CVR Refining LP (NYSE: CVRR)
Spun off from fertilizer manufacturer CVR Energy (NYSE: CVI) at the instigation of activist investor Carl Icahn, CVR Refining LP owns two refineries in the Midcontinent region: a high-complexity plant in Coffeyville, Kan., with a nameplate capacity of 115,000 barrels per day and a medium-complexity facility in Wynnewood, Okla., with a nameplate capacity of 77,000 barrels per day.
These downstream assets are complemented by 350 miles of crude-oil gathering pipelines, 125 trucks for moving liquids volumes and 6 million barrels of strategically located storage capacity.
Although unfavorable price differentials and escalating RIN prices forced the MLP to cut its distribution to $1.35 per unit from $1.58 in the first quarter, CVR Refining has several advantages over its peers: Its refinery in Wynnewood is capable of processing inexpensive heavy-sour crude oils from Canada, while its logistics operations provide a degree of insulation against the vagaries of the cyclical refining industry.
Management has also indicated that the MLP could grow its midstream assets either organically or via acquisitions. For these reasons, CVR Refining rates a hold. However, investors should also note that tumbling crack spreads and an unexpected outage at CVR Refining’s Coffeysville refinery could lead to another distribution cut in the third quarter.
DCP Midstream Partners LP (NYSE: DPM)
DCP Midstream Partners LP has evolved from a smaller MLP that primarily owns gathering and processing assets into a diversified midstream operator that generates 95 percent of its earnings from fee-based activities.
When tumbling NGL prices thinned DCP Midstream Partners’ distribution coverage ratio last year, the MLP’s supportive general partners, Spectra Energy Corp (NYSE: SE) and Phillips 66 (NYSE: PSE), accelerated their schedule of asset drop-downs to help offset this headwind. After completing $1 billion worth of drop-down transactions in 2012, DCP Midstream Partners has exceeded this target once again in 2013.
In April, the MLP acquired an additional 46 percent interest in a joint venture with its general partners in the Eagle Ford Shale. The deal includes 760 million cubic feet per day of processing capacity, 6,000 miles of gathering systems and 36,000 barrels per day of NGL fractionation. The acquisition is immediately accretive to distributable cash flow and includes a three-year direct commodity price hedge–the majority of contracts are percent of proceeds. DCP Midstream Partners now owns an 80 percent stake in this joint venture.
More recently, the MLP completed two additional drop-down transactions of assets in the Niobrara Shale: the Lasalle gas-processing plant, which is slated to come onstream in the first half of 2014 and will operate under 15-year agreements that provide for a fixed demand charge and a volume-based throughput fee; and the Front Range Pipeline, an equally owned joined venture between the MLP, Anadarko Petroleum Corp (NYSE: APC) Enterprise Products Partners LP (NYSE: EPD) that will begin to transport NGLs from the region to the Gulf Coast in the fourth quarter of 2013.
Management expects Spectra Energy and Phillips 66 to drop down another $1 billion worth of assets in 2014, setting the stage for the MLP to continue to grow its distribution at an average annual rate of 6 percent to 8 percent.
Among the MLP’s organic-growth projects, we’re bullish on its Chesapeake propane and butane export facility, which should help to offset persistent weakness in its wholesale propane business.
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Elliott and Roger on Mar. 20, 2018
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