Shares of Valero Energy Partners (NYSE: VLP) began trading this morning, making it the 20th master limited partnership to IPO this year. The new MLP offered 15 million common units to the public and debuted at a price of $23 per unit, raking in $345 million. Parent company Valero (VLO 0.08%) is no doubt thrilled with the success here. Now that the IPO is official, let's take a closer look at the market's newest member.
The MLP
Investors serious about picking up units of Valero Energy Partners should read the prospectus, but we'll cover the basics here.
First and foremost, Valero remains very much in control of this business. It will own 100% of the general partner stake, including all of the incentive distribution rights, and 72.5% of the limited partner stake. In other words, when Valero Energy Partners makes money, most of it will go to Valero. But it's a symbiotic relationship because Valero Energy Partners will rely heavily on Valero, not only for its business but its future growth potential as well.
Right now, Valero is VLP's one and only customer, and the MLP is completely dependent on its parent refiner to drive business to its three assets: the Port Arthur logistics system, the McKee products system, and the Memphis logistics system.
Clearly, there isn't much scale or diversity here, but VLP does have right of first refusal to at least six other assets for a period of five years beginning at the IPO. Outside of that, Valero is the largest independent refiner in the U.S., and that title comes with a serious transportation and logistics footprint. There are plenty of assets it can drop down to VLP to spur growth. In other words, scale will come to Valero Energy Partners, even if operational diversity does not.
Finally, it is certainly a risk to generate all of its revenue from one customer, even if it is a massive one like Valero. The upside to this deal is that all of VLP's revenue will be fee-based and backed by minimum quarterly throughput commitments with fixed tariffs. This gives Valero Energy Partners a high degree of stability, which should translate to reliable distributions for limited partners.
Bottom line
Valero Energy Partners marks Valero's second attempt at running a midstream MLP: the first was what is now NuStar Energy. But this is the refiner's first stab at developing one organically, and that may make a big difference. Though it is a humble beginning for Valero Energy Partners, it has a clear plan for growth, is backed by a mature business, and is sporting a solid yield, all of which will likely appeal to investors in the MLP space.
