Source: Phillips 66 Partners.
The worst oil crash in a generation is finally starting to affect growth in the midstream MLP industry. Yet some MLPs such as Phillips 66 Partners (NYSE: PSXP) seem immune from the devastation. In fact, the MLP just reported record quarterly results that included a 35% distribution increase. Here are four key advantages Phillips 66 Partners has over its peers that are likely to result in continued strong growth in 2016 and beyond.
Explosive growth potential
Phillips 66 Partners' growth benefits from its strong relationship with its sponsor and general partner, Phillips 66 (PSX -0.35%). As one of America's largest refiners, Phillips 66 has an enormous amount of midstream infrastructure -- that is, pipelines and storage facilities -- to drop down, or sell, to its MLP. These assets include 18,000 miles of pipelines, 15 crude oil terminals, and 39 refined petroleum products terminals.
In addition, Phillips 66 is investing heavily into expanding its midstream assets. In fact, through 2019, Phillips 66 plans to invest $8 billion to $9 billion into its midstream business and eventually plans to drop these assets down to Phillips 66 Partners, nearly quadrupling its annual EBITDA.
Source: Phillips 66 Partners investor presentation.
Even better, all of the dropdowns to Phillips 66 Partners include long-term, fixed-fee contracts, many with minimum volume commitments that help to insulate the MLP's cash flow from volatile energy prices.
In addition to dropdowns from its sponsor, Phillips 66 has two additional growth avenues. It plans to invest $300 million in 2016 into five organic growth projects.
Phillips 66 Partners can also make third-party acquisitions, such as the remaining 60% equity interest in its recently acquired Bayou Bridge Pipeline owned by Energy Transfer Partners and Sunoco Logistics Partners.
Strong balance sheet means easy access to credit
Another positive factor for Phillips 66 Partners is that, unlike many other midstream MLPs, it should have little trouble raising growth capital in this challenging market environment.
Phillips 66 Partners has three sources of growth funding: debt, equity, and excess distributable cash flow, or DCF.
The MLP currently holds $1.1 billion in long-term debt on its balance sheet, all of it senior notes, and none of it due earlier than 2020.
Its debt-to-EBITDA ratio, or leverage ratio, as calculated under its debt covenants, stands at 3.98, and management expects that figure to come down to around 3.5 as more of its organic growth projects come online.
The leverage ratio is one of the most important balance sheet strength metrics because credit ratings agencies and lenders use it to determine how much debt an MLP can take on and what interest rates they should pay. The average midstream MLP's leverage ratio is currently 6.54, nearly twice Phillips 66 Partners' long-term goal.
This strong balance sheet, along with Phillips 66 Partners' more conservative business model and strong sponsor, is why it's been able to borrow $1.1 billion in senior debt with a weighted average duration and interest rate of 14.1 years and 3.64%, respectively.
The leverage ratio is also usually one of the most important components of debt covenants that come with a revolving credit facility. Phillips 66 Partners' credit facility is currently untapped and stands at $500 million. However, management has the option to expand that to $750 million with the consent of its lenders, something a low leverage ratio makes more likely.
Continued access to equity markets
Phillips 66 Partners' unit price has held up much better than other fast-growing, refiner-sponsored midstream MLPs such as MPLX (MPLX 0.26%). This performance difference, along with both MLPs' supercharged payout growth, has caused Phillips 66 Partners' and MPLX's respective yields to diverge to 3.3%, and 6.1%, respectively.
While initially you might think investors should prefer MPLX's higher yield, from a growth funding perspective Phillips 66 Partners has the advantage. That's because its richer-valued units mean it can raise equity growth capital more cheaply and thus invest more profitably into expanding its business.
Strong coverage ratio: more than just a secure payout
Phillips 66 Partners generated a distribution coverage ratio of 1.4 this quarter thanks to a DCF that grew 93% year over year. That not only means its distribution is high, but it also means it generated an excess $25.8 million in DCF, or $103.2 million on an annualized basis. That's cash that the MLP can use to fund its growth without having to tap the debt or equity markets.
Bottom line
Low oil prices may be hurting many midstream MLPs' ability to grow, but thanks to its sponsor's immense dropdown pipeline and strong access to debt, equity, and excess DCF, Phillips 66 Partners is well situated to continue its impressive growth streak into 2016 and beyond.
