What you get are refining logistics MLPs, which have so far largely avoided the correction endured by their sponsors after a strong yearlong rally that ran out of gas in the spring.

The newest kid on this ritzy block is Phillips 66 Partners (NYSE: PSXP), which is only up 41 percent since its initial public offering a little more than two weeks ago. At its offering price, Phillips 66 yielded a full percentage point less than the prior lowest-yielding MLP IPO. At the current price the indicative yield is down to 2.6 percent, or less than half that of the blue-chip midstream MLP Kinder Morgan Partners (NYSE: KMP).

Other refiners typically valued at 8 times earnings are rushing to join the fun by spinning off their pipeline and storage assets into MLPs fetching up to 30 times their distributable cash flow. The spinoffs from Valero (NYSE: VLO) and Western Refining (NYSE: WNR) will join a field that, in addition to PSXP, already includes Marathon Petroleum (NYSE: MPC) spinoff MPLX (NYSE: MPLX), Tesoro (NYSE: TSO) subsidiary Tesoro Logistics LP (NYSE: TLLP) and Holly Energy Partners LP (NYSE: HEP), sponsored by Holly Frontier (NYSE: HFC).

Some of these still have yields significantly above PSXP’s (notably HEP at 5.2 percent) but all are up huge in the last two years or less. Investors have been willing to pay a high premium for the promise of continuing growth marketed by the logistics MLPs. They market’s also been keen because these MLPs’ long-term, fixed-price contracts shield them from the commodity and margin swings faced by their sponsors.

The danger is that investors are underestimating the degree to which those swings may affect the MLPs’ hoped-for distribution growth. Rock-bottom yields offer minimal margin for error in an industry that’s in the past been highly cyclical.

This is a survey of the refinery logistics MLPs, along with a few that do the actual refining and offer much higher yields.

Like the refining stocks, these have benefited from the surge in domestic oil and gas production, low interest rates, high margins and the industry’s high barriers for entry. Like the refining stocks, they’ve recently given up some of their earlier market windfalls.

At this point, the pure-play refiners (which we’ll cover first) seem much more attractively priced than the low-yielding logistics plays like PSXP and MLPX. But refining is a volatile industry that at the moment bears watching more than buying, on whole.

CVR Refining (NYSE:CVRR)

CVR Refining is a relatively new and high-yielding MLP operating two Midwest refineries and related assets.

It was spun off from CVR Energy (NYSE: CVI) in January, and both companies remain majority-owned by famous investor Carl Icahn, who also serves as chairman of both boards.

CVR Refining has a mandate to pay variable distributions consisting of all available cash not needed for refinery upgrades or maintenance.

After the recently concluded second quarter, the partnership declared a distribution of $1.35 per unit, bringing its per-unit distributions for the first half of the year to $2.93. At the same time, CVR Refining lowered its annual distribution target to a range of $4.10 to $4.80 per unit, essentially retracting the optimistic outlook issued in March, when it foresaw annual distributions of $5.50 to $6.50.

Management blamed recently diminished refining margins, unscheduled down time and the cost of complying with the government’s renewable fuels mandate.

The lower end of the new, downwardly revised forecast implies distributions of $ 1.17 in the second half of the year, for a forward annualized yield of 8.8 percent based on the recent $26.63 unit price.

Of course, it’s possible that the discount on the domestically sourced crude will widen again as management expects, bolstering margins and earnings. And merely hitting the lower end of the guidance will have produced a trailing yield of more than 15 percent based on the recent share price.

Adjusted EBITDA exceeded cash distribution by a ratio of 1.25 to 1, as the partnership set aside funds for maintenance and debt service. During the first half of the year the partnership has dramatically increased cash and working capital while paying down debt, nearly doubling partners’ capital in the process.

CVR Refining’s primary assets are two refineries with a combined processing capacity of approximately 185,000 barrels per day (bpd). These refineries are strategically located in near the major Cushing, Oklahoma shipment and storage hub, with easy access to discounted feedstock from the nearby Permian basin as well as the Bakken shale and Canadian oil sands.

The Coffeyville, Kansas plant is the larger and more profitable of the two. It has benefited from more than $700 million in upgrades since 2006, gaining throughput capacity and the flexibility to process a greater feedstock variety.

The second refinery is located in Wynnewood, Oklahoma. CVR Energy acquired this refinery in early 2011 and has invested more than $100 million in upgrades.

Fuel demand in the immediate region served by these refineries has consistently run above regional refining capacity, to the benefit of the local refiners. CVR’s refineries are also producing a higher proportion of distillates than most rivals, another prop for margins.

CVR Refining is a value play that can deliver a yield approaching double-digits even in the current challenging conditions for the industry, with the potential for strong capital gains should refining margins improve. Because its distributions will be volatile, it’s suitable only for aggressive investors. We are adding CVR to our Aggressive Portfolio. Buy below $28.

