Phillips 66 Partners (NYSE:PSXP) began trading today on the NYSE and by all indications the IPO was a rousing success. The MLP opened at $28.98, well above the initial pricing of $23. An AP report this morning said PSXP raised $377.8 million from its initial public offering of stock. These proceeds were above expectations and is bullish for Phillips 66 (NYSE:PSX).
As noted in my earlier article on the MLP offering, Phillips 66 Partners aimed to sell 15 million shares for $19-$21 and allowed for the banks managing the deal to buy another 2.3 million shares. Considering the market's strong acceptance of the shares, it seems plausible the extra 2.3 million shares will be sold. The underwriters have 30 days to sell the over allotment.
The company expected to raise only $315 million from the IPO so the results of the offering significantly exceeded expectations.
Success Of IPO Is Bullish for Phillips 66
Phillips 66 management made it clear that the MLP was designed as a growth vehicle:
- Organic growth via initial assets
- Growth via third-party asset acquisitions
- Growth via asset drop-downs from Phillips 66
And that last bullet is why I believe the success of this IPO is bullish for PSXP's general partner Phillips 66. First of all, the strong market acceptance of the IPO validates PSX's strategy of spinning off midstream assets. Secondly, as described in the prospectus, PSXP has "right of first offer" on two awesome assets: PSX's 1/3 interest in the Sand Hills and Southern Hills pipelines. The offer is good for a period of 5 years from the date of the IPO (today). These natural gas liquids ("NGLs") pipelines service surging production coming from the Permian, Eagle Ford, and multiple energy basins in Oklahoma. Of course any sale of these assets would depend on PSX's willingness to sell and PSXP's ability to negotiate acceptable purchase and commercial agreements, but it was obviously a goal from day one to drop-down these pipelines to the MLP. You can read more on the two pipelines here.
A successful IPO means PSXP will be well funded and that the potential for future asset drop-downs of one or both of these pipelines will occur sooner rather than later. Such a transaction would provide PSX with a nice influx of cash. Longer-term it would result in larger tax-advantaged distributions from the LP and eventually bigger dividends to existing PSX shareholders. As a result, PSX stock is up nicely this morning:
PSX data by YCharts
Summary & Conclusion
ConocoPhillips (NYSE:COP) strategy of spinning off its mid and downstream assets into Phillips 66, and now into Phillips 66 Partners, continues to generate strong returns for shareholders. Shareholders have benefited not only from generous dividends, but also in strong share price appreciation.
PSX has declined from a high of $70 as the Brent/WTI spread evaporated since the beginning of the year. But I suspect the spread will grow in the second half of 2013. Regardless, PSX has several advantages over pure refiners:
- CPChem, a 50/50 partnership with Chevron (NYSE:CVX), is arguably the best chemical company in the world and is benefiting from low-priced domestic natural gas and NGL feedstock prices
- PSX has a tremendous portfolio of midstream assets, including its 50/50 ownership of DCP Midstream with Spectra Energy (NYSE:SE).
- It has perhaps the best logistics of the domestic refiners with respect to sourcing advantaged crude feedstock and is the largest importer of inexpensive Canadian WCS.
Combine these strong attributes with the success of the new MLP, and I believe PSX is significantly undervalued. PSX is a BUY.
Watch for PSX's earnings report on Wednesday, July 31 at 8:00 a.m. EDT.