Valero (VLO +1.00%) is following in the footsteps of just about every other energy company lately and filing with the SEC to spin off some of its assets into a master limited partnership. MLPs are hot right now, so let's take a closer look at what the new entity, Valero Energy Partners, will offer investors.
Assets
Valero is the world's largest independent refiner, and it operates a plethora of logistics assets. The long-term success of an MLP is predicated on growth, however, so Valero Energy Partners is going to start small. Here's what we get from the filing:
Our initial assets consist of crude oil and refined petroleum products pipeline and terminal systems in the Gulf Coast and Mid-Continent regions of the United States ("U.S.") that are integral to the operations of Valero's refinery located in Port Arthur, Texas, its McKee refinery located in Sunray, Texas, and its refinery located in Memphis, Tennessee.
Investors should note that all of Valero Energy Partners agreements with Valero will be fee-based, keeping the MLP free from commodity risk.
Financially, on a pro forma basis the unit generated revenue of $46.4 million, net income of $22.7 million, and EBITDA of $31.3 million through the first six months of this year. As expected, information regarding a minimum distribution and initial share price remains incomplete.
What Else Can Investors Expect?
First and foremost, the recent onslaught of MLPs hitting the market means that it's taking the SEC perhaps a little longer to shuffle paper than in the past . We're looking at about three months until this MLP hits the market, and I'd venture as far as to say the first week or two in 2014 is more likely.
The big question on everyone's mind is whether or not Valero Energy Partners will pop on IPO day like Phillips 66 Partners (PSXP +0.00%) did. PSXP posted the third-biggest jump for an MLP on its first day of trading ever, climbing 29 %. It was unusual for MLPs, which don't typically pop or drop at an IPO. Shares are only up 6% year-to-date, which means investors might want to start treating MLP IPOs like every other IPO and wait until the hoopla dies down before picking up shares.
The other downside to a massive price spike is the subsequent yield drop. Most of the refining logistic MLPs we know and love post relatively low yields. Phillips 66 Partners debuted with about the lowest MLP yield in history, and its unprecedented pop meant it only went down from there.
Here are the current yields for some of the more established refining spinoffs:
|
MLP |
Yield |
|---|---|
|
MPLX (MPLX +0.05%) |
3.10% |
|
Tesoro Logistics |
3.50% |
|
Holly Energy Partners (HEP +0.00%) |
5.78% |
|
Sunoco Logistics (NYSE: SXL) |
3.63% |
Source: Google Finance
MPLX is the youngest name on here, approaching its one-year anniversary as a publicly traded MLP, and it is not that surprising to see it also has the lowest yield. All of these MLPs are fairly stable sources of income, but clearly Holly Energy Partners is the only one worth writing home about, at least in terms of yield. Even an MLP like Sunoco Logistics that isn't tied to a refiner any more still posts a relatively low yield.
Final Thoughts
Valero is a big, stable business that will likely generate very stable cash flows for investors. Like any stock, due diligence is required before buying in, and investors may want to think twice before jumping straight into this IPO.
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