Oil giant BP (BP +1.14%) quietly formed a master limited partnership (MLP) toward the end of last year to begin cashing in on the value of its midstream assets. In the process, it provided income-seeking investors with a new high-yielding option to consider. It did so by seeding BP Midstream (BPMP +0.00%) with a solid portfolio of cash flowing pipelines that would not only support a lucrative distribution to investors but had enough embedded organic growth so that the MLP could increase that payout at a 5% to 6% annual rate through 2020.
BP, however, thinks that it could grow the payout of its MLP at an even faster pace by dropping down additional midstream assets to the company in the coming years. The two companies recently completed the first such dropdown deal, which positions BP Midstream to increase its 5.6%-yielding distribution by a mid-teens rate next year. Meanwhile, with a large supply of acquisition opportunities in the pipeline and other expansion possibilities it could pursue, BP Midstream could continue increasing its payout at a high rate in the coming years, making it a potential gold mine for income seekers.
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Details on the deal
BP Midstream Partners has agreed to acquire interests in three assets from BP in a transaction valued at $468 million. The first asset is Mardi Gras, a joint venture (JV) with Royal Dutch Shell (NYSE: RDS-A)(NYSE: RDS-B) and its MLP, Shell Midstream Partners (SHLX +0.00%), which operates four offshore pipelines. BP Midstream already owned 20% of BP's interest in the JV but will now hold 65% of that stake. It's an important system that the partners have recently expanded so that it can support their new projects in the Gulf. They include Shell's Appomattox platform, which should start up next year, and BP's Thunder Horse North West Expansion, Atlantis Phase three, and Mad Dog 2, which will begin in 2019, 2020, and 2021, respectively.
BP Midstream will acquire BP's roughly 22.7% interest in Ursa, another offshore pipeline, as well. Shell also operates this pipeline, which will support the company's Kaikias development that started up earlier this year.
The final asset acquired is a 25% stake in KM-Phoenix, which is a JV with pipeline giant Kinder Morgan (KMI +0.74%). BP initially sold a 75% stake in the JV that held 14 terminals -- as well as selling one outright -- to Kinder Morgan for $350 million in 2015. However, KM-Phoenix currently operates 13 refined product terminals, with most supplied under long-term contracts by refineries operated by BP.
These new additions do two things for BP Midstream. First, it provides the company with need-moving growth since the cash flow from these assets should give it the fuel to increase its distribution at a mid-teens rate next year while supplying it with additional organic growth in the future as those offshore projects come on line. It further diversifies the company's revenue stream by adding onshore terminals to its portfolio of pipelines.
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Plenty of fuel in the tank
This transaction represents just a fraction of BP's U.S. midstream assets, leaving it with a vast pool of future drop-down candidates. For example, the company holds the right of first offer to acquire a long list of pipelines as well as stakes in pipeline joint ventures currently owned by BP, including the remaining interest in Mardi Gras. In addition, BP owns logistics assets such as loading and unloading docks and storage at its refineries, other infrastructure to support production, as well as a significant business to business fuels distribution service.
On top of the opportunities already embedded within BP that BP Midstream could acquire, there's also the potential for it to build or buy other assets to support BP's growth in the states. That's what Shell Midstream did last year when it acquired a stake in the Nautilus gas gathering system developed by Crestwood Equity Partners (CEQP +0.00%), which it started building to support Shell's fast-growing production from the Permian Basin. Crestwood and Shell Midstream will now work together to expand that footprint to meet Shell's needs in the future. BP could potentially seek out similar arrangements with midstream companies to support its growth after agreeing to spend $10.5 billion to bulk up its shale business earlier this year. BP Midstream could also participate in the development of long-haul pipelines to move production out of those regions, leaving it with no shortage of opportunities to expand.
The first of many
BP Midstream's deal with BP will provide it with enough fuel to grow its lucrative payout at a double-digit rate next year. It's the start of what will likely be a steady string of transactions between the two companies, which could give BP Midstream the fuel to grow its distribution at a fast pace for the next several years. That growing income stream makes the MLP an intriguing option for income-seeking investors to consider.
