Fresh Off Merger Pitch, Western Refining Drops Down Key Pipeline

Foreshadowing possible transactions to come, Western Refining Logistics LP (NYSE: WNRL) said Nov. 2 it has acquired a 375-mile segment of the TexNew Mex pipeline and an 80,000 barrel (bbl) crude oil storage tank from its sponsor, Western Refining Inc. (NYSE: WNR).

The deal comes just six days after Western Refining, an El Paso, Texas-based refiner, made a bid to acquire Northern Tier Energy LP (NYSE: NTI). Northern Tier, like Western, has midstream assets which could be similarly dropped down into the MLP as a way to more easily cash in on them.

Western Refining Logistics, which was formed by Western Refining to own, operate and acquire assets, will acquire the pipeline segment in a $180 million deal. Such dropdown deals are part of a long-term strategy by Western to shore up its MLP.

With additional midstream assets, the MLP could ship crude oil from the Delaware and San Juan basins to the U.S. Gulf Coast.

"Management reiterated that the development and drop-down of logistics assets in the Delaware and San Juan basins serves as an important step towards growing distributions at the WNRL level," said Jeff Dietert, analyst with Simmons & Co. International, in a Nov. 2 report.

The MLP currently has about 300 miles of pipelines and about 7.9 MMbbl of active storage capacity, as well as other assets.

Merger

The proposed Western/Northern Tier merger would create a company with twice the miles of pipeline—600 miles—and increased exposure to crude production in western Canada, the Permian and San Juan basins and the Bakken Shale.

The combination would also increase Western’s storage capacity to 11.9 MMbbl from 8.1 MMbbl.

"WNR's long-term strategy is to continue to develop newly-constructed logistics assets in the Delaware and San Juan basins, which will enhance the crude oil advantage of our refineries,” said Jeff Stevens, president and CEO of WNR and WNRL, in a statement.

However, the proposed Western/Northern Tier merger has split some analysts. Some believe it gives Western a top-tier refinery portfolio with three of the highest-margin refineries in the U.S. Others say Northern Tier is undervalued and may seek a higher asking price.

Western Refining owns about 38% of Northern Tier’s outstanding common units. On Oct. 26, the company made a bid to acquire the remaining interest of Northern Tier’s publicly-held common units at a 14% premium.

However, Northern Tier could find an easier path to monetizing its midstream assets, analysts said.

Refined Deal

The TexNew Mex pipeline and crude oil storage tank are expected to generate $18.5- to $19 million of EBITDA in 2016, the release said.

The line extends from WNRL's crude oil station in Star Lake, N.M., in the Four Corners region to the company's T Station in Eddy County, N.M. The storage tank is located at WNRL's crude oil pumping station in Star Lake.

The pipeline supplies WNR's El Paso refinery with "cost-advantaged crude oil," Stevens said.

As production grows in the Four Corners region, the TexNew Mex pipeline will also provide a "potential outlet for crude oil shipments to Midland and the U.S. Gulf Coast," Stevens added.

In connection with the closing, Western and WNRL amended certain commercial agreements. As part of the amendments, Western will provide minimum volume commitments for 10 years of 13,000 bbl/d on the TexNew Mex pipeline and about 80,000 bbl of crude oil storage.

The primary consideration for the assets consists of $25 million in cash, $145 million in revolver borrowings and $10 million in WNRL common units issued to Western.

WNRL also issued to Western a new class of WNRL partnership interests in connection with the acquisition that entitle WNR to 80% of the economics resulting from crude oil throughput on the TexNew Mex pipeline above 13,000 bbl/d. WNRL will be entitled to 20% of the economics resulting from crude oil throughput above this minimum volume commitment.

The terms of the transaction were approved by Western's board of directors. Terms were also approved by the conflict committee serving the board of WNRL’s general partner, which is composed of independent directors.

Contact the author, Emily Moser, at emoser@hartenergy.com.