Is This the Next Can’t-Miss MLP IPO?

Valero (NYSE: VLO  ) is following in the footsteps of just about every other energy company lately and filing with the SEC to spin off some of its assets into a master limited partnership. MLPs are hot right now, so let's take a closer look at what the new entity, Valero Energy Partners, will offer investors.

Assets 
Valero is the world's largest independent refiner, and it operates a plethora of logistics assets. The long-term success of an MLP is predicated on growth, however, so Valero Energy Partners is going to start small. Here's what we get from the filing:

Our initial assets consist of crude oil and refined petroleum products pipeline and terminal systems in the Gulf Coast and Mid-Continent regions of the United States ("U.S.") that are integral to the operations of Valero's refinery located in Port Arthur, Texas, its McKee refinery located in Sunray, Texas, and its refinery located in Memphis, Tennessee.

Investors should note that all of Valero Energy Partners agreements with Valero will be fee-based, keeping the MLP free from commodity risk.

Financially, on a pro forma basis the unit generated revenue of $46.4 million, net income of $22.7 million, and EBITDA of $31.3 million through the first six months of this year. As expected, information regarding a minimum distribution and initial share price remains incomplete.

What Else Can Investors Expect?
First and foremost, the recent onslaught of MLPs hitting the market means that it's taking the SEC perhaps a little longer to shuffle paper than in the past . We're looking at about three months until this MLP hits the market, and I'd venture as far as to say the first week or two in 2014 is more likely.

The big question on everyone's mind is whether or not Valero Energy Partners will pop on IPO day like Phillips 66 Partners (NYSE: PSXP  ) did. PSXP posted the third-biggest jump for an MLP on its first day of trading ever, climbing 29 %. It was unusual for MLPs, which don't typically pop or drop at an IPO. Shares are only up 6% year-to-date, which means investors might want to start treating MLP IPOs like every other IPO and wait until the hoopla dies down before picking up shares.

The other downside to a massive price spike is the subsequent yield drop. Most of the refining logistic MLPs we know and love post relatively low yields. Phillips 66 Partners debuted with about the lowest MLP yield in history, and its unprecedented pop meant it only went down from there.

Here are the current yields for some of the more established refining spinoffs:

MLP

Yield

MPLX (NYSE: MPLX  )

3.10%

Tesoro Logistics

3.50%

Holly Energy Partners (NYSE: HEP  )

5.78%

Sunoco Logistics (NYSE: SXL  )

3.63%

Source: Google Finance

MPLX is the youngest name on here, approaching its one-year anniversary as a publicly traded MLP, and it is not that surprising to see it also has the lowest yield. All of these MLPs are fairly stable sources of income, but clearly Holly Energy Partners is the only one worth writing home about, at least in terms of yield. Even an MLP like Sunoco Logistics that isn't tied to a refiner any more still posts a relatively low yield.

Final Thoughts
Valero is a big, stable business that will likely generate very stable cash flows for investors. Like any stock, due diligence is required before buying in, and investors may want to think twice before jumping straight into this IPO.

Great Dividends Without the MLP Paperwork!
MLPs can make you rich, no doubt about it. But there is something to be said for the power of income generating stocks that don't generate tax headaches. Here's a free list of nine of our best ideas.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 20, 2013, at 2:59 PM, moweenfarmer wrote:

    Hi Aimee, One thing I look for in an IPO is what happens with the proceeds. QEPM used most of the cash to pay the parent and for debt.PSXP kept most of the cash for future drop downs.Although PSXP is dead money until they get the drop downs. The IPO I am looking forward to is Dominions. Keep up the good work.

  • Report this Comment On September 20, 2013, at 3:15 PM, moweenfarmer wrote:

    Also,you should do an article on the CMLP and NRGM merger , should happen in 2-3 weeks. I really like Crestwood, mainly their wet Marcellus gathering assests they got from Antero. Also Antero is IPO'ing soon,a mini RRC.

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