There's no doubt that Holly Energy Partners, L.P. (NYSE:HEP) was a standout performer among its peers -- energy infrastructure master limited partnerships -- in 2017. Although the stock's price only rose by about 1%, almost all the other energy infrastructure MLPs lost money for the year. In this particular case, a flat line is good.
Consistent distribution growth
There's consistency, and then there's consistency. Luckily for investors, Holly Energy Partners has the latter, at least in terms of its distributions. Because of its MLP status, it gives distributions to its partners/unitholders as opposed to dividends to its shareholders, but the overall effect is pretty much the same. And Holly has increased its distribution every quarter -- year in and year out -- since it went public in July 2004.
In the most recent third quarter, the distribution was $0.645 per unit, for a yield of about 7.6%. That's high, even for an energy infrastructure MLP, which tend to have high yields. By comparison, Holly's fellow MLP Magellan Midstream Partners currently yields "just" 5%, while parent HollyFrontier -- not an MLP -- yields just 2.6%.
Holly is even paying more than it was a year ago, with the distribution up 8.4% over the year-ago quarter. There's no question: If you're after a robust distribution, Holly Energy Partners is a great place to get one.
Despite what you might think based on its distribution increase and its outperformance of its peers, Holly's pipeline revenue actually declined by 7.8% in the first three quarters of 2017. But the company was still better off, thanks to a massive increase in refinery revenue.
Refiners had a great year in 2017. Many of their stocks posted double-digit gains, thanks to higher demand. HollyFrontier, which is primarily a refiner, was no exception, with a 56.4% share price increase.
Holly was able to jump in on that trend thanks to a savvy maneuver in late 2016 by which HollyFrontier sold a group of refinery units to Holly for $275 million in cash. HollyFrontier then signed 15-year tolling agreements, making guarantees of minimum throughput for the units to its subsidiary. Structuring the agreement in this manner means that the revenue from those refineries goes to the tax-advantaged Holly Energy Partners. Because of this arrangement, Holly's refinery revenue increased by 346% year over year in just the first nine months of 2017, more than offsetting the pipeline revenue declines.
This arrangement lasts for 15 years, but Holly -- with or without its parent -- is likely to ink further deals to improve its position and reward its unitholders.
A good value
Because energy infrastructure MLPs are high-depreciation businesses, trying to evaluate their value only makes sense if you use a metric that strips out depreciation. So let's look at the company's enterprise-value-to-EBITDA ratio compared to that of its peers:
On both a forward and a trailing-12-month basis, Holly's EV-to-EBITDA -- the blue line -- is lower than peers' like Magellan. That suggests the company is trading at a reasonable valuation.
Why not to buy
So, with a good distribution yield, solid revenue streams, and a more-than-reasonable valuation, what might prevent you from buying shares of this company?
Well, remember that it's an MLP, which the IRS classifies as a partnership instead of a stock. So, while MLPs are tax-advantaged investments -- another plus! -- they do require a bit of extra work around tax time to make sure you have all your i's dotted and your t's crossed.
But if you're willing to put in that little bit of extra effort, Holly Energy Partners looks like a buy.