Oiltanking Partners LP (NYSE:OILT) is a midstream company that provides terminals, pipeline, storage and other related facilities to companies in the United States.
Source: company presentation
The above pie chart shows the revenue profile of the company. It makes all of its revenue from fixed-fee contracts. The largest chunk of revenue comes from the storage-service fees. Oil and gas producers, such as the exploration and production (E&P) companies, have contracts with Oiltanking Partners LP (NYSE:OILT) to store their crude oil produced. Similarly, refineries have contracts with Oiltanking Partners to store the refined products that they produce for future sales.
Throughput revenue fees also account for a significant portion of the revenue. Here, both upstream and downstream companies have contracts with Oiltanking Partners LP (NYSE:OILT) to transport crude oil, liquefied petroleum gas (LPG) and refined petroleum products. Ancillary services fees come from mixing, heating, recirculating, blending of petroleum products at the storage facilities owned by Oiltanking Partners.
Almost all of the contracts of Oiltanking Partners LP (NYSE:OILT) are with investment-grade companies. These contracts help Oiltanking Partners to generate a diversified revenue mix.
Source: company presentation
The company has been able to progressively increase its revenue and terminal throughput. Company revenue has been increasing with a compound annual growth rate (CAGR) of 14.4% over the past five years. Notice how the company was able to increase its revenue even in times of recession. This is because the company’s fixed revenue made on different contracts. Midstream companies are mostly defensive stocks.
The company’s Houston and Beaumont, Texas facilities are its most prized possessions. Both of these facilities are located near the Houston ship channel, which is a major hub for oil and gas businesses.
Source: company presentation
The Houston facility is relatively larger than the Beaumont, Texas facility in terms of storage capacity. The average contracted storage capacity is very high for both of the facilities (>95%), which shows the high utilization of the assets owned by the company. The facilities also have long-term contracts with weighted average contract life close to 5.5 years. Both of these facilities have expansions underway which will help increase the number of contracts Oiltanking Partners LP (NYSE:OILT) can enter into, thus increasing the income from operations.
Future outlook
One promising development for the oil and gas sector in recent times is the technique called fracking. This technique has allowed companies to uncover several new sources of natural gas in the United States. The exploration and production industry was quick to adopt this technique. The resulting boom in natural-gas production bridged the supply/demand gap in the United States, eventually leading to an oversupply of natural gas in the country. The oversupply caused natural gas prices to stoop to record-low levels.
As the global natural-gas markets are not integrated like the oil markets, there exists a lot of arbitrage in world natural-gas prices. The Japanese and European markets present a very attractive opportunity for companies that want to export natural gas from the United States.
Oiltanking has grabbed this opportunity and it is planning to cash into the LPG export boom. The company is planning to spend $44 million for a new deepwater dock that will increase its LPG loading capabilities. This deepwater dock will be constructed in the Houston facility and will start to function by the end of year 2014.
Enterprise Products Partners L.P. (NYSE:EPD) will have exclusive rights to use the Oiltanking vessel based import and export services on the Houston Channel. Enterprise Products Partners is one of the top customers of Oiltanking’s services. The contract with Enterprise Products Partners L.P. (NYSE:EPD) will run through 2026 and has the capability of becoming a solid long-term revenue stream for Oiltanking Partners.
Comparative Performance
Oiltanking Partners is a relatively new player in the midstream industry of the United States. It is in competition with some of the most well established midstream companies, such as Energy Transfer Partners LP (NYSE:ETP) and Kinder Morgan Energy Partners LP (NYSE:KMP). These companies are well underway in their expansion plans, which will help them exploit the coming changes in the oil and gas sector of the United States.
