In July 2013, refining company Phillips 66 (NYSE:PSX) spun off a small portion of the company's midstream assets with the IPO of Phillips 66 Partners LP (NYSE:PSXP). This new midstream MLP is positioned to provide investors with total returns in the 20% per year range for at least the next 3 to 4 years and very likely much longer.
Note: MLP companies such as Phillips 66 Partners LP have units and pay distributions. The words stock, shares and dividends may be used here with the understanding that the rules of MLP units apply including the tax consequences of investing in MLP units.
Cash Rich and Ready to Grow
Phillips 66 Partners started out life with the drop down of pipelines and terminals for both crude oil and refined products, barge docks and ship docks. The assets produce reliable fee based revenues from the transport and storage of products going to and coming from the Phillips 66 refineries.
With the IPO, Phillips 66 sold 26.3 percent of the limited partner units to the public and retained the rest along with the general partner 2% ownership. PSX Partners retained all of the cash raised in the IPO, which will provide the initial powder the company needs to acquire assets for growth. On the 3rd quarter earnings results, the PSX Partners shows $421 million of cash and has $250 million available on a revolving line of credit.
The cash on hand plus available credit line will allow Phillips 66 Partners to start adding cash flow producing assets without tapping into the equity markets. The typical MLP growth funding mechanism is a combination of selling more units into the market to raise equity capital and borrowing. PSX Partners management has noted that the company is willing to take on debt of up to three times annual EBITDA. The current state of lots of cash plus no outstanding debt gives this midstream MLP plenty of room to start adding assets and grow distributable cash flow without diluting the current unit base.
Committed to 20% Distribution Growth
During the quarterly earnings conference call, Chairman and CEO Greg Garland stated that the company has targeted distribution growth in excess of 20% for the company's first year. When the subject was hit again during the Q&A, management expressed a belief that a 20%-plus dividend growth rate would probably be kept up for at least the next several years.
The engine that allows this growth will be the midstream assets owned and developed Phillips 66. With a $40 billion parent company, PSX Partners has access to a large amount of premium midstream assets that can be dropped down whenever the partnership is ready to increase its size and boost cash flow - no development time or capital required. As PSX Partners grows, it will be able to make larger and larger acquisitions.
Phillips 66 Partners has declared an initial $0.85 annual dividend rate, providing a 2.66% yield on the current $32 unit price. Dividend growth of 20% per year doubles the payout in 4 years, and a 25% growth rate produces a double in 3 years. When PSX Partners starts posting that level of distribution increases, the share price should start to increase in parallel with the distribution growth. As a result, - barring a serious disruption in the economy, markets or the refining industry - Phillips 66 Partners provides close to a lock on an investment double over the next three to four years.