Alon USA Partners, a refinery company with >20% FCF

Alon Energy doesn’t seem to be hit by the recent sell-off in oil stocks sporting a PE of 51. How can I possibly be interested in this refining company? Well, if you peruse through its filings you’ll see a subsidiary called Alon USA Partners (ALDW). This was IPOed in 2012, and it owns and operates the Big Spring refinery in Texas. Alon Energy kept itself as the controlling stake with 81% of the shares of ALDW.
For the last years, ALDW has been able to capitalize on the oversupply of oil coming from the shale boom. Given that american drillers had been barred from exporting unrefined products, this led to cheap oil for ALDW to refine, which it could then export at the more expensive international price. In the process, ALDW completed an expansion of its refinery.
In the last week or two, ALDW has come tumbling like a dead rock. Perhaps investors got scared by the recent oil prices coming down, or were wary of Alon Energy trying to sell ALDW another refinery for $450M. The attempt by Alon Energy to sell a refinery to Alon USA Partners would result in a price of $100M in cash and $350M in stock. A quick napkin math: at the current price, that is equivalent to ~29% of its market cap and in the meantime the stock is diluted ~22%. And then, it all went to the trash can and the deal was off due to market conditions. Not good, but not this bad either.

Right now, ALDW has a FCF% of ~20%, which is amazing. How did I come up with this number? I averaged the FCF since ALDW’s inception and assumed an issuance of stock related to the buying of Alon Energy’s refinery that doesn’t yet exist, but I suspect will.
At the current price, the market is selling ALDW’s business for 6 times earnings, which is the same as saying 16% earnings yield. The company has been operating extremely well, spitting out a huge chunk of free cash flow that it mostly uses to pay dividends and repay debt to Alon Energy. The dividend policy is to distribute most of the net income and not borrow when times are bad, but rather skipping the dividend.

There is a good way to see every investment idea. You ask yourself two simple questions: is it cheap? Is it safe? Well, with that amount of free cash flow, and not aware of the impending collapse of the refinery industry, I’m confident in saying that this is the cheapest stock I bought so far. Is it safe? Not as safe as I’d like. The controlling stake is a bit worrisome, but then again Alon Energy is also getting money from ALDW’s dividends so it’s in its interest to operate it well. Furthermore, ALDW has a sizeable, although manageable, debt. I’m not worried about its debt, but I’ll keep an eye on it.

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