This past year has largely been a disappointment for investors in master limited partnerships (MLPs). The Alerian MLP Index, which tracks energy infrastructure MLPs, has delivered a negative total return of 7.4%. That said, Holly Energy Partners, L.P. (HEP -0.17%) wasn't one of the companies weighing down the index this year since it delivered a peer-group-crushing total return of 14%.
Here's a look at how the pipeline and storage MLP crushed it this year and whether it has enough fuel left in the tank to continue outpacing the returns of rivals.
A timely deal drives 2017's results
One of the fuels of Holly Energy Partners' outperformance this year was the addition of several refinery processing units that it acquired from its parent company HollyFrontier (HFC) late last year. Holly Energy Partners paid $275 million for the newly constructed units, which HollyFrontier backed with 15-year contracts. Those new additions boosted the revenue Holly Energy Partners earns from refinery processing units to $57.5 million through the third quarter, which is a $44.6 million year-over-year increase. That more than made up for the fact that revenue across its three pipeline segments declined $13 million versus last year.
Also offsetting the weaker pipeline revenue was the company's terminal-business revenue, which increased $4.3 million to $105.9 million through the third quarter. Higher volumes at Holly Energy's Tulsa refinery crude tanks drove that growth.
Those dual fueled helped boosts Holly Energy Partners' distributable cash flow by 10.7% through the third quarter. Because of that, the company was able to increase its distribution to investors by 8.4% this year, which exceeded its target for an 8% increase. Further, the company has now raised its payout in 52 straight quarters.
Setting itself up for future success
This past year has also been an important one for Holly Energy Partners on the strategic front. In October, HollyFrontier agreed to eliminate the incentive distribution rights (IDRs) it held in exchange for additional units in Holly Energy Partners. This transaction wipes out an increasingly costly fee that entitled the parent company to a significant portion of the MLP's distributable cash flow. Furthermore, eliminating these IDRs will reduce Holly Energy Partners' cost of capital, making it cheaper for the company to finance future acquisitions.
Speaking of deals, Holly Energy Partners is in the process of acquiring the remaining interests in two pipelines from Plains All American Pipeline (PAA 0.36%) for $250 million. Plains All American Pipeline has agreed to sell its 50% interest in the Frontier Aspen Pipeline and its 75% stake in the Salt Lake City Pipeline to Holly Energy Partners, which would boost its stake in both lines up to 100%. These pipelines should supply the company with $23 million incremental EBITDA next year, which represents an 8% increase from the $287 million it has pulled in over the past year. Those earnings should provide the company with the fuel needed to keep boosting its payout. Meanwhile, the deal will provide Plains All American Pipeline with some of the cash it needs to meet its debt-reduction target.
Even with these transactions, Holly Energy Partners has maintained a solid balance sheet. At the end of June, its leverage ratio was 4.33, which is a fairly comfortable level for an MLP and well below Plains' 4.8 leverage ratio, for perspective. So the company has the financial flexibility to continue making acquisitions that will further expand cash flow and likely push its distribution even higher.
Gassed up and ready to grow
An acquisition toward the end of 2016 provided Holly Energy Partners with the fuel needed to keep growing this year, enabling it to crush the returns of rival MLPs. That outperformance could continue in 2018 since the company has already secured another needle-moving deal, which should allow it to maintain its momentum. Meanwhile, with a solid balance sheet and lower capital costs going forward, the company has plenty of fuel to keep growing, making it a solid income growth stock to consider.