VTTI Energy Partners LP. (NYSE:VTTI) - Buy Recommendation - PT $23.30
August 26 marks the conclusion of the 25 day quiet period on underwriter research for VTTI; on August 27, VTTI's IPO underwriters will likely release positive reports on VTTI. We remain optimistic on this stock-both long-term and at the upcoming quiet period expiration. Our recent research shows +2.3% returns within an 8 day (-5, +2) period surrounding the quiet period expiration of many firms. We believe that the firm's strong quarterly distributions will continue to attract investors, along with its likely continued generation of steady revenue streams.
August 26 will mark the conclusion of the 25 day quiet period on underwriter research reports that began with the July 31 IPO of VTTI Energy Partners LP. .
The end of the quiet period will allow the firm's IPO underwriters to publish analyses of the MLP formed to own and operate refined petroleum product and crude oil terminals and infrastructure assets. VTTI's share prices will likely rise temporarily as a result of the release of underwriter analyses.
Steady Increases in Market Performance
VTTI's IPO priced at the high end of its expected price range at $21 per share and made a small first day return of 5.2% return in its first day on the market. The stock has since made small gains to close at $23.04 per share on August 13.
Strong List of Underwriters
VTTI's team of IPO underwriters, including Citigroup Global Markets Inc; J.P. Morgan Securities LLC; BofA Merrill Lynch; BNP Paribas Securities Corp.; Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A.; Credit Suisse Securities LLC; Credit Agricole Securities Inc.; Deutsche Bank Securities, Inc; ING Financial Markets LLC; HSBC Securities Inc.; Mitsubishi UFJ Securities , Inc.; SMBC Nikko Securities America, Inc; SG Americas Securities, LLC; and Wells Fargo Securities, LLC, will seek to accelerate the stock's gains through the release of positive analyses beginning on the 25th.
Underwriters, Quiet Period Expirations, and Buying Opportunities: Academic Studies
The Journal of Finance (VOL. LVIII, NO. 1; 2003) explains that an increase in share prices usually emerges before the quiet period expiration date, as investors anticipate positive analyses from the IPO underwriters and begin to purchase shares in advance so that they can take advantage of the forthcoming market response to the analyses.
Lead author Dan Bradley, PhD, CFA, affiliated with the University of South Florida, and his colleagues note that 76% of firms receive immediate initiation of analyst coverage at the expiration of the quiet period, nearly always with a rating of 'Strong Buy' or 'Buy.' After coverage is initiated, firms receive abnormal positive returns of 4.1% for the two days before and the two days after the date of initiation. When more than one analyst initiates coverage, returns have been found to increase further-to 6.4%.
The work of Carter, Piwowar, and Strader (2001) backs up Dr. Bradley's findings. Carter et al note that the mean analyst rating at the expiration of the quiet period is a "Buy," with a correlation between higher ratings and higher returns. Lach and Highfield (2009) find that analyst initiations have not been as positively biased since the Global Settlement and the NASD and NYSE rules; however, Highfield, Lach and White (2008) found that the five-day cumulative adjusted returns remain statistically significant at approximately 2%.
Bradley et al also found a significant correlation between the quantity and reputation of IPO underwriters and rising share prices near the expiration of the quiet period.
Our own analysis, performed on a sample of 2014 IPOs, shows above-market returns of 2.3% within an 8 day (-5, +2) period surrounding the quiet period expiration (day 0 being expiration). Our data are statistically significant at the 90% level. Excluding IPOs for REITs and banks from the data set, returns increase further and remain within the 90% significance level. We also found that a greater number of underwriters could lead to diminished volatility of returns in the quiet period. We found no significant linear relationship between market capitalization and returns or volatility of returns in the same period. We also observed no significant linear relationship between the percentage of the company floated at the time of IPO and returns or volatility of returns.
In all cases, investors' early share buys often create an atmosphere of rising demand, leading to an increase in share prices before the quiet period ends and creating a short-term buying opportunity.
VTTI is an MLP formed by its parent (also VTTI) to own and operate crude oil and refined petroleum product terminals and other infrastructure assets.
VTTI holds a 36% interest in VTTI Operating, which owns six terminals with a total of 396 tanks; the terminals collectively have a storage capacity of 35.5 million barrels. These facilities are located in North America, Asia, Europe, and the Middle East. The firm's parent company holds the remaining 64% interest in VTTI Operating.
VTTI hopes to use its relationships with its parent and its parent's partners, Vitol Holding B.V. and MISC Berhad, to further expand its assets by acquiring facilities from the parent and from third parties and through organic development. VTTI has right of first offer on various other energy assets owned by its parent, including expanded equity interests in VTTI Operating.
VTTI generates almost all of its revenues via long-term, fee-based contracts for terminal storage and throughput. The firm does not own any of the products that it stores and is not a commodity trader. Most of VTTI's revenue comes through Vitol, which accounted for approximately 76% of the firm's revenues in calendar 2013 and is one of the world's largest independent energy traders.
Strong Yields On Horizon
VTTI plans to make quarterly cash distributions of $0.2625 per unit, or $1.05 per unit per year, subject to the firm having sufficient cash available to pay the distributions. At its August 11 closing price of $22.89 per share, this would be equivalent to a 4.59% annual yield.
Lowered Risk of Competitors
VTTI does face some competition, but the firm's relationship with Vitol should allow it to maintain a steady flow of business regardless. Very high barriers to entry in terminaling will limit new competitors, including a lengthy development period, high construction costs, and limited skilled personnel. VTTI's existing facilities could also be expanded at significantly lower cost than a greenfield construction project for a new industry competitor.
Management's Background and Experience
Robert Nijst serves as the CEO of VTTI's general partner and has served as the CEO of VTTI's parent since 2006. Mr. Nijst previously worked in various roles over the course of 14 years of experience at VOPAK and predecessor companies, most recently as president of VOPAK's Oil Europe and Middle East division.
Mr. Nijst holds a degree in economics from Erasmus University in Rotterdam and a Master's Degree in Business Administration from IMD Lausanne.
Conclusion: Long Term, Short Term Optimism
We remain optimistic on this stock-both long-term and at the upcoming quiet period expiration.
VTTI's relationship with Vitol should allow it to continue to generate steady revenue streams, and should also allow the firm to continue to grow and to access the personnel and other organizations that it will require to do so.
The firm will continue to be insulated from competition so long as it can continue to make the bulk of its revenue through Vitol.
We also believe that the firm's strong quarterly distributions will continue to attract investors interested in income-generating stocks.
The upcoming quiet period expiration will likely produce a strong buying opportunity for those interested in getting involved.
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Disclosure: The author is long VTTI. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.