This Could Be a Big Buy for Phillips 66 Partners LP

The master limited partnership recently announced its first acquisition; here's what you need to know.

Feb 14, 2014 at 5:13PM

Phillips 66 Partners (NYSE:PSXP) reported its first acquisition on Thursday, announcing its intent to purchase the 681-mile Gold Line system and two propylene storage systems from its parent company, Phillips 66 (NYSE:PSX), for $700 million. Investors had been waiting with bated breath for any news of a dropdown; so let's take a closer look at Phillips 66 Partners' first big buy. 

The deal
When Phillips 66 Partners began its publicly traded life last July, it did so with a limited footprint, which only included the following assets:

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

In this context, any acquisition is going to be significant. The Gold Line system shuttles approximately 132,000 barrels per day of refined products from a Phillips 66 refinery in Borger, Texas, north to Cahokia, Ill. It also includes two lateral lines, and four terminals with 4.3 million barrels of aggregate storage capacity. 

The two propylene storage systems are located in Medford, Okla., with a combined capacity of 70,000 barrels. The units will serve as a temporary stopover for refinery-grade propylene coming from the Phillips 66 refinery in Ponca City, Okla., en route to the major natural gas liquids hub in Mont Belvieu, Texas. 

In addition to acquiring the assets, PSXP enters into transportation, storage, and terminaling agreements with Phillips 66 based on minimum throughput contracts with terms ranging from five to 10 years, resulting in EBITDA contributions between $65 and $70 million in the first full year of operations. For context, the partnership reported fourth-quarter EBITDA for all operations of $18.8 million, which means -- at least on paper -- the new throughput contracts could roughly double EBITDA, once they go into effect.

Phillips 66 Partners will use $400 million in cash on hand, a five-year, $160 million note payable to a PSX subsidiary, and an issuance of new units worth $140 million. The number of new units issued will be based on an average price of $38.86, with 98% of them issued as limited partner units, and the remaining 2% issued as general partner units. 

The bigger picture
Again, this certainly enhances the asset footprint at PSXP, and the deal is expected to be immediately accretive to distributable cash flow. The boost to DCF should benefit investors nicely. As CEO Greg Garland explained: "This transaction will position Phillips 66 Partners to deliver on its strategic plans of achieving top-quartile distribution growth." 

What is potentially more intriguing, however, is the focus that parent company Phillips 66 is putting on its own midstream growth story. It recently announced two major projects worth more than $3 billion to enhance the company's natural gas liquids footprint, specifically targeting growth in liquefied petroleum exports and NGL fractionation. Management at Phillips 66 has even gone as far as changing the boiler-plate description of the company from "an advantaged downstream energy company" to "a growing energy manufacturing and logistics company."

Midstream is the focus, and that should bode well for future dropdowns at Phillips 66 Partners.

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