Northern Tier Energy (NYSE:NTI)

Northern Tier Energy is another independent Midwest refiner, processing up to 84,500 bpd at its St. Paul Park, Minnesota plant. The refinery’s complexity allows it to process a variety of light, heavy, sweet and sour crudes.

Northern Tier Energy also operates 166 convenience stores and supports 70 franchised convenience stores, primarily in Minnesota and Wisconsin, under the SuperAmerica trademark, and owns a bakery and commissary under the SuperMom’s brand.

SuperAmerica filling stations are clustered around the refinery, which supplies their gasoline at prices that tend to give Northern Tier a margin premium over the regional crack spread.  

Margins also benefit from the refinery’s proximity to the Canadian border and to the Bakken in North Dakota, allowing the partnership to take advantage of growing Canadian oil production, which often sells at a major discount to West Texas Intermediate (WTI) crude and Brent crude, and also giving it cheap access to the light sweet crude from the shale revolution in the Bakken.

The refinery, stores and related pipeline interests belonged to Marathon Oil (NYSE: MRO) until 2010, when it sold them to a private equity consortium. The buyers have since recouped their investment many times over, profiting most recently in April when they unloaded 12 million shares via a secondary offering. Private-equity investors including TPG Capital and Acon Refining Partners retain a combined 51 percent stake, so there is the potential for additional sales down the road.

The partnership is due to report quarterly numbers Monday and they’re sure to be a pale shadow of the prior results, given the recent compression in refining margins. When it reported first-quarter earnings in May, Northern Tier paid out a distribution of $1.23 per unit, bringing its payouts in the three quarters since last year’s IPO to $3.98 per unit. Assuming a distribution decline comparable to that forecast by CVR Refining, Northern Tier units trading near $24 may offer a prospective forward yield of approximately 10 percent, a number that would likely rise with any recovery in refining margins.

A security reliant on a single refinery for the bulk of its returns is inherently risky, though Northern Tier does carry insurance covering up to $1 billion in damages and down time. On the other hand, the advantageous geography and the retail network are positives, and the rich yield does provide some backstop.

Aggressive investors seeking to diversify from CVRR may consider buying after next week’s earnings report, should it prove favorable.

Alon USA Partners (NYSE: ALDW)

Alon USA Partners was spun off in November by parent Alon USA Energy (NYSE: ALJ), which continues to own an 81.6 percent stake.

Its primary asset is a crude oil refinery in Big Spring, Texas, with total throughput capacity of approximately 70,000 bpd. Big Spring supplies gasoline to a nearby network of nearly 300 filling stations operated by its parent company and also produces distillates, asphalt and petrochemicals.

Big Spring has the good fortune to be located in the heart of the energy-rich Permian Basin, where it has recently been able to source its primary feedstock, West Texas Sour crude at a sizeable discount to the benchmark West Texas Intermediate. But that differential shrank from more than $11 in the first quarter of this year to less than $1 in the most recent period, as new pipelines cheaply shipped Permian crude to the Gulf Coast.

As a result, ALDW slashed its quarterly distribution this week to 71 cents per unit, from $1.48 per unit in the immediately prior period. That still works out to a prospective yield of 14 percent at the current share price. But there are worries the squeeze could get worse as the peak driving season winds down.

In the longer run, West Texas Sour is likely to get discounted once again once Gulf refiners have had their fill, since it’s a less valuable feedstock than West Texas Intermediate. In the meantime, the MLP is using more light sweet crude and planning incremental improvements to improve refinery yields during next year’s scheduled turnaround.

The cost of complying with government’s Renewable Fuel Standard has continued to rise, and will cost the partnership $20 million this year. The 33-year-old Big Spring is one of the newer refineries in the US, and underwent extensive renovations following an explosion and fire five years ago. Recent operations have been efficient and uneventful, but this is another MLP with everything on the line in the event of a serious accident.

More so than for CVRR and NTI, ALDW’s prosperity is heavily tied to the pricing of crude in a single basin, the Permian. In recent years, that’s been a huge advantage, but the new pipelines linking the region to the Gulf aren’t going away. For the most aggressive investors, ALDW would only make sense as part of a diversified refinery portfolio. 

Calumet Specialty Products Partners LP (Nasdaq: CLMT)          

Calumet is the largest independent refiner of specialty petrochemicals, with 11 plants spread across Louisiana, Texas, Montana, Wisconsin and Pennsylvania. In addition to gasoline, diesel, jet fuel and asphalt, the partnership produces solvents, mineral oils, waxes and specialty lubricants.

The partnership has expanded aggressively since its 2006 IPO, with adjusted EBITDA growing at a 26 percent compound annual rate in 2008-2012, and distributions growing at a 10 percent annual rate for the last four years.

