago), the cash from the IPO did not go to the company to fund growth or acquisitions (it looks like it went to cover derivative losses and debt), so I don’t imagine they’ll be making big moves in the near future to change the business, and I have no idea how much the company should be worth. TPG apparently paid much less than a billion for the assets in 2010 and the MLP is now valued at over $2 billion, but those may not be like-for-like comparisons. Indications are that other analysts expect substantially lower payouts in future quarters, but even a much lower payout could easily provide a 10-12% yield, which might be enough to get investors interested in this yield-starved climate.

I’m going to try to take a deeper look at this one, since I haven’t looked very closely at the recent crop of “riskier” MLP IPOs and there’s probably some interesting stuff in there, but that’s all I know on this one so far.

So whaddya think? Want to buy and hope that their yield stays huge on the back of their refining margins? Let us know with a comment below.


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