Even during one of the worst oil crashes in decades, some energy companies still manage to grow like gangbusters. Take, for instance, Phillips 66 Partners (PSXP), which just announced the kind of blowout earnings most energy stocks would have been envious of back in the glory days of $100-per-barrel oil.
There is also reason to believe that Phillips 66 Partners is likely to keep firing on all cylinders even if crude prices stay low for years. Let's look at why its business model makes it one of America's best dividend growth stocks.
Earnings results don't come much better than this
| Metric | Q3 2015 | Q3 2014 | YOY Change |
|---|---|---|---|
| Revenue | $91.4 million | $53.4 million | 71% |
| EBITDA | $67.3 million | $35 million | 92% |
| Distributable cash flow (DCF) | $64.5 million | $33.4 million | 93% |
| Quarterly distribution | $0.428 | $0.317 | 35% |
| Distribution coverage ratio (DCR) | 1.4 | 1.32 | 6% |
Data Source: Phillips 66 Partners earnings release.
Phillips 66 Partners' results were truly exceptional. Growth came from this year's previous dropdowns, the Explorer and Sand Hills pipelines, as well as increased volumes on three of its systems.
Investors need to focus most on growth in DCF, since that is what funds the growing payout. Phillips 66 Partners was able to deliver distribution growth that beat its already jaw-dropping 30% guidance through 2018. It also managed to do so while maintaining a rock-solid coverage ratio. This leaves it plenty of excess cash with which it can fund its ambitious growth program.
As part of that plan, management just announced the acquisition of another dropdown from its sponsor and general partner, Phillips 66 (PSX -1.03%) -- the 40% interest in the Bayou Bridge oil pipeline. The project is a joint venture involving Phillips 66, Sunoco Logistics, and Energy Transfer Partners, each of which owns a 30% stake in the project.
The deal is expected to close in December and will have Phillips 66 Partners paying $70 million in cash plus limited- and general-partner units to Phillips 66. Since the pipeline's two stages aren't scheduled for completion until the first quarter of 2016 and second half of 2017, Phillips 66 Partners is adding the pipeline to its organic growth backlog. That backlog is growing nicely, with management budgeting $314 million for capital investment in 2016 -- 96% of which, or $300 million, is designated for growth projects.
Distribution profile is just about perfect
MLP investors care most about a partnership's distribution profile -- forward yield, payout security, and realistic long-term growth potential.
| Yield | TTM Coverage Ratio | Long-Term Payout Growth Guidance |
|---|---|---|
| 2.8% | 1.25 | 30% through 2018 |
Data source: Phillips 66 Partners earnings releases.
Phillips 66 Partners' distribution profile is impressive in all aspects except for one -- its yield. Not that a 2.8% yield is anything to sneeze at. It's substantially better than the S&P 500's payout of 2% but far beneath the Alerian MLP Index's 5.5% forward yield.
The difference in yields is that Phillips 66 Partners' unit price has held up far better than those of most other MLPs during the oil crash.
There's a good reason long-term investors should care about an partnership's unit price. Since MLPs pay out most of their DCF each quarter as distributions, they rely on a combination of debt and equity to fund growth projects. If unit prices decline too much, then an MLP needs to sell a lot more units to fund a project.
That dilutes existing investors more and makes it harder to grow the distribution in the future. In other words, an MLP can be cut off from equity markets. With its unit price holding up better than those of its peers, Phillips 66 Partners has a competitive advantage when it comes to being able to fund its aggressive growth plans.
Long-term growth prospects remain massive
Phillips 66 is investing $8 billion to $9 billion in midstream projects over the next three to four years. By the end of 2018 it plans to drop down half of those projects to Phillips 66 Partners.
To help finance that growth, Phillips 66 Partners has secured a yet-untapped $500 million credit facility and hopes to expand it to $750 million. Further equity raises as well as excess cash will be two additional important sources of growth capital. That's why it's important for Phillips 66 Partners to maintain a high distribution coverage ratio.
Bottom line: Phillips 66 Partners continues to grow as if the oil crash never happened
Thanks to its long-term-contracted, fee-based business model, Phillips 66 Partners has fast-growing cash flows that are almost entirely immune from the chaos of the energy market today. In addition, billions of dollars in future dropdowns are likely to fuel mind-blowing distribution growth for many years to come.
More importantly, Wall Street recognizes Phillips 66 Partners' greatness, which has spared its units from excessive and irrational price drops. Thus, unlike many of its competitors, Phillips 66 Partners continues to benefit from friendly debt and equity markets, thereby providing it with the access to capital it needs to continue its payout growth.
