This MLP Spinoff Will Be Hard to Resist

It's official: Phillips 66 (NYSE: PSX  ) is going to IPO a master limited partnership before the end of this year. The company announced yesterday it has filed registration paperwork with the SEC. Currently a wholly owned subsidiary, Phillips 66 Partners will trade under the ticker PSXP. Management has yet to decide how many limited partner units will be offered, or how they will be priced, but it intends to raise about $300 million in proceeds from the sale. This could be a great opportunity for investors looking for a stable business to add to their portfolios. With that in mind, let's take a closer look at the midstream story at Phillips 66. 

Midstream at PSX
Phillips 66 has a significant midstream business, and reorganizing into an MLP makes plenty of sense. The assets that will fall under the Phillips 66 Partners entity include:

  • Clifton Ridge crude oil pipeline
  • Terminals and storage in Louisiana, Illinois, and Texas
  • Sweeny to Pasadena refined products pipeline
  • Hartford Connector refined products pipeline
  • 3 NGL fractionators: 130,000 bpd capacity 

Phillips 66 also holds a 50% interest in DCP Midstream, the parent company of DCP Midstream Partners (NYSE: DPM  ) . Spectra Energy holds the other 50% stake. DCP specializes in natural gas gathering systems, and is also one of the largest producers and marketers of natural gas liquids in the U.S. The company produced 400,000 bpd of NGLs, and contributed EBITDA of $1.1 billion to Phillips 66 in 2012. .

Room to run
Phillips 66 Partners will IPO in the second half of this year, but don't expect this MLP to sit still for very long. Management sees compelling growth opportunities ahead, especially in exports, and is looking to significantly increase full-year EBITDA from the current level of about $180 million.

Both Phillips 66 and DCP Midstream have a strong asset footprint on the Gulf Coast, which makes it easy to target export growth. PSXP will focus on international markets for petrochemicals and heating, specifically aiming to increase exports of liquefied petroleum gas and NGLs.

DCP Midstream is also targeting growth, and it expects to grow its NGL production by 25% over the next five years.

Foolish takeaway
I encourage Fools interested in this IPO to take a long look at the prospectus, once it becomes available on the SEC website. Specifically, look for an indication of what level of commodity risk PSXP will be exposed to. NGL prices have wreaked havoc on the industry in the past, and by Phillips 66's own calculation, a $0.01 change in NGL prices causes a $4 million change in net income.  If PSX structures fee-based contracts with the new MLP, this IPO will be hard to resist.

Enterprise Products Partners is another midstream company targeting export growth. To help investors decide whether Enterprise Products Partners is a buy or a sell today, click here now to check out The Motley Fool's brand new premium research report on the company.


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  • Report this Comment On March 29, 2013, at 10:57 AM, PTrinder wrote:

    Here is a link to the initial S-1 filing for Phillips 66 Partners, LP: http://www.sec.gov/Archives/edgar/data/1572910/0001193125131...

    $PSXP is an MLP so the key will be its Cash Available for Distribution (as opposed to Net Income). In the current draft of the S-1 they provide an Estimated Cash Available for Distribution table for the period ending March 31, 2014 on page 57.

    Hopefully in the draft filed at the start of the roadshow they will add a breakout of projected quarterly detail over that time frame and provide some "Sensitivity Analysis" details to allow investors to see how changes in key drivers (like NGL prices) impact estimated cash available for distribution.

    Best Regards,

    Philip Trinder

    www.mlpprotocol.com

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