By Robert Campbell
NEW YORK, Aug 15 (Reuters) - Executives at publicly-held U.S. oil refiners have been at pains to reassure investors that the dislocations once seen in the North American crude oil market will return, delivering bumper profits once again to refineries.
Despite bumper earnings, there is a sense of unease among refining executives.
No doubt they are worried that skittish investors, who have seen the discount on benchmark U.S. crude oil evaporate and a deterioration in the spreads between refined products and crude oil, will prematurely dump their shares.
Maybe these executives are right and anyone selling now would be foolish. At the same time, it is worth bearing in mind that the compensation packages of these men are tied to the company share price. Perhaps it pays to follow where the so-called smart money is going.
If things are good and only going to get better, why are two private equity firms choosing this moment to dispose of roughly a third of their remaining shareholding in a small refiner that is supposedly well-positioned to take advantage of these sorts of conditions?
ACON Investments and TPG Capital, the two private equity groups that control the general partner of Northern Tier Energy LP, a Minnesota oil refiner, are selling off part of their controlling stake in the firm this week, cashing out more than $250 million from their investment.
There’s nothing sinister here; it is what private equity firms do. They buy assets, usually using a lot of debt, then sell for a profit.
Why do they sell? Perhaps because their financial wizardry has genuinely improved the asset or perhaps simply because market conditions are now more favorable than when they acquired the company in the first place.
Still, an insider selling out is usually a signal that the easy money has been made and that whatever profit that might be earned by holding out longer is not enough to offset the risk that market conditions get tougher.
The $250 million payout at Northern Tier represents a nice gain for ACON and TPG. Having paid $554 million to Marathon Petroleum for the St Paul Park, Minnesota refinery, along with some pipeline and marketing assets, in December 2010, the two investors are cashing out nicely after less than three years.
Of course, the bulk of this purchase was not with the PE firms’ cash. Northern Tier raised debt, securitized assets and sold off real estate to help fund most of the deal. So the $250 million sale likely represents a sizable profit for the two investors, not counting any dividends they may have received from the company.
There’s still more profit to be had. After all, even after this sale, the two investors will control more than a third of Northern Tier’s common units as well as the general partnership that manages the company. Doubtless they will look to sell the remainder off once the market has digested the first divestment.
The likely rationale for the selloff is what is interesting. Northern Tier’s main asset, a refinery capable of processing some 90,000 barrels per day of crude oil and other feedstocks, is seemingly well-positioned to profit from anticipated dislocations in North American oil prices.
It is much nearer to the prolific, yet logistically-challenged Bakken field in North Dakota than most U.S. refineries, giving it a big edge in shipping economics. It is also well-positioned to receive discounted Canadian crude oil from the big pipeline networks that run through Minnesota.
It has further advantages. Unlike other small refiners that operate on a wholesale basis, Northern Tier has a marketing arm that blends fuels, allowing the company to generate most of the renewable fuel credits known as RINs that it needs to meet government mandates, saving itself millions of dollars in compliance costs.
But notwithstanding these advantages the time has come to sell. The real problem for small inland North American oil refiners is that the improvements to continental oil distribution networks are cutting away their advantage on feedstock prices, even as government regulation and changing consumer demand patterns cut into oil consumption.
Without easy access to export markets, inland oil refineries face a tough fight in the coming future. The biggest and most sophisticated plants will be the most successful. The smallest and least diversified will be the most vulnerable.
This isn’t to say that smaller companies like Northern Tier cannot be successful in this new, more competitive environment. But it does mean that the easy money is well and truly gone. Only investors with the stomach for a tough fight need stay on board.