Northern Tier Energy LP, a
downstream energy company, is focusing on growing its refining segment after
experiencing downtime last quarter. The company’s only refining plant, St. Paul
Park refinery, in Minnesota, contributes 72% of the company’s total revenue.
With the advantage of the refining plant’s location in the U.S. PADD II region,
which includes the Bakken formation of North Dakota, and its total throughput
capacity of 89,500 barrels per day, the company is optimistic about this
segment. Northern Tier’s refinery segment is strengthening its production base
with higher crude oil production in the Bakken formation and is in line to meet
the guidance for refining throughput of 80,000 to 85,000 barrels per day in the
fourth quarter of 2013.
In December, total crude oil
production from the North Dakota Bakken formation was 1 million barrels of oil
per day, or Mbopd. Production is expected to increase to 1.02 Mbopd in January.
This projected production growth in Bakken will help the company increase its
total throughput and also improve the crack spread.
With production throughput,
increased crack spread largely determines a refinery’s profitability. Crack
spread is the difference between the wholesale petroleum product price and the
crude price. A higher spread between the crude price and the wholesale price
generates higher refining profits. The price of Bakken crude is a major factor
for Northern Tier’s Minnesota refinery. The Bakken crude is currently trading
at $16 lower per barrel than the U.S. benchmark West Texas Intermediate, or
WTI. Earlier, the Bakken crude traded $10 lower than the WTI. The widened
spread will help the company improve its margin with lower-priced Bakken crude.
Along with a widened crack
spread, the company also reduced costs in crude oil transportation from North
Dakota and Western Canada. It has a 17% interest in a Minnesota pipeline
company, through which it accesses crude oil from the Bakken formation and
Western Canada directly. The transportation of crude via pipeline is considered
less costly, generally around $12 to $15 less per barrel than railroad shipping.
This pipeline helps the company receive cheaper Bakken crude in Minnesota
through its 300-mile pipeline.
Besides direct access to the
Bakken formation and Western Canada crude oil production through the Minnesota
pipeline, the refining plant’s location enabled the company to take advantage
of the higher demand in refined products in the PADD II region.
Demand of refined products
in PADD II has exceeded the total regional production for the last seven years.
To meet the demand, retailers in this region had to import from the coastal
region, adding an extra transportation cost. While looking at the opportunity,
the company planned for the expansion of its St. Paul Park refinery in the
fourth quarter of 2013 to support local demand. Recently, it completed its wet
gas compressor project that helps reduce the output of black oil by 2,000
barrels per day and converts it into gasoline, distillate, and liquid petroleum
gas (LPG). Black oil is used to lubricate a slow-moving machine, and it has
less economic value than other refined products. Earlier, the company expanded
the sweet crude tower throughput with an additional 8,000 barrels per day. As
there are only two refineries in Minnesota, including the company’s St. Paul
Park refinery, it can capitalize on the growth in demand for refined products
in this region.
Northern Tier’s existing and
new expansion plans should enable it to keep up with the higher demand of
refined products in the PADD II region with its increased throughput in the
coming years.
Acquisition: Growth
continues
To strengthen its refining
segment and positioning, the company announced an acquisition agreement with
Western Refining (WNR). With this agreement, Western Refining acquired 100%
general-partner interest and 38.7% of limited-partnership interest in Northern
Tier, which was held by previous partners ACON investment and TPG. With this
deal, both companies will benefit from refining operations. Northern Tier’s
total refining capacity is expected to increase by 242,500 barrels per day,
including Western Refining’s platform, which will be used to fulfill part of
the higher demand in the PADD II region.
This acquisition will help
Northern Tier extend its pipeline network to the Permian and San Juan basins.
Northern Tier will benefit from the production growth of these two basins. With
the current crude discount of $4.75 less than WTI, its refining margin is
expected to improve in coming years. Along with the lower-cost crude from these
fields, Northern Tier will also take advantage of the integrated retail network
of Western Refining’s 458 retail stores to distribute in the Southwest,
mid-Atlantic and upper Midwest. Moreover, Northern Tier also has a contract
with Marathon Petroleum LLC (MPC) to supply all of its gasoline and diesel requirements
in 90 Marathon convenience stores in the company’s marketing area.
With extensive access to
most of the lower-cost-crude fields and a strong retail network, Northern Tier
will offset the impact of throughput downtime in the third quarter and will
improve the top-line of its refining and retail segments.
Conclusion
Although Northern Tier’s
refining segment has suffered downtime in throughput and weaker revenue during
the third quarter, its strategic position in the U.S. PADD II region will enable
the company to turn around in coming years. Moreover, Western Refining’s
acquisition of its 100% general-partner interest, along with expansion of its
refining plant, will enable it to meet the growing demand of refined petroleum
products in the PADD II region. Hence, Northern Tier is expected to improve its
refining production and strengthen its top-line in the coming quarters.
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