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Phillips 66 Partners Perks As Pipeline For Oil Giant

Posted
12/9/2013 3:48:00 PM
By: Investor's Business Daily
Referenced Stocks:KMP;MLP;PAA;PSX;PSXP

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 ( PSXP ) has that advantage.

The company is a master limited partnership ( MLP ) that owns and operates oil and refined petroleum product pipelines and terminals.

It was founded as a subsidiary ofPhillips 66 ( PSX ), 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.

Auspicious Start

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 66.

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 Phillips 66."

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 partnership succeed.

"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 midstream business.

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 term."

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 company.

"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 Tysseland noted.

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 ( KMP ),Plains All American Pipeline ( PAA ) andSunoco Logistics Partners (SXL).