Refiner Valero Energy recently IPOed some of its midstream assets into a master limited partnership. Valero Energy Partners gives the company a new source of growth capital, but what are you getting as a unitholder?
Following the trend
Energy companies often have infrastructure assets hidden within them that have material value, but that are overshadowed by the larger business. Valero Energy is the perfect example of this. Before selling units in Valero Energy Partners, the company's refining assets got all the attention while its vital support assets were largely ignored.
That's why Valero Energy chose to create a master limited partnership (MLP) with those midstream pipes and sell a portion of that business to the public. After the late 2013 initial public offering of Valero Energy Partners, Valero Energy owns roughly 70% of the midstream business and investors own the rest. Valero Energy is the general partner (GP), too, so it's not only the largest shareholder but also controls the the newly public business.
This MLP thing is a great deal for Valero Energy. Not only did it raise cash from the IPO to help fund growth, but it gets to raise cash from future assets sales (called drop downs), too. Those assets were largely overshadowed by Valero Energy's refining business, so it really is creating value by breaking them out. Most importantly, it still controls them because it's the GP.
That's really important, too, because transporting inputs and end products is a vital part of the operation. While dropping down assets might dilute ownership in Valero Energy Partners, which will have to sell more shares to afford such acquisitions, so long as Valero Energy remains the GP it still controls Valero Energy Partners.
Is this as good for you?
On one level, this is a great opportunity for investors. If you like the idea of owning midstream assets, Valero Energy Partners' IPO unlocked more investing options. Midstream assets aren't normally as volatile as refining, so Valero Energy Partners is a way to be indirectly involved in refining without as much risk.
Don't forget that the big draw for Valero Energy is to raise cash, though. That likely means a steady flow of assets from Valero Energy to Valero Energy Partners, which should support growth at the new midstream company. However, Valero Energy has almost total control over what happens at Valero Energy Partners via is GP interest.
This means that the separation may not be as great as you might expect. For starters, you have to keep a close eye on the prices being paid for any drop downs. Despite the separation, you still need to watch what's going on at Valero Energy as well. For example, Valero Energy Partners recently saw its units turn lower on the heels of a drop in Valero Energy shares, showing that what impacts the parent could impact the child.
Valero Energy's business can be volatile. The refiner essentially makes money off of the spread between its costs and what it can sell refined products for. On that front, the company recently noted that all is not well, saying, "Valero's refining segment operating income is expected to be higher in the second quarter of 2014 versus the second quarter of 2013 primarily due to higher throughput volumes, as well as wider discounts on sour crude oil and certain types of North American light crude oil, which offset weaker year-over-year gasoline and distillate margins in most regions."
Essentially, volume growth at Valero Energy will help hide margin weakness in a key business. Is that a reason to be concerned about Valero Energy Partners? Yes and no. Clearly, higher throughput likely means more products flowing through Valero Energy Partners' pipes. Refiners also shift with the times, though, and that could eventually mean Valero Energy curtails production if it isn't making enough money.
The recent drop in Valero Energy Partners' unit price, which follows along with a drop in Valero Energy's share price, is worth keeping in mind. These two companies are closely related. As an investor, owning one means watching both. That's particularly true if what you own is the newly formed Valero Energy Partners.