Last year, big oil giant BP (BP 1.01%) joined a growing number of peers by creating a master limited partnership to extract more value out of its midstream assets. That entity, aptly named BP Midstream Partners LP (BPMP), completed its IPO last October and recently reported results for the first time as a public company. The report shows that BP laid a solid foundation for its MLP, which positions it to grow its high-yielding payout at a fast pace over the next few years.
Drilling down into the plan
BP initially seeded BP Midstream Partners with stakes in several onshore and offshore pipelines that transport crude oil, refined products, and natural gas. The most important is BP2, which, while only 12 miles long, carries 475,000 barrels of oil per day from a third-party storage terminal to BP's Whiting refinery. Not only is it crucial to that refinery, but the wholly owned asset accounts for 41.8% of BP Midstream's cash flow.
Another vital one is the 163-mile Mars pipeline, which moves oil from platforms in the Gulf of Mexico to the Louisiana Offshore Oil Port. BP Midstream owns a 28.5% interest in this line, which supplies it with 29.2% of its cash flow, while Royal Dutch Shell (RDS.A) (RDS.B) and its MLP Shell Midstream Partners (SHLX) own the other 71.5%.
This dividend stock is hot off the presses. Image source: Getty Images.
These assets tend to produce very steady cash flow. Last quarter, they supplied BP Midstream with $23.3 million in cash, which was enough money to cover the company's first distribution to investors by a comfortable 1.2 times. Meanwhile, the company anticipates that the cash flow from those assets should support the current payout level -- which equates to about a 6% yield -- with the same healthy coverage ratio going forward.
A look at what's coming down the pipeline
There's enough embedded organic growth within BP Midstream's existing portfolio to support 5% to 6% distribution growth through 2020. BP's goal, though, is to grow that payout at an even faster pace by dropping down additional assets to its MLP. The companies believe these transactions could deliver annual distribution growth in the mid-teens.
BP plans on completing at least one drop-down transaction with its MLP each year, with the first one likely coming in the second half of 2018. The company has an extensive portfolio of drop-down candidates, including additional pipelines, storage terminals, docks, and a whole host of other midstream assets.
That strategy is a carbon copy of the one Shell used to grow its MLP since creating it in 2014. The companies completed their first drop down deal about a year after Shell Midstream's IPO, which included the purchase of additional stakes in two pipelines for $448 million. Shell Midstream has gone on to complete several other drop-down transactions, as well as some third-party acquisitions, which have fueled a big increase in earnings and cash flow, enabling the company to grow its distribution to investors by 100% since the initial payment. The company still has plenty of growth left in the tank because Shell has several drop-down eligible assets remaining, giving Shell Midstream the confidence that it can increase its distribution another 20% in 2018. Given the outcome of Shell's strategy, BP is hoping that by following this blueprint, its MLP will be just as successful.
An exciting time to consider jumping aboard
With only one quarter in the books, BP Midstream Partners is just starting out on its journey. While the next few months might be slow, the company sees high-octane growth up ahead. That's why investors seeking income growth might want to take a closer look at this brand-new income option.
