2017 wasn't a great year for shares of Holly Energy Partners (NYSE:HEP). On a total return basis -- that's dividends plus share price appreciation -- the midstream oil company posted a 9% gain. Considering the company has a dividend yield of 8% and the S&P 500 generated a total return of 21.8%, that's a weak year. There isn't much in the company's earnings reports that would suggest a bad year. For the most part, the company continued its slow and steady growth path. 

Using an agricultural analogy, 2017 was a year to do a full crop rotation, as the company made some significant changes to how it does business. With the company set to start over in 2018, it is worth wondering if this stock is worth a buy at today's relatively cheap valuation. So let's look at some of the things that changed at Holly Energy Partners this past year and what it could mean for the future. 

Stock index and chart superimposed over picture of oil refinery at night.

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Reconfigured for growth...

The most significant change at Holly Energy Partners this past year didn't have anything to do with its operations. Instead, it had to do with the significant change of its corporate and ownership structure. For years, Holly Energy Partners was a limited partner subsidiary of refining company HollyFrontier (NYSE:HFC). As the owner of the general partner stake, HollyFrontier also received incentive distribution rights (IDRs). These rights are akin to management fees, where the general partner is entitled to a higher percentage of total distributable cash flow as the per-unit distribution increases. 

The theory behind this corporate structure is that it allows the parent organization to sell a large stake in the company to the public while maintaining operational control. Also, increasing its cut of distributable cash flow gives the parent incentive to grow that payout as quickly as possible. There is a side effect, though. As the IDR cut becomes greater and greater, it means you have to generate that much more cash flow to justify issuing new shares. This will inevitably restrict growth as the cost of capital becomes prohibitive to growth. 

So HollyFrontier's management acknowledged that this was an issue early on in the year, but it was also busy trying to integrate its recent acquisition. In October, though, the company announced a sweeping change to Holly Energy Partners, whereby it exchanged its general partner stake and its IDRs for 37 million common shares in the limited partnership. As a result of the transaction, HollyFrontier now owns 59% of the limited partner and retains voting control. With a single share class, though, it better aligns the parent organization's and public shareholders' interests as well as reduces the cost of capital.

Over the longer term, this change should make it easier for the company to grow its business through organic development as well as acquisitions. This type of move was incredibly popular in 2017, as investors started to see the general partner/limited partner structure as troublesome over the long run. 

...but not a lot of growth in the pipeline

So the good news is that Holly Energy Partners has a much improved corporate structure that should encourage further growth and hopefully allow the company to maintain its streak of 52 consecutive quarters of distribution increases. The question that remains unanswered, though, is where the company is going to come up with the growth to ensure the streak stays alive

As it stands, Holly Energy Partners has two organic growth projects in the wings: Increasing its crude oil gathering network in the Permian Basin, and expanding its SLC and Frontier pipelines to deliver crude from Casper, Wyoming, to its Salt Lake City refining complex. These are relatively minor projects -- management expects to spend $40 million-$50 million in 2018 on them -- and certainly isn't enough to support long-term distribution growth. Furthermore, HollyFrontier has sold all the assets it has that would reasonably work in a master limited partnership. 

This leaves the company with one other outlet for growing the business: acquisitions. While that is certainly a viable way to grow the business, it's going to become harder and harder to find assets selling for reasonable prices as crude oil prices rise and North American oil production continues to grow. An ill-timed purchase or overpaying for a new asset can do a lot of damage to a company's cash-generating abilities. 

Holly Energy Partners recently acquired the remaining stake in the SLC and Frontier pipelines from its former partner, which should give the company a little runway to grow its payout. Beyond that, though, it's looking like slim pickings.

HEP Total Return Price Chart

HEP Total Return Price data by YCharts

What a Fool believes

For the most part, I'm willing to give management the benefit of the doubt here. So far it has adeptly run the business and kept it out of financial trouble. So there is reason to believe that it can continue to do so. It would be much more reassuring, though, if the company had a more visible growth pipeline that could show investors growth for the next couple of years. Perhaps with this new corporate structure in place and a lower cost of capital, management will have a wider array of projects to select from.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.