Western Refining Logistics (NYSE:WNRL)

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Member Avatar LouPinella (< 20) Submitted: 12/1/2013 6:01:32 PM : Outperform Start Price: $22.70 WNRL Score: -13.81

WNRL is the newest kid on the MLP pipeline & terminalling scene (SXL, BPL, TLLP, & PAA come to mind). They have a minimum quarterly distribution of 28.75 cents / unit, though it is not guaranteed. At $25 / unit -- close to where they are around Thanksgiving -- that's 4.6% per unit. In MLP-land, that's not huge, but I think it will go over well with Wall Street. In some ways its an amalgamation of many of the current investing buzzwords -- shale oil, MLP, yield, Permian Basin, stability and growth, kittens and rainbows, etc. (OK, that last part wasn't in the prospectus, but anyway...) The cash payout is relatively stable because it's based on long-term contracts with the parent (WNR) to transport and store their oil and refined products, including guaranteed minimums which are enough to cover a lot of the payout. At the same time, they've got a brand-spanking new pipeline connected to the Permian Basin which has a lot of room to move increasing amounts of crude, as production ramps up. They are also planning to evaluate organic and acquisitive growth opportunities, etc., etc.

Here's the "but": WNR didn't create this investment just because they want to give you money. In the beginning, the common units get most of the money, but as cash flow increases it will also flow into Western's subordinated units. After that, once common and subordinated unit payouts rise up to 33.06 cents per unit (5.3% yield at $25 a unit), Western (via the GP) starts raking in the Incentive Distribution Rights (IDRs). All this means that they got a pretty good return at the IPO because of the starting payouts to the common units, but as cash flow grows more and more of it goes to Western. Furthermore, in the future if they decide to reset the payout threshold for the IDRs, Western immediately gets common units to compensate it for the lost cash flow from the IDRs -- i.e., dilution (~20%, in the example given in the prospectus). There will also likely be dilution in the interim anyway because they're not retaining cash for growth, instead getting debt or issuing units. This is not unusual for MLPs. Take home: the MLP is definitely going to grow and increase cash flow, I believe, but individual common unit holders will not see all of that growth reflected in the their own units and distributions. Finally, my last raincloud is that I really don't know anything about the San Juan basin / Four Corners fracking scene, which is where very roughly half of the logistics assets lie. I haven't heard that this is a big production area, which makes me think it's either the =next= big thing, or an overrated asset.

I have a small position, and will be monitoring WNRL through their first few payouts to see how it shakes out. Like I said, I think WS will push the unit price up, but I'm not convinced it's a home run.

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