-- 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
-- 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
-- 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.
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.
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 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".
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.
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
Alon USA Partners L.P.
Corporate Credit Rating B/Stable/--
$250 mil term loan due 2018 B+
Recovery Rating 2
Rating Affirmed; Off CreditWatch
Alon USA Energy Inc.
$450 mil term loan B+ B+/Watch Neg
Recovery Rating 2 2
Alon USA Energy Inc.
Corporate Credit Rating NR B/Stable/--
$450 mil term loan NR B+
Recovery Rating NR 2