El Paso, Texas-based Western Refining Inc. (NYSE: WNR) said Oct. 26 that it has bid to acquire the rest of Northern Tier Energy LP (NYSE: NTI) by buying out its outstanding publicly-held common units.

Combined, the companies would have about 600 miles of pipeline and increased exposure to crude production in western Canada, the Permian and San Juan basins and the Bakken.

In the past two years, Western Refining has increasingly used Delaware Basin crude oil at its El Paso refinery to replace, in part, common stream barrels. The Delaware crude offers better economics and improved gasoline and diesel yields.

If the transaction is completed, WNR could drop down more midstream assets into its infrastructure MLP, Western Refining Logistics LP (NYSE: WNRL) and open an easier path to monetizing NTI’s midstream assets, analysts said.

About two years ago, Western Refining bought 100% of NTI’s general partner and owns about 38% of the outstanding common units of NTI. WNR’s offer puts a 14% premium on NTI’s Oct. 23 closing price of $24.23 and gives NTI a ballpark enterprise value of $2.74 billion, said Paul Y. Cheng, analyst, Barclays Capital.

Western Refining plans to use a combination of cash, equity and a bank bridge loan to complete the transaction. The deal offers NTI unitholders $17.50 per unit in cash and 0.2266 of Western Refining’s common stock. The remaining 62% interest in NTI would cost about $27.50 per share—an estimated $1.575 billion.

Western Refining submitted a proposal to the North Tier’s general partner, which will be reviewed by the board’s conflict committee. If a deal is completed, NTI will become a wholly owned subsidiary of Western Refining and NTI’s common units will cease to be publicly traded.

The proposed transaction drew mixed reaction from industry observers.

“We think WNR’s offer to acquire the remaining 62% of NTI’s outstanding units represents the right strategic move,” Brad Heffern, analyst for Canadian investment bank RBC Capital Markets LLC, said in a note to clients.

“NTI has always been an undervalued and stranded asset, and uncertainty around WNR’s plan for its existing 38% stake has been an overhang. The acquisition will give WNR a top-tier refinery portfolio with three of the highest-margin refineries in the U.S.,” Heffern said.

Conversely, some analysts’ initial takeaways characterized the deal as negative, suggesting that the proposed consolidation could be dilutive to WNR shareholders.

“While not a major component of financial analysis, this transaction also signals a strategic shift as this appears to end the variable payout MLP refinery experiment. Some positives will include a more direct path to pursue drop-downs to WNR’s refining and logistics subsidiary (WRNL) and corporate and operating cost savings in refining and retail operations,” Roger Read, analyst for Wells Fargo Securities LLC, observed in a note to clients.

However, Read pointed out that synergies from the transaction could be meaningful long term.

“Cost savings from the merger could include corporate overhead, refining and retail and conventional MLP drop-downs to WNRL from NTI and WNR,” Read said.

Meanwhile, Chi Chow, analyst for Tudor, Pickering, Holt & Co. remains cautious on the deal.

“This deal is no slam dunk for NTI—a 14% premium is solid, but not exceptional, and this premium will narrow if the market reacts negatively to WNR issuing equity to take out a higher-multiple subsidiary,” Chow said in a note to clients.

WNR pipeline and gathering assets consist of about 300 miles of crude oil pipelines, gathering systems and roughly 566,000 barrels of active crude oil storage located in the Delaware and Permian basins of West Texas and southern New Mexico and in the Four Corners area in northwestern New Mexico.

The assets serve as a key source of high quality, cost-advantaged crude oil for Western Refining’s El Paso and Gallup Refineries.

Bryan Sims can be reached at bsims@hartenergy.com.

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