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.
Phillips 66 Partners LP (NYSE:PSXP) generated distributable cash flow (net income plus depreciation) of $74 million. The company now retains a market capitalization of just over $1 billion. The result is a distributable cash flow yield of 7%. The DCF yield is a proven winner at identifying MLPs poised to outperform. PSXP currently sits very close to the median of all MLPs. MPLX LP (NYSE:MPLX) is slightly higher at 8% and the largest MLP, Enterprise Products Partners L.P. (NYSE:EPD), sits at 6.2%.
The middling valuation on PSXP may not initially sound overwhelming, but the company will have substantial opportunities during the coming quarters as Phillips 66 continues to drop down its other midstream assets. Enterprise Products Partners L.P. (NYSE:EPD) may offer substantial diversity in its more than $45 billion in annual revenues, but growth will remain tepid going forward. Dividends have only grown at a 5% rate during the last half-decade. EPD is still a good investment for conservative accounts as the company is well positioned to capitalize on increasing natural gas production in the United States over the coming decade. But investors that want to trade into another MLP with much higher growth opportunities should swap into Phillips 66 Partners LP. And those successful investors in MPLX LP (NYSE:MPLX) may want to diversify some of their winnings as well.
The Foolish Bottom Line
Is Phillips 66 Partners LP (NYSE:PSXP) going to be the eighth consecutive midstream MLP to crush the market in its first year as an independent public company? The stock has ripped out of the gate, but should still be evaluated in the context of where it is now and where it will be in a year. I think the price will be substantially higher than $30 per share.
The article History Says This Stock Will Soar originally appeared on Fool.com and is written by Justin Carley.
Justin Carley owns shares in Phillips 66 Partners LP. The Motley Fool recommends Enterprise Products Partners L.P. Justin is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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