Phillips 66 Partners (PSXP) has increased its cash distribution every quarter since its initial public offering in 2013, boosting it 25 times overall. Last year, the master limited partnership (MLP) grew its payout by 11%. That helped push its yield up to its current level of 5.8%, which is well above average.
This growth trend should continue for the foreseeable future. That was evident in the company's fourth-quarter conference call, where the MLP's management team discussed all the avenues it has to keep expanding.
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Organic expansion will keep earnings growing in 2020
Last year was another excellent one for Phillips 66 Partners. The MLP grew its adjusted EBITDA by 11.5% to $1.268 billion. Fueling that growth was the strong operational and financial performance of its legacy assets. It also got a boost from completing the Bayou Bridge pipeline extension, the Lake Charles products pipeline, and the Lake Charles isomerization units (which converts refinery byproducts into usable feedstocks to make motor fuels). The company capped the year by finishing its largest expansion project so far, the Gray Oak Pipeline, which provided a slight boost to its fourth-quarter results.
As a result of the timing of the completion of its expansion projects, it ended the year with an annualized adjusted EBITDA run rate of $1.4 billion. The company's management expects that number to rise again in 2020. On the call, COO Rosy Zuklic stated that "we still believe that the $1.5 billion run rate EBITDA is what we'll exit 2020 with." Fueling that increase will be the ramp-up of Gray Oak, which won't reach its full capacity until the second quarter, and the start-up of several other expansion projects. These include the Sweeney to Pasadena capacity expansion, the South Texas Gateway Terminal, and the Clemens Caverns expansion, which should enter service in the second, third, and fourth quarters, respectively.
Plenty of fuel to continue growing beyond this year
With Gray Oak not reaching full capacity until next quarter, and three other expansion projects starting up over the course this year, the company has lots of momentum heading into 2021. On top of that, it will get an additional boost mid-year when the C2G pipeline begins service. Because of this visible growth, the MLP should have plenty of fuel to continue growing its payout each quarter for the next few years.
Meanwhile, with a strong balance sheet and conservative distribution coverage ratio, Phillips 66 Partners has the financial flexibility to continue sanctioning additional organic expansion projects as opportunities arise. That would give it more fuel to keep growing its payout.
However, even if the MLP is unable to secure new projects, it could still continue increasing its distribution. That's because it has a secondary fuel source in the form of addition midstream acquisitions from its parent Phillips 66 (PSX 1.05%).
That company's CEO, Greg Garland, noted on its fourth-quarter conference call that it's generating "$800 million to $900 million of EBITDA" from MLP qualifying midstream assets. Garland further pointed out that the number is "growing of course as we are bringing on these new projects," which includes two more oil pipelines that should start up next year. Phillips 66 Partners' CFO Kevin Mitchell addressed these comments on the MLP's call by noting that "Greg talked about the $800 million or so of existing EBITDA that's available to drop. And of course, he also, in fact, clarified that there's a significant amount of investment under way at the PSX level that we'll continue to grow that EBITDA number."
That gives the company a large pool of assets that it could acquire in the future, which would give it the fuel to keep growing its earnings and distribution. The tricky part will be financing a transaction since it has become nearly impossible for MLPs to issue new equity, given how much investors have soured on the energy market. Because of that, Mitchell said the company would need to structure a deal focused "around the balance sheet, the leverage ratios, maintaining coverage" on the distribution so that it doesn't negatively impact its financial profile. One option it could consider is issuing preferred stock to help fund a deal, which Mitchell noted: "we've done that in the past, and that's proven to be very, very successful for us."
Lots of room to keep running
Phillips 66 Partners has increased its payout like clockwork each quarter since it came public in 2013. That streak appears poised to continue since the company's earnings are on track to rise over the next two years thanks to its organic expansion program. Meanwhile, it has plenty of fuel to continue increasing its payout beyond that timeframe because it could acquire some of Phillips 66's midstream assets if it runs out of organic fuel. That highly visible growth makes this energy company an excellent option for investors who want a steadily rising income stream.
