With master limited partnerships' multiyear streak of outperformance against the S&P 500 having come to an abrupt end in 2012, it's time for investors to get pickier with these high-yielding investments. Though larger MLPs with low capital costs are inherently safer, investors willing to take on a little more risk should consider the universe of small-cap MLPs, many of which are flying under analysts' radar.
Oiltanking Partners (NYSE: OILT), with a market cap of $3.2 billion, is one such opportunity. The company owns extremely valuable crude oil and refined products infrastructure assets along the U.S. Gulf Coast, has a spotless balance sheet with very little debt, and offers strong distribution growth prospects. Let's take a closer look.
A view of the Houston Ship Channel, where Oiltanking's Houston and Appelt terminals are located. Flickr/Roy Luck.
Highly stable business model
Oiltanking Partners is a master limited partnership engaged in independent storage and transportation of crude oil, refined petroleum products, and liquefied petroleum gas, or LPG. The partnership's core assets are located on the Houston Ship Channel and in Beaumont, Texas, and provide a major competitive advantage due to their connectivity to major refining, production, and storage facilities at the Gulf Coast and Cushing, Okla.
Since Oiltanking doesn't take ownership of the materials that it terminals, stores, and transports, its revenue comes exclusively from customer payments, which include storage service fees, throughput fees, and ancillary services fees. Last year, the partnership generated roughly 57% of its revenue from fixed monthly fees for storage services and 38% from throughput fees.
Crucially, Oiltanking's customers pay for reserving storage space for an agreed-upon volume of product regardless of the actual storage capacity they end up using or the amount of product throughput. In other words, the revenue from Oiltanking's storage services business has virtually no volumetric risk and is therefore highly predictable.
More than 99% of Oiltanking's Houston facility's storage capacity has been contracted, while 95.5% of the Beaumont facility's capacity is under long-term contract. Not only are these long-term contracts backed by risk-mitigating provisions such as minimum volume commitments and inflation escalators, the contracts are with some of the most credit-worthy counterparties one could hope for.
Last year, Oiltanking's two biggest customers were Enterprise Products Partners (EPD +1.09%) and ExxonMobil (XOM +1.86%), which respectively accounted for 29% and 9% of its total revenue. Enterprise, one of the largest publicly traded midstream energy companies in North America, has an investment-grade credit rating of BBB+ from rating agency Standard & Poor's, while ExxonMobil, the nation's largest oil company, boasts the highest possible AAA credit rating from all of the major credit ratings agencies.
Strong growth prospects
While Oiltanking yields only 2.4%, the company has extremely strong distribution growth prospects and an exceptionally conservative distribution coverage ratio, which stood at roughly 1.9 times as of year-end 2013. This means that the partnership has a 90% cash cushion after paying out its distributions -- almost unheard of in the MLP universe.
With so much excess cash, Oiltanking can pursue a bevy of expansion projects to further cement its strong position in the Gulf Coast. This year, the partnership expects to spend between $230 and $250 million on capital projects, up from $180 million in 2013, that will greatly expand its storage. For instance, the Appelt expansion project will add 3.7 million barrels of storage capacity to the partnership's existing 22 million barrels of capacity.
Since Oiltanking's revenue is based on contracted volumes, this capacity expansion will provide a big boost to storage service fee revenue. Last year, for instance, the partnership's storage service fee revenue jumped by $9 million as approximately 4.1 million barrels of new storage capacity was placed into service.
Robust balance sheet, very little debt
Last but certainly not least, Oiltanking boasts a solid balance sheet with very little debt. As of year-end 2013, its total debt stood at $190.8 million, which gives it a debt-to-EBITDA ratio of just 1.3 times. By comparison, the average MLP's debt is about three times its EBITDA. Oiltanking also has $117 million in cash and expected proceeds from short-term notes receivable on hand, as well as an unused $150 million revolving line of credit, giving it additional flexibility to pursue growth projects.
Furthermore, the vast majority of OIltanking's outstanding long-term debt, which had a face value of $188.3 million as of year-end 2013, doesn't mature until 2019 or beyond. This gives the partnership plenty of time to generate cash from its expansion projects to repay its debt.
The takeaway
While Oiltanking's yield is very low compared to its MLP peers, the partnership's Gulf Coast assets are extremely well positioned to benefit from the rapidly growing demand for storage, terminaling, and transportation services along the Gulf Coast.
With a remarkably conservative distribution coverage ratio, a strong balance sheet with very little debt, and major expansion projects on the way, Oiltanking should be able to easily grow its distribution at an annual rate of at least 15% over the next few years, which should support yield growth.