But aggressive growth and capital spending have strained the bottom line now that the MLP, like other refiners, has to cope with reduced crude differentials and margins.

Calumet has already announced a second-quarter distribution of 68.5 cents per unit, up 16 percent year-over-year and half a cent over the first-quarter payout. But heavy capital spending, scheduled downtime at the largest refinery and the soaring cost of meeting the federal renewable fuel mandate ate through what was left of the refining margins, and distributable cash flow was negative, amounting to a $2.5 million deficit.

Calumet expects past investments to meaningfully boost cash flow in the coming quarters, targeting distribution coverage of 1.2 to 1.5 on an annual basis and indicating it hopes to continue raising payouts. Based on the most recent distribution the projected yield is up to 9.3 percent. But that’s only after the unit price slumped 6 percent as the report of negative distributable cash flow spooked investors.

Even if the energy and petrochemical markets cooperate, it will take time to soothe those worries and repair the significant technical damage on the charts. And while the yield is high, it’s best admired from the sidelines until sentiment strengthens. For now, CLMT should be avoided. 

Now on to the logistics MLPs whose main concern is compensating for very modest yields with rapid distribution growth helped along by asset dropdowns from corporate parents. They continue to sit on hefty capital gains because dropping refinery margins are not a direct threat in the near-term. But if the rough patch were to persist it could certainly delay or derail planned growth initiatives.

Phillips 66 Partners LP (NYSE: PSXP)

As mentioned at the outset, the MLP is up 41 percent in a little more than two weeks since its IPO, bringing the prospective yield down to 2.6 percent.

Parent Phillips 66 (NYSE: PSX) retains a 76 percent stake, and a strong financial interest in backing up its marketing of Phillips 66 Partners as a growth vehicle. Initially, it has transferred to its offspring three pipelines totaling 130 miles in length along with associated storage and terminal facilities. The Clifton Ridge Crude System supplies crude to the Phillips 66 refinery in Lake Charles, Louisiana; the Sweeny-to-Pasdena products system distributes the refined output of the Sweeny, Texas refinery; and the Hartford Connector links the Wood River refinery in Roxana, Illinois to the Explorer refined products pipeline.

Together, these assets are expected to generate $67 million in distributable cash flow over the next year, about 10 percent more than needed to cover the minimum promised aggregate distribution of 85 cents per unit over the next four quarters.

Investors are counting heavily on continued dropdowns, and Phillips 66 has encouraged the optimists by giving its offspring the right of first offer to its one-third interest in two other pipelines. The recently opened 720-mile Sand Hills pipeline transports natural gas liquids from the Permian Basin and the Eagle Ford shale basin in Texas to the Gulf for processing, while the Southern Hills is a former refined products pipeline repurposed to move NGLs from mid-continent down to the Gulf. Both will be integral to the new petrochemical exports projects springing up all along the Gulf coast, and accordingly lucrative.

Meanwhile, the parent company saw revenue drop 9 percent in the first half of this year from the year-ago period. Like other refiners, it’s facing diminished margins and crude differentials, and there’s no guarantee that it will be able to deliver the distribution growth investors in its recent spinoff are expecting. PSXP’s yield is hardly worth the risk that growth and profitability end up disappointing recent buyers.

MPLX LP (NYSE:MPLX)

MPLX is the logistics arm spun off by Marathon Petroleum (NYSE: MPC) last October, and its extensive pipeline system is both much larger than PSXP’s and much more central to its parent’s operations.

MPLX operates approximately 2,900 miles of crude and product pipelines across nine states, one of the most prolific networks in the US based on annual volumes delivered.

Additionally, the partnership owns four Midwest tank farms with approximately 3.3 million barrels of available storage capacity, a Mississippi River barge dock for shipping crude and fuel, along with a butane storage cavern located in West Virginia that serves MPC’s Catlettsburg, Kentucky, refinery.

Marathon Petroleum holds a 71.6 percent limited partner interest in MPLX, and provides steady income under long-term, fee-based contracts shielded from swings in commodity prices. MPLX is managed by Marathon’s executives, and the parent company has an interest in enabling the distribution growth necessary to maintain MPLX as a source of cheap capital.

MPLX depends on Marathon for 89 percent of its annual revenue, and like other subsidiary MLPs is run for the primary benefit of the parent company. For the moment, that interest is best served by attracting investors with a second-quarter distribution that increased 4.6 percent from the first quarter’s payouts. Assuming continued growth at that pace, the current price may provide a fiscal-year yield of 3.2 percent. But this pace does imply 20 percent annualized growth.

To achieve this pace, MLPX used $100 million of its IPO proceeds to acquire a further 5 percent interest in the logistics holding subsidiary from its parent. It retains a $500 million credit line for financing other growth, but encouragingly has virtually no debt.

