REINSTATING Northern Tier Energy LP ( NTI )/ CVR Refining LP ( CVRR ) with OUTPERFORM Ratings on Attractive Returns Potential; Raising TPs."
Reinstate Coverage: "We reinstate coverage on NTI and CVRR with Outperform ratings vs the MLP universe. We raise 2013-15 EBITDA for NTI and CVRR by c6% and c11%, respectively, and increase NTI's TP from $34 to $37 and CVRR's from $34 to $36. We note that these estimate changes reflect 1) our revised commodity price
assumptions from the April 3rd, 2013 note "Commodity Forecasts: The Setting of the Sun..." where we notably raised our WTI-Brent and WTI-WCS spread assumptions; and 2) 1Q13 actuals and forward guidance. NTI offers a NTM total return potential of c57% (46% upside to DDM / 11% yield) while CVRR offers a NTM total return potential of c34% (19% upside to DDM / c15% yield) vs. the average MLP return of 13% (6.5% upside to DDM / 6.5% yield). While NTI has a lower NTM yield (c11% which reflects the impact of maintenance in 2Q13) vs. CVRR (c15%), on a normalized basis, NTI returns c17% vs. CVRR at c12%."
Transition from super normal to normal: "As we laid out in January's Great LLS Debate, we felt there was a chance WTI-Brent crude spreads could narrow as early as 2Q13 when Mid-Con refineries ramped back up to full speed and with some additional pipe infrastructure from Permian/Cushing to the Gulf. We also felt global refining margins would fall once large refinery maintenance programs were complete. A transition from super normal to a "new normal" for earnings power is taking place during 2013."
Value in group: "Refiner shares look undervalued in this hoped-for new-normal earnings environment - Refiners could be entering a "Decade of Free Cashflow". Within refining, the crude advantage is shifting to the Gulf and West Coast. However, the northern Mid-Con should still have some of the most profitable refineries in the US. The ingredients for the next step higher are starting to fall into place - (1) a lot of damage has now been done to the WTI-Brent perceptions (2) the Credit Suisse Basic Material Indicator is turning more positive off its lows but (3) we are yet to see the impact on refining margins of the 3.5MBD increase in refining runs as worldwide maintenance is concluded."