The energy industry needs to invest a whopping $321 billion in building enough pipelines and related infrastructure over the next several years to support fast-growing oil volumes in the U.S. and Canada. It's a massive opportunity for midstream companies to expand their footprints as well as their cash flows, which they can then use to increase their lucrative dividends.
One way these companies are positioning themselves to cash in on this opportunity is by working together so that they can lock up new expansion projects. That was recently the case as master limited partnerships Phillips 66 Partners (PSXP) and PBF Logistics (PBFX) teamed up with privately held Harvest Midstream to jointly develop a new oil pipeline in Louisiana. If they're successful in signing enough shippers up for the project, it could be in service and generating cash flow by the second half of next year.
An ACE up their sleeve
The trio of midstream companies will be jointly developing the ACE Pipeline System, which would move oil from a hub in St. James, Louisiana, to refineries in Belle Chasse, Meraux, and Chalmette in the same state. What's worth noting about those destinations is that Phillips 66 Partners' parent, refining giant Phillips 66 (PSX -2.62%), operates a refinery in Belle Chasse while PBF Logistics' parent, refiner PBF Energy (PBF -3.04%), owns one in Chalmette. So, the pipeline would improve the flow of domestically produced oil to these facilities, thereby benefitting their parent companies. In addition to transporting crude to those refineries, the companies are also gauging whether shippers are interested in moving oil to Clovelly, Louisiana, where it could then could go through the Louisiana Offshore Oil Port (LOOP) to global markets.
The ACE Pipeline would have an initial capacity of 400,000 barrels per day, though the developers could expand that depending on shipper interest. If they secure enough customers to move forward with the project, it could be in service by the second half of 2020.
One thing that increases the likelihood that this project will edge out competing ones and move forward is that it's an expansion of an existing system instead of a completely new build. That's because they plan to use Harvest Midstream's CAM Pipeline, which already connects LOOP to those three Gulf Coast refineries. They plan to build a new line from St. James to the legacy CAM pipeline so that ACE can feed those refineries with domestically produced oil instead of oil imported via LOOP. That will improve returns on investment for the developers as well as reduce costs for the refineries since oil produced in the U.S. trades at a discount to foreign crude.
More fuel for dividend growth
Both Phillips 66 Partners and PBF Logistics have a long history of paying their investors steadily rising distributions. PBF Logistics, for example, announced its 16th consecutive quarterly pay raise last October and now yields 9.4%. Meanwhile, Phillips 66 Partners has increased its payout for 12 straight quarters and currently pays 6.6%.
One of the main fuels those two companies used to grow their payouts over the years was the acquisition of midstream assets from their refining parents PBF Energy and Phillips 66. However, after buying the bulk of the pipelines and other logistics assets owned by those companies, these MLPs needed a new source of fuel for distribution growth, which they're finding by pursuing organic expansion projects.
Phillips 66 Partners already has several needle-moving projects underway, including a large-scale oil pipeline that should start up later this year. In the meantime, PBF Energy is targeting to generate $100 million of incremental earnings from organic growth projects that it implements over the next four years. Not only does this shift toward growing organically mean these companies will have the fuel to keep increasing their dividends, but they should create more value for investors since organic expansions tend to generate higher returns than acquisitions.
Teaming up to win
While there's a massive opportunity to build new oil pipelines across North America, there's lots of competition for these lucrative projects. That's why Phillips 66 Partners and PBF Logistics are working with a privately held midstream company to provide an innovative solution. That gives them a leg up on rivals, increasing the odds that they'll win over customers so that they'll be the ones building a new oil pipeline to serve the Louisiana refining market. That would enable these MLPs to continue expanding cash flow so that they can grow value for their investors in the coming years.
Check out the latest Phillips 66 Partners earnings call transcript.