Phillips 66 Partners' (PSXP +0.00%) growth engine continued humming along during the third quarter. Overall, the master limited partnership's (MLP's) earnings increased by 6% year over year; cash flow surged 17% thanks to higher volumes on its pipeline and storage assets, fueled in part by recently completed expansion projects. That has given it the fuel to increase its dividend by 9% over the past year, pushing the yield up past 6%.
The company's dividend growth engine will get even more fuel next year after the MLP and its partners finish up two major expansion projects. So 2020 could be a big year for Phillips 66 Partners and its investors, which was one of the takeaways from the third-quarter conference call of its parent, refiner Phillips 66 (PSX +1.82%).
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The midstream advancement continues
Phillips 66's CEO Greg Garland started the call by briefly discussing the company's third-quarter results, as well as how it allocates its cash flow. He noted that the refiner aims to reinvest 60% of its funds into growing its business.
One area where it's investing a significant amount of money is in the midstream sector. Not only is it investing in midstream growth projects on its balance sheet, but its MLPs (Phillips 66 Partners and DCP Midstream) are also working on a variety of expansions. Garland noted that "these projects will contribute to future earnings growth, creating additional value for our shareholders."
He also said:
Phillips 66 Partners has started line fill and commissioning activities on the Gray Oak Pipeline. The 900,000 barrel-per-day pipeline will transport crude oil from the Permian and the Eagle Ford to the Texas Gulf Coast, including our Sweeny Refinery. We expect to begin initial service in November and anticipate full service in the first quarter of 2020. Phillips 66 Partners owns a 42.25% interest in the joint venture. Gray Oak Pipeline will connect with multiple refineries and export facilities in the Corpus Christi area, including the South Texas Gateway Terminal, in which PSXP has a 25% ownership. The terminal will have two deepwater marine docks, over 7 million barrels of storage capacity, and up to 800,000 barrels per day of throughput capacity. The terminal is expected to start out in mid-2020.
As Garland points out, Phillips 66 Partners is putting the finishing touches on the $2.7 billion Gray Oak pipeline. While the MLP will receive some benefit from its investment during the fourth quarter, the biggest bump will come in 2020, with management noting that it should enjoy the full benefit by the second quarter.
In addition to that, the company and its partners are on track to finish the $500 million South Texas Gateway Terminal by midyear. That project will enable shippers on Gray Oak to export some of their crude overseas, while allowing Phillips 66 Partners to make a bit more money off that oil as it benefits from its interest in the export facility.
Adding it all up
Those two projects should drive significant growth for Phillips 66 next year. Not only are they sizable investments, but also high-returning ones; the company notes it will earn an EBITDA multiple of 6 to 8 from its projects.
To put the numbers into some perspective, the company expects to invest about $1.5 billion into these two major projects, as well as two smaller ones that should come online next year. Assuming the midpoint on the returns (or 7 times EBITDA), its investment in these projects should generate about $215 million of annual earnings. That's a sizable boost for a company that's currently producing about $1.3 billion of annualized EBITDA given its third-quarter run rate, implying about a 15% increase in earnings.
That earnings growth should enable Phillips 66 Partners to continue increasing its distribution at a healthy pace in 2020. Further supporting that view is the company's strong financial metrics. Not only does it cover its current payout by a comfortable 1.29 times, but it also has a top-notch balance sheet with a low leverage ratio of 3.2. For comparison's sake, most MLPs want a coverage ratio above 1.2, and leverage below 4.0.
A high-growth year ahead
Phillips 66 Partners expects to complete four expansion projects over the next year, which should drive its growth throughout 2020. That should give the MLP the fuel to continue increasing its high-yielding payout at a healthy pace next year. It remains an ideal option for income-focused investors to consider.
