MLP IPO Review: Northern Tier Energy, L.P. (“NTI”)

UPDATE 111212: NTI just announced its first prorated 3Q12 distribution of $1.48 per unit, substantially outperforming the estimates from the IPO Prospectus. The Variable Distribution policy MLPs are great on the way up. We are currently in the “I’m a Genius!!” phase shown in the CLMT chart below.

Apologies for not pulling a real review of this one together back when it was pricing on July 25th but here’s my current 2 cents on NTI:

NTI was on its roadshow looking to price in the $19 – $21 range, but on the night of pricing it got pushed down to $14. Subsequent to NTI going public I saw various information about the placement of the units and estimates were that around 70% of the NTI IPO was placed institutionally. So, higher than expected for an MLP (versus expectations that more would be placed in Individual Investor hands, aka Price Takers, although that trend is definitely going the other way as there are more ETFs, ETNs, mutual funds etc. specifically focused on MLPs). On the night of the NTI pricing it was like Christmas as a kid for me, I kept waking up all night checking the clock and got up really early in anticipation of the start of trading of NTI. My personal belief is that those institutions that invest in the specialized area of energy MLPs and who had also been invested in the recent PDH IPO were irritated with PDH’s performance (the most recent VARIABLE rate MLP) and sitting on unrealized losses (just like I am) and thus pushed down the IPO price of NTI by scaling their bids down and putting in larger and larger orders at lower and lower prices (eventually causing the IPO to clear at $14, big thanks to those Institutions!). These Institutions, aka Price Makers, set the pricing for IPO’s so their general mindset is extremely important while an IPO roadshow is going on and the more of an MLP IPO that has to get placed with them (that’s a general sign of lack of receptiveness from the traditional Individual Investors/Price Takers) the more likely those Institutions/Price Makers are to want to get a better deal.

I’m long NTI and now of course it continues to run up making me wish I had a larger position, such is life, but NTI is EXTREMELY RISKY, it has a single refining asset (these are always, always trying to blow up) so its cash flow is exposed to the very volatile crack spread and it has a VARIABLE distribution policy with no stated Minimum Quarterly Distribution. It does have some hedging in place but a much lower percentage than say the Upstream MLPs. If you are long NTI you are long while crack spreads for its refinery are at very, very favorable levels, this cannot and will not last forever so be prepared to SELL when their crack spread turns or be prepared for signficant drops in distributions and the unit price. Calumet Specialty Products Partners (CLMT) is the closest MLP peer to NTI by business and they had a great run from their IPO into the back half of 2007 but then things turned and eventually they had to drop their distribution from $0.63 down to $0.45 for the first quarter of 2008 ($0.45 is their stated Minimum Quarterly Distribution). Here’s what happened to CLMT’s unit price:

With all of that in mind, you can find all the good things about NTI in the roadshow slides here (see slide 7): NTI Roadshow

Also Hi-Crush Partners LP is now out on the road looking to price its IPO next Wednesday night (8/15/12, Roadshow video). This is another stretching of the MLP universe as HCLP produces “premium monocrystalline sand, a specialized mineral that is used as a “proppant” to enhance the recovery rates of hydrocarbons from oil and natural gas wells,” i.e sand that is used by oilfield service companies for hydraulic well fracturing, so as always it will be really interesting to see how it goes…

About Philip Trinder

President of MLP Protocol, investor, trader, and proponent of Master Limited Partnerships.
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4 Responses to MLP IPO Review: Northern Tier Energy, L.P. (“NTI”)

  1. Agreed on the competition, thanks for posting the article link.

  2. sportscliche says:

    I’m not really getting Hi-Crush’s significant-barriers-to-entry argument. The barriers may be significant, but there sure seems to be a lot of competition:

  3. Yep NTI will definitely be interesting over the long haul. TNH is a VARIABLE rate MLP and if you bought and held the whole time it has probably worked out pretty well (sort of a small sample size though).

    I do need to do some diligence on the whole sand mine concept as an MLP but at first pass it seems like a depleting natural resource asset (so parallel to say a coal mine but without the black lung). It would be great if HCLP got a specific Letter Ruling from the IRS but the IRS has ruled that MLP qualifying activities include “Fracturing services, fees for removing or recycling flowback fluids,” and since the output from the sand mine is the input into “Fracturing services” it seems like a green light to me (although I’m sure they list all kinds of IRS related risks in the S-1). (Article about IRS MLP rule changes:

    But still, let’s hope the same Institutions/Price Makers are going to look at that indicative Hi-Crush yield of 9.5% with the same distaste as NTI and push that IPO price down for the rest of us. I’ll be absolutely shocked though if it gets hammered down as much as NTI but we shall see…

    And yes if too many assets are moved into MLP structures and not paying income taxes then eventually Uncle Sam could put an end to the party, but given the total size of the energy related MLP space I think that remains a relatively low risk for now.

  4. Christmas morning…now that’s funny, but it looks like Santa was good to you! To their credit, NTI was very up-front in their roadshow about the roller-coaster nature of their business, especially the risks associated with having a single refinery. I’ve been wondering whether an investor who can stomach the wild ride that’s likely in store — both from the market and the variable distribution — could actually come out ahead in the long-run compared to a boring, fee-based pipeline partnership? I’m not even thinking of trading in and out of NTI with the ebbs and flows of the oil market, which I feel would be too difficult, just battening down the hatches for the long haul.

    High Crush on the other hand, is touting a rapidly growing business model with big, sustainable distribution increases, conservative DCR, and a standard IDR in place. I’m a little concerned about how they shoe-horned a sand mine business into the MLP structure. Who ultimately decides if this is appropriate and legal? If too many fringe businesses work their way in, legislators may notice, and we could have another Canadian Royalty Trust debacle. The Boston Celtics were an MLP at one point.

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