Jumping On The "USA MLP" Bandwagon: UPGRADING Delek US Holdings
), Marathon Petroleum Corp (
) and Phillips 66 (
) to OUTPERFORM (from Neutral); Raising TPs.
Bottom Line: Last month, when we took the sector to Market
Weight, we were worried that a fall in margins and WTI-LLS spreads
through 2013 would interrupt the upswing for the group that is
justified by their improved free cash generation. Today, we're
jumping on the "USA MLP" bandwagon to argue that the MLP valuation
uplift, mainly for logistic assets but also for variable refining
MLP's, provides a significant offset. Higher regular dividends
would not hurt either. In this note we conclude (1) Logistic MLP's
can drive valuations higher. PSX and DK have the most logistics
value in current EV (2) Variable rate MLP's would need to beat an
11% mid-cycle yield to be accretive to our C-Corp EV/EBITDA
valuations. We raise TPs and upgrade PSX/DK/MPC to Outperform.
Raising Refining Target Prices (again): We believe managements
will initially focus on logistic MLPs. Based on work in this
report, we raise refiner target prices by c8%. Indeed at current
valuations, 40-50% of the value of PSX and DK would be supported by
our logistics fair value alone. There is now c50% upside to
theoretical value across the group.
What is the right multiple for logistic MLP spin-outs? Given
MLP's typically start small and then grow, we are less interested
in near term EV/EBITDA multiples. We attempt to quantify the
correct multiple for a company that states "we have say $500m of
EBITDA that could be dropped into an MLP over time". We suggest a
fair multiple seems to be 8-10x EV/EBITDA (after tax). This will
depend on the longer term Treasury yield, the risk premium for MLP
assets, the level of deferred taxation benefit from the MLP
formation and corporate performance.
Upside for Refining or Ethane MLP's Would Require a Mid-Cycle
Yield Less than 11% or Greater Tax Deferral: NTI is trading on a
mid-cycle distributable yield of c12% or 7.1x EV/EBITDA (2015).
This compares with the C-Corp average of 4.6x. Working the math,
unless c-corps can increase the tax deferral of the MLP
distributions, the market would need to accept less than an 11%
mid-cycle yield to create EV/EBITDA accretion vs our target c-corp
Refining Is More Suitable for MLP's Than Perhaps People Realize:
With the bulk of the Independent's EBITDA in the mid-con region,
free cash generation and hence MLP suitability looks quite high. On
a back cast, Refiner MLPs (including Gulf names) could have paid
variable dividends in 33 of the last 40 quarters.
Raise the Regular: As an alternative to launching variable rate
MLP's, for those management teams looking to force equity value
higher and confident in their free cash generation, we say "Raise
the Regular" dividend