If you want to make a splash on Wall Street with your initial
public offering, it helps if your name is instantly recognizable
to most investors.
Phillips 66 Partners (
) has that advantage.
The company is a master limited partnership (
) that owns and operates oil and refined petroleum product
pipelines and terminals.
It was founded as a subsidiary ofPhillips 66 (
), the Houston-based oil and gas giant that ranks as one of the
world's biggest companies.
Phillips 66 Partners' assets include a crude oil pipeline,
terminal and storage system in Louisiana; a refined petroleum
product pipeline, terminal and storage system in Texas; and
another refined petroleum product pipeline, terminal and storage
system in Illinois.
The partnership gets just about all of its revenue by charging
tariffs and fees for transporting, terminaling, and storing crude
oil and refined products for Phillips 66.
Phillips 66 Partners had its initial public offering July 23.
Its units priced at $23 a share, above the target range of $19 to
$21. They opened at 28.98 on the first day of trading and closed
at 29.70, up 29% from the IPO price.
Shares then peaked at 35.94 on July 29, and they currently
trade near 33.
The early strength in Phillips 66 Partners' share price -- and
the reason for much of the optimism around the company's growth
prospects -- has a lot to do with its relationship with Phillips
In a report initiating coverage on Phillips 66 Partners,
Citigroup analyst John Tysseland said the company is "set to
benefit from a large portfolio of drop-down eligible assets from
He estimates that around $5.4 billion worth of crude oil,
refined product and natural gas pipelines, terminals and other
midstream assets that are still being operated by Phillips 66
"will likely be dropped down to the partnership" over the next
three to five years.
"With the potential to add about $660 million in additional
EBITDA (earnings before interest, taxes, depreciation and
amortization), these drop-downs serve as the primary driver of
double-digit distribution growth to PSXP over the next several
years," Tysseland noted.
BofA Merrill Lynch analyst Gabe Moreen has a similarly upbeat
assessment, saying that Phillips 66 Partners offers unit holders
"the ability to invest in a pure-play drop-down story with the
potential for substantial cash distribution growth -- driven by
PSX's stable of logistics assets -- as long as PSX continues to
drop down assets at a reasonable pace and valuation."
In most circumstances, it's risky to depend on one client for
your business because of the possibility that the relationship
goes sour somewhere down the line.
"If PSX becomes financially strained, does not support PSXP's
growth, proposes changes to contractual terms, or defaults on
contractual terms, PSXP would be materially impacted," JPMorgan
analyst Jeremy Tonet noted in a report.
MLPs A Rising Trend
However, it's unlikely Phillips 66 would do anything to
undermine the partnership. Phillips 66 is one of a growing number
of oil and gas firms that have formed MLPs to operate their
midstream business units. It has a vested interest in seeing the
"PSXP is integral to its parent's business," noted John
Edwards, analyst at Credit Suisse.
He cites a couple of reasons. For one thing, Phillips 66
Partners' assets support the refining and marketing operations of
PSX's refineries. For another, Phillips 66 Partners is a primary
growth/financing vehicle for PSX's expanding transportation and
On a third-quarter conference call with analysts, Phillips 66
Partners Chief Executive Greg Garland said the parent company has
plans to rapidly grow its midstream businesses and plans to use
the partnership to achieve that growth.
"Given its large portfolio of midstream assets and strategy
for growth, we anticipate near-term opportunities to acquire
additional assets," Garland said. "This will allow for
significant Phillips 66 Partners growth in the near-term and
provide the platform on attractive growth profile longer
Phillips 66 Partners charges fixed fees for the use of its
pipelines, terminals, barge docks and storage facilities. All of
the company's assets operate under long-term, fee-based
transportation and terminaling agreements with its parent
"These agreements include specified minimum volume commitments
and rate escalators, which provide the partnership with
long-term, stable cash flows that have little to no direct
sensitivity to commodity price fluctuations," Citigroup's
Phillips 66 Partners reported its first quarter as a publicly
traded company on Oct. 30.
It posted transportation and terminaling revenue of $29.6
million, up from $21.3 million the prior year and above the $27.6
million expected by JPMorgan.
Adjusted EBITDA came in at $19.2 million, up from $11.9
million a year earlier and above consensus estimates.
Phillips 66 Partners is part of IBD's Oil &
Gas-Transportation/Pipeline group. Master limited partnership
peers in the group includeKinder Morgan Energy (
),Plains All American Pipeline (
) andSunoco Logistics Partners (SXL).