Phillips 66 Partners LP (PSXP): History Says This Stock Will Soar

The IPO I have been waiting for has finally arrived. I first drew attention to it in mid-May when I recommended investors build cash and wait. The market correction I hinted at did happen, but was minuscule, and now the S&P 500 resides about 5% higher. MLPs haven’t fared as well and remain unchanged on a total return basis, but got whip-sawed with the volatile movements in the Treasury market. Thus, it has been a bit turbulent for MLP investors in recent months. Luckily, there is a new MLP stock ready to take its turn being a first year high-flyer.

Phillips 66 Partners LP (NYSE:PSXP) is being spun-off from Phillips 66, which will retain a majority ownership interest, and will operate as a fee-based midstream master limited partnership. The company will own three separate pipelines that total 135 miles in length as well as terminal and storage assets. These assets generate fee-based revenues that are derived from long-term fixed price contracts. The result is consistent cash flow that is in turn paid out as dividends.

An initial risk is that the new MLP will derive more than 97% of sales from Phillips 66. However, this is really where the opportunity lies. This relationship, and the fact that Phillips 66 owns the general partnership and 77% of the common units, creates substantial growth opportunities for Phillips 66 Partners LP (NYSE:PSXP). The former parent will continue to drop down (sell) midstream assets to PSXP at reasonable rates. This creates a win-win for both parties and can fuel substantial growth in distributable cash flow for the MLP. In fact, this is the explicit goal as Phillips 66 Partners LP (NYSE:PSXP) has been granted right of first refusal on several of their former parents remaining midstream assets.

Rookie of the year

The chart below shows the performance of the last seven midstream MLP IPOs. I updated the results from May and the performance remains exceptional. The IPO date is listed as well. It should be noted that the last two stocks had their IPO date less than a year ago. The blue bars represent 1-year total returns and the red bars show the performance relative to the S&P 500. Thus, the red bars show the EXCESS return these investments produced over the S&P 500. The results are pretty stunning and all seven have performed very well.

A GARP stock

Phillips 66 Partners LP (NYSE:PSXP) recorded 2012 revenue of $110 million, net income of $67 million, and EBITDA of $75 million. PSXP has committed to a minimum quarter distribution of $0.2125, which equates to a dividend yield of 2.8%. Phillips 66 Partners LP (NYSE:PSXP) priced their IPO at a $23 per share. On its first day of trading, it shot up 30% to around $30 per share. This highlights the demand in this type of investment, but doesn’t change the bullish thesis on the stock. Delek Logistics Parnters LP, the last midstream MLP IPO, only popped 6% on its first day of trading, but MPLX LP (NYSE:MPLX) closed its first day of trading with a 23% advance. Even after this huge advance, MPLX would outperform the S&P 500 by 25% over the next nine months.