Northern Tier Energy LP (NTI): Yet Another Risky Oil and Gas MLP – HollyFrontier Corp (HFC), McMoRan Exploration Co (MMR)

For certain MLPs it is a very repeatable business model. Their origins lie in fixed assets like oil and natural gas pipelines and storage facilities, where a Kinder Morgan Inc (NYSE:KMI) or Plains Exploration & Production Company (NYSE:PXP) essentially collect a toll for every barrel of oil equivalent transported through their pipeline system. These MLPs work because they needn’t rely on the price of the underlying energy source, instead collecting revenues based upon long-term contracts. Whether oil’s $100 a barrel or $75 a barrel, the toll must be paid.

Horse of a different color
Yet other MLPs are might be what you’d call hybrids. On the surface they use the same model as the pipeline operators, but their business is highly dependent on the price of energy or on other factors. Hi-Crush Partners LP (NYSE:HCLP), for example, bases its payout on the production of fracking sand. That’s really a different animal altogether, and Northern Tier Energy LP (NYSE:NTI) is of this latter sort as well.

NTE operates in two segments, refineries and retail — a string of 166 SuperAmerica brand convenience stores and 68 supported franchised convenience stores. Unlike other MLPs, NTE doesn’t guarantee its payout because of the risks inherent in refining. That’s similar to the approach taken by Alon USA Energy, Inc. (NYSE:ALJ) Alon USA Partners LP (NYSE:ALDW) , which also operates a refinery in Big Spring, Texas, and markets its output through some 600 7-Eleven branded convenience stores that are owned by Alon Energy.

That makes an investment in them much more risky than those founded on the toll-road model. Refining is a cyclical business, and while it might be in favor now, margins could quickly slide, and those tempting yields NTE offers could evaporate rather quickly. Although some MLPs may be good investments, I’m not keen on these new breeds, and the industry’s separate and complex paperwork requirements make tax time an especially agitation-inducing period.

These hybrids have become all the rage, but investors need to go in with their eyes wide open. I’m not ready to rate this MLP as being ready to maintain its outperformance over the long haul, but let me know below whether you are.

The article Northern Tier Energy: Yet Another Risky Oil and Gas MLP originally appeared on Fool.com.

Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Kinder Morgan.

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