On Dec. 13, 2012 Phillips 66 (NYSE:PSX) announced it intends form a master limited partnership (MLP). Management indicated it will file the required S-1 paperwork with the SEC early in 2Q13. It is currently on schedule for a 2H13 IPO.
MLP details
The MLP is structured in the traditional way. Phillips 66 (NYSE:PSX) would be the general partner, have incentive distribution rights and make quarterly distributions to unit holders. It would sell a minority interest to the public as limited partners. Total proceeds of $300-$400 million are expected for Phillips 66 (NYSE:PSX) from the deal. In the announcement, Phillips 66 (NYSE:PSX) did not detail the list of assets it will include. Management did note the MLP would likely contain crude and product pipelines, terminals, rail loading and unloading facilities, truck business, and NGL assets. Management plans to use funds from the deal to invest in improving the movement of advantaged price crude and NGLs across its system. In this way, the deal would create value for Phillips 66 (NYSE:PSX).
The Street expectations for the size of the assets in the MLP were larger than what management said were in its plans. Management noted it plans to include around $200 million in NGL related EBITDA and $250-$300 million of crude and product logistics. It indicated it could grow the latter to $500 million in EBITDA in the near-term. Phillips 66 reported $5.6 billion of EBITDA in FY12. There are also additional assets, such as Phillips’ interest in Southern Hills and Sand Hills, that could add to EBITDA. Some of the assets Phillips will likely include are currently operating as cost centers for the company.
About Phillips 66
Phillips 66 (NYSE:PSX) is a downstream energy company that operates three businesses, Refining and Marketing (R&M), Midstream and Chemicals. R&M operating include 15 refineries with net crude capacity of 2.2 million barrels/day, 10,000 branded marketing outlets and 15,000 miles of pipelines. The Midstream business operates its 50% interest in DCP Midstream, a US natural gas gatherer and processor with 7.2 billion cubic ft/day of processing capacity. Its Chemicals business is the 50% interest in Chevron Phillips Chemical Company, a producer of olefins and polyolefins with 30 billion pounds of net annual chemical production.
Competition – valuation ranges
Phillips 66 is part of the oil and gas refiners and marketers industry. This includes companies such as Marathon Petroleum Corp (MPC), Valero Energy Corporation (NYSE:VLO) and Chevron Corporation (NYSE:CVX). These stocks currently trade at 8.5 -12 times TTM earnings with Phillips trading at 10 times currently.
For the expected valuation of the MLP, we can look at other similar MLPs such as Alon USA Partners LP (NYSE:ALDW) EBITDA and Northern Tier Energy LP (NYSE:NTI) that trade at 4.3 times and 4 times TTM EBITDA, respectively. Analysts are expecting around a 5 EBITDA multiple for Phillips 66 (NYSE:PSX) MLP. Like many MLPs, these two have low D/E ratios and high yields. Alon yields 8.7% and Northern yields 16% for investors. These dividends for both MLPs are significantly higher than the recent net earnings of the companies.
Conclusion
Following the announcement at the Analyst Day in December, the stock declined slightly. While initially met with some disappointment due to fewer than expected assets included in the MLP, it is generally a positive for shareholders of PSX. The firm can create value for itself and future MLP holders as well as continue to invest in and develop its core business. Next up is a filing of the S-1 that will likely occur in April 2013 which will give more details on the assets included.
The article New MLP Hitting the Market Soon originally appeared on Fool.com and is written by Mike Thiessen.
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