BRIEF-Crew Energy Inc. announces C$300 million senior notes offering
* Crew Energy Inc. announces C$300 million senior notes offering
Overview -- Alon USA Partners L.P. was formed in August 2012 by Alon USA Energy Inc. as a variable master limited partnership (MLP) to own and operate their strategically located Big Springs Refinery and petroleum products marketing business. -- The MLP raised about $184 million through an initial public offering and used proceeds along with cash on hand to pay down $200 million of the term loan at Alon USA Energy. Alon USA Partners has assumed $250 million of term loan debt from its parent. -- We are assigning our 'B' corporate credit rating to the MLP Alon USA Partners. We are also assigning our 'B+' rating with a recovery rating of '2' to the partnership's $250 million term loan, which was assigned by Alon USA Energy. -- We are withdrawing the B/Stable/-- corporate credit rating for Alon USA Energy, removing the $450 million term loan issue rating of 'B+' from CreditWatch with negative implications, and withdrawing the issue rating. Rating Action On Jan. 10, 2013, Standard & Poor's Ratings Services assigned its 'B' issuer credit rating to Alon USA Partners L.P., a variable master limited partnership (MLP) in the refining sector. The outlook on the rating is stable. We also assigned our 'B+' rating and a recovery rating of' '2' to the $250 million term loan. The '2' recovery rating indicates that we expect lenders would receive a substantial recovery (70% to 90%) if a payment default occurs. At the same time, we withdrew the B/Stable/-- corporate credit rating on Alon USA Energy Inc., removed the $450 million term loan issue rating of 'B+' from CreditWatch where we placed it with negative implications on Oct. 22, 2012, and withdrew the issue rating. Rationale The rating on Alon USA Partners reflects its "vulnerable" business risk profile and its "significant" financial risk profile. We base the company's vulnerable business risk profile on its lack of operating diversity and exposure to volatile commodity prices. The refinery is small relative to its peers, and the partnership's lack of operational diversity makes it vulnerable to regional economic downturns, supply shocks, cost increases, and margin volatility. We also see some added risk from the company's variable MLP formation. In our view, this structure puts added pressure on the company to manage distributions to unitholders, which could reduce financial flexibility and prove challenging given the refining business' highly cyclical nature. The variable MLP structure should offer better credit protection than traditional MLPs because payouts will automatically decrease in down markets, but relative to a corporation, it will have a greater reliance on capital markets for growth capital and acquisition funding. Also, given that variable MLPs are so new and lack a track record of raising equity subsequent to a distribution decline, we will remain cautious in our credit evaluations, until it establishes a successful track record. The MLP has a refining and a marketing segment. The refining segment consists of the 70,000 barrel-per-day (bpd) Big Spring refinery in West Texas. Big Spring's proximity to Midland, Texas, the largest origination terminal for West Texas crude oil provides it with cost-effective sources of West Texas Sour and West Texas Intermediate crude, which allows it to earn higher margins. This has been incremental to the large discount in Cushing-based crudes driven by surplus production in the Mid-Continent region and constrained pipeline take-away capacity. The Cushing-based West Texas Intermediate discount to Brent crude has averaged $16.04 per barrel for the nine months ended Sept. 30, 2012, and has spiked to near $30 per barrel at times. We expect this dynamic is likely to persist in 2013, although at more modest levels as take-away pipelines come into service, gradually moderating to about $5 per barrel longer term. The refinery's 10.2 Nelson Complexity rating allows it to process lower-cost crude oil into higher value light refined products, like gasoline and distillates, resulting in good product yields. The feedstock conversion percentage for the refinery for the nine months ended Sept. 30, 2012 was about 49.6% gasoline, 32.8% diesel/jet fuel, 6.3% asphalt, 5.9% petrochemicals, and 5.4% other refined products. Operational performance has been stable, with a utilization rate of 97.3% for the nine months ended Sept. 30, 2012. The marketing business focuses on transporting fuels to Texas, Oklahoma, New Mexico, and Arizona through its physically integrated refining and distribution system. It distributes fuel products through a product pipeline and terminal network of seven pipelines totaling about 840 miles and five terminals that it owns or accesses through leases or long-term throughput agreements. It sells refined products from the Big Spring refinery in both the wholesale rack and bulk markets. Through its wholesale marketing operations it supplies refined products to branded distributors, as well as Alon USA Energy's retail convenience stores. The partnership's significant financial profile reflects our expectation that debt to EBITDA is likely to be in the 1x to 2x range in 2013 and 2014. While indicative of a "modest" financial risk profile under our criteria, the assessment incorporates our view of the broader refining sector as having high fixed costs--including substantial turnaround costs--that add a high degree of operating leverage to a cash flow stream that can be volatile. We view the refining industry to be highly competitive and highly capital-intensive, and its profitability is often very low. MLPs also rely much more than corporations on outside sources of capital to fund growth spending and are more vulnerable to frozen capital markets. Security interests for lenders to the $250 million term loan will also become limited to the assets of Alon USA Partners and its subsidiaries, and they will face single-asset risk. Liquidity Liquidity is "adequate" for the next 12 months, with sources over uses of more than 2x. We estimate about $361 million in sources, consisting of about $160 million in funds from operations under our mid-cycle assumptions and about $191 million of assumed credit line availability as of Dec. 31, 2012. We assume uses of about $165 million, including about $41 million for capital spending and distributions of $105 million, as well as changes in working capital. Although the sources and uses point to a "strong" descriptor, more qualitative factors--such as the variable MLP structure, capital market access, and the refining sector's highly volatile cash flows--limit our liquidity descriptor to "adequate". Recovery analysis We rate the company's $250 million term loan due 2018 'B+', with a recovery rating of '2'. The '2' recovery rating indicates our expectation of substantial (70% to 90%) recovery if a payment default occurs, and is based on a $2,750 value assumption per barrel of throughput capacity at Big Spring. For more information, please see our recovery report to be published shortly on RatingsDirect and "Assumptions For Assigning Recovery Ratings To The Debt Of U.S. Oil Refining Companies," published March 14, 2011. Outlook The stable outlook reflects our expectation that Alon USA Partners will generate strong financial measures, with a mid-cycle debt to EBITDA leverage of about 2x as a result of low leverage and strong EBITDA driven by access to discounted crude supply. We could raise the rating if Alon can demonstrate a track record of operational performance and financial discipline under the new MLP structure, such that we expect debt to EBITDA will remain below 2x in the longer term. We believe there is significant financial cushion in the current rating, but we could lower it if leverage increases beyond our expectations, operating problems occur at the refinery, or a compression of crack spreads or crude differentials lead to lower margins and we expect sustained debt to EBITDA approaching 4x. Related Criteria And Research -- Key Credit Factors: Criteria For Rating The Global Oil Refining Industry, Nov. 28, 2011 -- Assumptions For Assigning Recovery Ratings To The Debt Of U.S. Oil Refining Companies, March 14, 2011 Ratings List New Ratings Alon USA Partners L.P. Corporate Credit Rating B/Stable/-- $250 mil term loan due 2018 B+ Recovery Rating 2 Rating Affirmed; Off CreditWatch To From Alon USA Energy Inc. $450 mil term loan B+ B+/Watch Neg Recovery Rating 2 2 Ratings Withdrawn To From Alon USA Energy Inc. Corporate Credit Rating NR B/Stable/-- $450 mil term loan NR B+ Recovery Rating NR 2
* Crew Energy Inc. announces C$300 million senior notes offering
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