This is perhaps the most promising refinery logistics MLP. But we’re not sold on the likelihood that this pace of distribution growth will prove sustainable over the long haul. We would be more interested if the yield crosses 4.5 percent, and higher payouts are just one way to get there.

Tesoro Logistics (NYSE:TLLP)

Tesoro Logistics was spun off by the Tesoro (NYSE: TSO) in 2011 to operate pipelines leading to and from Tesoro refineries.

The MLP’s assets consist of a crude oil gathering system in the Bakken Shale/Williston Basin area of North Dakota and Montana, eight refined products terminals in the Midwest and the West and a crude oil and refined products storage facility along with five related short-haul pipelines in Utah.

Tesoro Logistics currently has a distribution yield of 3.9 percent. Late last month the distribution was increased by 4 percent over the prior quarter and an impressive 24 percent over the second quarter of 2012.

The MLP currently has a distribution coverage ratio of 1.07, below its target of 1.1.

That’s mainly because of some additional expenses tied to two major acquisitions. Last month, Tesoro bought the Northwest Product Pipeline and Terminal System from affiliates of Chevron (NYSE CVX) for approximately $355 million, using the proceeds of a January equity offering. The deal brought ownership of a 760-mile products pipeline linking Salt Lake City, Utah and Spokane, Washington, along with a short jet fuel pipeline appendix and three refined products terminals in Washington and Idaho.              

In June, TLLP digested the first serving of logistics dropdowns tied to Tesoro’s purchase of the Carson, California refinery complex from BP (NYSE: BO). TLLP paid its parent $544 million in cash and approximately $96 million in equity for the privilege, supplying much of the liquidity Tesoro needed for its purchase.

These assets, with expected annual EBITDA of $60 million to $65 million, include six marketing and storage terminal facilities with a total combined throughput capacity of about 225 thousand barrels per day and approximately 6.4 million barrels of total storage capacity. 

Tesoro Logistics expects to be offered remaining Carson logistics assets, consisting of dedicated storage capacity, pipelines and marine terminals valued at $450 million to $550 million, within a year.

Another $100 million in capital spending is already slated for organic growth projects this year.

With a market cap of $2.4 billion, Tesoro Logistics has already closed on nearly $1 billion worth of acquisitions in just the last two months, on the heels of $465 million worth of accretive acquisitions were done in 2012. The wheeling and dealing has boosted the debt to 3.5 times trailing EBITDA.

Tesoro Logistics is well positioned in the Bakken, one of the fastest growing US oil production  regions and the MLP expects continued support from its parent via accretive dropdowns. Still, there’s too much leverage on the balance sheet and TLLP is too much a fundraising vehicle for Tesoro to get excited about the projected growth. TLLP units are down 24 percent from their May peak but still up 19 percent year-to-date, and have more than doubled in the two-plus years since the IPO. They are also many times more expensive than shares of the parent company. Resist the temptation to buy TLLP.  

Holly Energy Partners (NYSE: HEP)

Holly Energy Partners was formed by parent refiner HollyFrontier (NYSE: HFC) in 2004. The MLP owns pipelines and terminals in the Southwest, Midwest and Rocky Mountains, in support of HollyFrontier’s five refineries.

As with other logistics spinoffs, HEP depends on its parent for the bulk of its income, and enjoys the security of long-term, fee-based contracts with limited commodity risk.

HFC and its affiliates own 37 percent of HEP’s limited partner interests and an additional 2 percent stake as the general partner.

As HFC grows, HEP is positioned to benefit by partnering with HFC to build or acquire supporting logistics assets. HEP generally has right of first refusal on HFC’s logistics infrastructure.

Since its IPO in 2004, Holly Energy Partners has completed nine accretive asset acquisitions including a number of dropdown asset purchases from Holly Frontier.

Partnership units currently yield 5.2 percent, and the payout was increased 6.6 percent year-over-year last month, extending the streak of quarterly hikes to 35, which dates back to the IPO.

EBITDA has grown by five-fold over the last nine years, while distributable cash flow has bearly quadrupled. The distribution coverage ratio in the most recent quarter was a strong 1.3.  

The partnership plans to spend $50 million this year on capital projects, mainly to expand a crude gathering system in New Mexico. But other longer-term growth plans are being held hostage by the recent implosion in crude differentials and refining margins, underscoring the fact that commodity prices remain a risk for refining logistics MLPs even when they don’t directly affect the near-term bottom line.

The unit price is down 16 percent from the March high, but still up 12 percent year-to-date. Because the parent refiner is less geographically diversified than some of its larger rivals, HEP’s growth is more dependent on crude differentials than those of its counterparts. Avoid HEP despite its solid track record until those differentials recover.