As much as we all try to be dispassionate about our investments, pretty much any company will invoke some feeling of elation or disappointment when it reports earnings. This past quarter, Holly Energy Partners' (NYSE:HEP) results elicited a little bit of both emotional reactions at the same time. While there were some things that seemed satisfactory, there were others that likely left shareholders hoping for more.
Let's take a look at the master limited partnership's most recent results and what investors can expect from this company down the road.
By the numbers
|Metric||Q1 2018||Q4 2017||Q1 2017|
|Revenue||$128.9 million||$129.2 million||$105.6 million|
|EBITDA||$88.4 million||$124.6 million||$57.8 million|
|Distributable cash flow||$69.1 million||$65.5 million||$57.3 million|
This quarter was neither good nor bad from a numbers' perspective. Revenue, EBITDA, and distributable cash flow showed healthy growth compared to this time last year, and earnings per share came in right where Wall Street expected them to be. Even though distributable cash flow increased 20%, the company reported a rather paltry distribution coverage ratio of 1.04 times. Part of the reason has to do with the company maintaining its streak of quarterly distribution increases, which stands at 54 quarters, and also because management issued about $100 million in new equity to help fund the acquisition of two crude oil pipelines it purchased late last year.
In terms of business activity, this was a quiet quarter as the company digests the acquisitions of its Salt Lake City and Frontier crude pipelines. Now that Holly Energy Partners has 100% ownership of these pipes, management intends to expand capacity through some marginal capital improvements. At the end of the quarter, it also announced that it would be adding a new loading truck rack in the Permian Basin to meet growing diesel demand in the region. This project should add about $10 million to $20 million to its capital spending for the year.
What management had to say
One of the things that enabled Holly Energy Partners to grow its business consistently for the past dozen years has been thanks to asset dropdowns from its parent organization, HollyFrontier (NYSE:HFC). Last year, though, HollyFrontier dropped down the last of its pipeline and logistics assets, which means that all of Holly Energy Partners' growth from here will have to come from organic growth. According to CEO George Damiris on the company's conference call, the current plan is to develop smaller organic projects like that diesel loading rack to fuel growth.
Looking forward, our focus is to leverage our existing footprint to grow organically, especially in the Permian. This morning, we announced our intention to construct a new rack in Orla, Texas connected to our refined product system in Texas and New Mexico. This asset will serve growing diesel demand associated with the oil patch activity in and around the Delaware basin. We also have an upcoming debottleneck project for the Malaga crude oil pipeline system and plan to expand the Salt Lake City and Frontier pipelines this year.
Of course, mergers and acquisitions are always a possibility, but when asked about the current M&A market, Damiris wasn't too enthused with the options out there today.
I don't think there's much change in the overall M&A market from what we've discussed earlier. We think it's still pretty hot market especially in the Permian. And as far as smaller opportunities, there really aren't a whole lot of smaller opportunities in Permian and that most of the smaller systems are full already. And most of the activity is oriented around new construction or the new volumes that are coming out in the area.
Hard to get excited about this stock right now
Holly Energy Partners is very much in neutral territory for investors. The company has a relatively solid balance sheet and the recent deal to simplify its corporate structure should make it easier to grow per-share distributions. At the same time, though, it doesn't have a deep bench of potential projects that would give investors confidence that the company can continue to grow its business well into the future. Also, seeing its distribution coverage ratio so low isn't reassuring. In fact, management even noted that its coverage ratio could dip below one next quarter because of low seasonal demand.
I can't fault anyone for finding Holly Energy Partners attractive today. Management has proven themselves over several years to sustainably grow the business and its payout without too much trouble, and a distribution yield of 8.8% is enticing. That said, there are other master limited partnerships with yields not that much lower than Holly's with better long-term growth prospects that look more appealing today.