Alon USA Partners L.P.: Poised for Big Second Quarter Distribution?

Oxford Resource Explorer Weekly Wire

A few weeks ago, we added Alon USA Partners L.P. (NYSE: ALDW) to Oxford Resource Explorer‘s Growth Portfolio. Alon is a relatively small downstream refining master limited partnership (MLP).

Its Big Spring Texas refinery is very small, processing slightly more than 70,000 barrels of crude per day (bpd). However, unlike its larger counterparts, Alon processes a mixture of 80% West Texas Sour (WTS) crude and 20% West Texas Intermediate (WTI) light, sweet crude.

However, based on market conditions, its refinery can process 100% WTS or 100% WTI. Both trade at substantial discounts to Brent crude, giving Alon a sustainable feedstock advantage over other refiners. No other refinery in the U.S. has that flexibility.

Regardless of the mix, all of Alon’s crude comes from the Permian Basin. Its finished products are ultra-low sulfur gasoline (50%), diesel and jet fuel (33%), petrochemicals (6%) and asphalt (6%), and other refined products make up the balance.

About a month from now, Alon will release its second quarter 2015 distribution. In the first quarter, it was $0.71 per unit.

I expect its second quarter distribution to be at least $0.80 per unit or higher. Why? It’s all about crack spreads.

You see, Alon is one of a few downstream refineries that pay variable quarterly distributions. Changes in refined products and crude oil pricing affect the amount of the distribution.

The crack spread is the difference between the prices of both the raw materials (crude oil) and the finished products (gasoline, diesel fuel and jet fuel).

Therefore, it should come as no surprise that these prices and the resulting refinery profits can and do have big variations from quarter to quarter. A refiner’s profit margins are the difference between what it has to pay for crude and what it gets for its refined products.

Because both crude oil and refined products pricing are market-driven, a refiner’s operating margin isn’t really under its control. Refining MLPs like Alon pay their general and operating expenses out of gross margin.

In addition, some money is set aside for maintenance and turnaround expenses. However, the majority of the cash is for distributions to MLP unit holders.

Because of the variability of both crude and refined products pricing, distributions change every quarter. Obviously, the wider the crack spread, the higher the profits.

However, pricing isn’t the only thing that can affect distributions. Unplanned downtime can have a big effect on gross margins.

Planned events, referred to as turnarounds, can partially or completely shut down the refinery. Some refinery MLPs will store excess production to lessen the impact of the turnaround during that quarter.

In the second quarter of 2014, the Big Spring Refinery underwent a turnaround. In this case, the turnaround was necessary in order to replace a catalyst that is an integral part of the refining process.

As a result, the average daily throughput of the refinery during the second quarter of 2014 fell to 46,000 bpd. This compares to Big Spring’s 2014 full capacity of 70,000 bpd.

This outage lowered 2014’s full-year throughput to 67,000 bpd. However, Alon performed several enhancements to the refinery in conjunction with the outage.

The shutdown and turnaround was well worth the effort. As a result of these important projects, Big Spring’s overall throughput is now 73,000 bpd.

In addition to its refining business, Alon owns a wholesale fuels marketing business. Last year, more than 90% of the gasoline and diesel produced by Big Spring was transferred to the partnership’s wholesale marketing business.

The partnership supplies about 640 branded sites, many of which are located at the company’s 7-Eleven retail stores. Last year, those sites sold 8% of the diesel and 27% of the gasoline produced by the Big Spring Refinery.

With the company’s turnaround behind it and no scheduled maintenance on the horizon, the rest of 2015 looks like it could be very profitable for Alon USA Partners and its unit holders. If you’re looking for supersized dividends, you might want to consider adding a few units of Alon USA Partners L.P. to your energy portfolio.

Good investing,

Dave

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