Northern Tier Energy LP (NTI)

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http://seekingalpha.com/article/3612256-northern-tier-energy-what-to-make-of-the-western-refining-takeover?auth_param=46e5d:1b3178d:7e3cabb6f68c92e0eea1d01384d889e9&uprof=45

Northern Tier Energy: What To Make Of The Western Refining Takeover
Oct. 28, 2015 6:00 AM ET | 4 comments | About: Northern Tier Energy (NTI), Includes: WNR
Disclosure: I am/we are long NTI, KMI, PSX. (More...)
Summary

Western Refining is to buy Northern Tier Energy for $17.50 in cash and 0.2266 in stock.

This represents a premium of ~15%.

I believe this is not enough of a premium to buy out one of the best located refiners out there, but WNR controls NTI’s destiny due to its large 38% stake.

Western Refining (NYSE:WNR) has recently proposed to acquire all of Northern Tier Energy's (NYSE:NTI) common units for $17.50 in cash and 0.2266 of a share of WNR common stock, a 15% premium. At current prices, this comes out to a total consideration of ~$26.70 per unit of NTI.

NTI Total Return Price Chart

NTI Total Return Price data by YCharts
A deal was bound to happen sooner or later

That NTI is being bought out by WNR should not come as much of a surprise. After all, the refiner purchased a 38% stake in NTI and the general partner interest back in late 2013 for $775M (~$21.15 per share). This stake was being held by two private equity firms who had been slowly paring down their position for quite some time.

At the time, it was speculated that WNR would want to either do two things with NTI, either drop down assets into the MLP structure or buy out the whole firm.

Many thought the latter scenario was more likely. As a MLP, NTI has traded at a higher valuation compared to WNR. In 2013, the EV/EBITDA multiple of WNR was ~3.3x, half that of NTI's 6.7x. If WNR were to drop down downstream or sell assets directly to NTI, the company would have seen a massive benefit from the multiple arbitrage.

However, the worsening outlook for the MLP structure, due to the low price of oil, has made such a scenario unlikely. Since NTI retains no cash flows for growth, it would have needed to sell equity to fund any transaction. With the way energy stocks are trading, NTI would not have gotten a good price for its equity.

Though, the second option, with WNR consolidating the whole of NTI, is not that bad either. NTI, due to its location, has an advantage over other refiners. The company has access to discounted Bakken and Canadian crude feedstocks, allowing it to boost its refining margins well above what the crack spreads indicated. This can be seen with the often 20% annualized distributions paid by NTI. WNR will benefit greatly from adding NTI's assets to its own.

Furthermore, compared to others in the sector, NTI has one of the best refinery locations. Though, the main drawback is that by having only one refinery, the company is hurt whenever operational issues force a shutdown. This was put on display in 2014 when a minor fire resulted in a much-reduced distribution for one quarter, and for the recent Q3 2015, when unplanned maintenance took the refinery offline for a few days. In other words, NTI carried more risk than the more-diversified WNR.
Is the 15% premium enough?

In my opinion, WNR is stealing NTI at the current price of under $27 per unit. Sure, investors would get an upfront premium. NTI's unit price was already trading above $27 per unit as early as August, when the Whiting refinery outage boosted crack spreads across the country.

In addition, NTI's share price is down in recent weeks largely due to the impact of the unplanned maintenance and the Refinery Outage. I believe the stock price would have organically recovered to near or above the current offer price from WNR just via its fundamentals.
Conclusion

Overall, I am not too happy with this proposal. NTI is worth more than WNR is offering. However, given that WNR owns so much of the common equity, I doubt we'll see the acquisition fail. In any regards, at least we'll have the option to keep some equity in NTI via the token 0.2266 per unit stake in WNR.

As to where to invest capital now that NTI is being sold, I do not like the other downstream MLPs Alon USA Partners (NYSE:ALDW) or CVR Refining (NYSE:CVRR) as much as NTI and would wait for a pull back on both. If I were not already long, I would probably pick Phillips 66 (NYSE:PSX) among the refiners, with Valero (NYSE:VLO) as my second choice.

I will soon be taking some profits in NTI and buy more of another distressed energy stock, namely the pipeline giant Kinder Morgan (NYSE:KMI). Though, I will wait for the next distribution, which will likely come in mid-November.