Source: Phillips 66 Partners.
Certain energy dividend growth stocks seem blessed with the ability to grow like weeds despite the worst oil crash in 50 years, such as Phillips 66 Partners (PSXP). In fact, the midstream MLP just announced record-smashing results that gave investors a lot to cheer about. Let's take a look at this past quarters results and the two biggest growth risks facing Phillips 66 Partners in 2016.
Growth engine firing on all cylinders
| Metric | Q4 2015 | Q4 2014 | YOY Change |
|---|---|---|---|
| Adjusted EBITDA | $87.1 million | $43.7 million | 99% |
| Distributable cash flow | $74.0 million | $37.2 million | 99% |
| Quarterly distribution | $0.458 | $0.34 | 35% |
| Distribution Coverage Ratio | 1.44 | 1.40 | 3% |
| Cash in Excess of Distribution | $22.6 million | $18.3 million | 24% |
Sources: Yahoo! Finance, earnings release presentation, 10-Qs.
Any way you cut it, Phillips 66 Partners had a fantastic fourth quarter. This performance was mainly due to last year's $1.1 billion in organic growth projects and dropdowns from its sponsor, manager, and general partner, Phillips 66 (PSX -0.66%). For example, in the fourth quarter the MLP completed its acquisition of Phillips 66's 40% interest in the Bayou Bridge pipeline and the Palermo rail terminal.
For 2016, many of last year's acquisitions will provide ongoing organic growth opportunities, with the Sacagawea pipeline and the first stage of the Bayou Bridge pipeline scheduled to come online in the Q3 and Q1, respectively.
What matters most to income investors
Let's face it: The entire purpose of owning a midstream MLP is for the income, and when it comes to two aspects of the payout profile -- sustainability and growth -- Phillips 66 Partners hit it out of the park.
Not only did the MLP achieve an impressive 1.44 distribution coverage ratio, but it also managed to do this while growing its payout 35%. That's even better than management's already spectacular goal of 30% distribution growth through 2018.
In addition, thanks to its fast growth and rising DCR Phillips 66 Partners is growing excess distributable cash flow at a phenomenal rate. For example in 2015 it generated $52.3 million in excess cash, an 83% increase over 2014's results. That's cash that will not only help secure the payout in 2016 but also help the MLP achieve strong growth in the years ahead.
High debt: the biggest risk to 2016 growth prospects
Few midstream MLPs have better growth prospects than Phillips 66 Partners, thanks to the massive dropdown pipeline Phillips 66 provides.
Source: Phillips 66 Partners investor presentation.
Phillips 66 has already earmarked billions of dollars in future dropdown candidates for its MLP to acquire over the next three years. At the same time, though, Phillips 66 is investing heavily in midstream assets and expects to construct $8 billion to $9 billion in additional midstream assets over the next three to four years. It's entirely possible these could eventually wind up owned by Phillips 66 Partners.
However, despite a very long potential growth runway, Phillips 66 faces two major risk factors in 2016 and both have to do with its growth funding.
First, the MLP has $1.1 billion in debt, which gives it a debt-to-EBITDA, or leverage, ratio of 3.8.Liquidity for future growth consists of $48 million in cash on its balance sheet and an untapped $500 million revolving credit facility that can be expanded to $750 million.
While that may seem like a lot of growth capital, keep in mind that that credit facility includes a debt covenant that requires the MLP to maintain a leverage ratio of 5 or less unless it just made a big purchase, in which case the limit is 5.5 for several quarters.That means for now Phillips 66 Partners can probably only borrow a portion of its credit facility to fund an acquisition.
That doesn't mean Phillips 66 Partners can't grow in 2016, but it does mean the MLP is likely to have to rely heavily on equity markets to fund ongoing acquisitions. Doing so will dilute existing investors and probably cause its coverage ratio to decline, especially if management holds to its planned 30% payout growth rate.
Then there is the second potential growth risk of 2016. Should oil prices keep falling or stay extremely low, Phillips 66 Partners' unit price could take a beating. This would make any equity issuances less economical and translate to higher capital costs and less profitable deals (due to having to sell more units to finance growth initiatives).
Bottom line:
Despite the potential for debt and equity markets to potentially muzzle its growth in 2016, I continue to be bullish on this fast growing midstream MLP because of its vast dropdown pipeline, which could fuel strong growth over quite some time.
