An Associated Press story reported today that the Phillips 66 (PSX) offering of its Phillips 66 Partners (PSXP) MLP is now available. The company aims to sell 15 million shares of the unit for $19 to $21. The banks managing the deal could buy another 2.3 million shares, adding to the proceeds. At the top end of the range, the offering could raise ~$350 million.
Phillips 66 Partners is a traditional growth oriented master limited partnership ("MLP"). It will own, operate, develop and acquire crude oil, refined petroleum product, and natural gas liquids ("NGL") pipelines and terminals and other midstream assets. PSXP will generate revenue primarily from tariffs and fee for transporting petroleum products through its pipelines and for storing crude oil and refined products at its terminals.
I was emailed the new prospectus (dated July 15th) by Morgan Stanley (MS) this morning. I have requested a hyperlink for the prospectus so that readers of this article can link to the document. I will leave the link in the comment section when it becomes available. For now, I will share some of the details contained in the new prospectus. Here is an overview of the initial assets contained in the Phillips 66 Partners offering:
Public unit holders will have a 20.9% limited partner interest with Phillips 66 keeping a 77.1% stake. The remaining 2% interest will be held by Phillips 66 Partners GP LLC, in which Phillips 66 will have a 100% ownership interest. The organization structure is shown below:
According to the prospectus, for the year ended December 31, 2012, and the three months ended March 31, 2013, on a pro forma basis, the company had revenue of approximately $110.7 million and $25.0 million, net income of ~$67.3 million and $13.6 million, and EBITDA of approximately $75 million and $15.6 million, respectively.
What's not to like about that? EBITDA of $15.6 million on $25 million in revenue for the latest quarter (Q1 2013) - not too shabby! On an annualized basis, if 15 million shares are sold for a 20.9% interest, and annual net income is $67.3 million, which equates to roughly $0.94/PSXP share. Not counting expenses and miscellaneous accounting charges, that yields roughly 4.7%.
But Phillips 66 intends to grow its midstream and transportation businesses and will use PSXP as a primary vehicle to drive this growth. The strategy is to generate stable and predictable cash flows while increasing quarterly cash distributions by executing on the following strategies:
- Maintain reliable and safe operations
- Focus on fee-based businesses supported by contracts and minimum volume commitments and inflation escalators
- Optimizing existing assets while pursuing organic growth opportunities
An idea of the fees and tariffs associated with the initial assets can be seen below:
Conclusion & Summary
Investors can participate in the Phillips 66 Partners' IPO in two ways: then can purchase shares in the PSXP MLP itself, or they can purchase shares of PSX. As noted in my previous article Phillips 66 Partners' MLP, Part 2: How Existing PSX Shareholders Benefit, PSX shareholders will benefit from the MLP IPO in a number of ways:
- PSX will receive tax-advantaged distributions from the MLP, which will be passed along to existing shareholders.
- The publicly traded MLP will have increased access to capital markets, which should enhance its ability to grow. A growing MLP should result in its ability to throw off an increasing distribution stream to PSX and thus its existing shareholders.
- The MLP offering sets a good precedent for further potential offerings within PSX's substantial midstream portfolio.
- Increasing price appreciation in PSX's stock price as a result of the bullets above.
So if you are looking for MLP income and don't mind the tax preparation complications, shares of PSXP may look quite desirable. If you'd like exposure to chemicals and refinery operations in addition to midstream assets, and/or don't care for the tax complications associated with MLPs, PSX is the way to go. Either way, both companies are good long-term investments for growth oriented dividend-income focused investors. Phillips 66 currently pays a $1.25 dividend and yields 2.1%.
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