Oiltanking Partners L.P. (OILT), began trading on July 14th. The IPO was a success with 10 million common units priced at $21.50 (click here for SEC filing). The partnership's focus is to pay a quarterly dividend based upon a stable fee-based revenue stream. The pricing was favorably moved upward with an initial expectation of a $19-21 price range. The underwriters also have an over-allotment option of 1.5 million shares.
OILT provides oil and petroleum product storage services at a Beaumont terminal and a Houston terminal. An image of the business model identifies the flow of product between OILT's properties:
click on images to enlarge
Oiltanking's vital business strategy is to operate as a stable fee-based business. The goal is to create consistent and profitable cash flows and to pay quarterly distributions. A focus upon increasing distributions over time in a fiscally prudent process is central to the limited partnership strategy.
Per page 95 of OILT's Business Overview:
This equates to a 5.7% dividend yield based upon a current $23.80-unit price.
OILT's business model is focused upon providing integrated terminal, storage, and pipeline services to customers. The company's customers are companies involved in the production, distribution, and marketing of crude oil and refined petroleum products.
The aggregate oil storage operations is a fee based business. Oiltanking Partners operates two key terminals: Houston and Beaumont. Houston offers 12.1 million barrels of active storage services. Beaumont offers 5.7 million barrels of active storage services. Fees are focused upon the following services:
- Storage Services Fees: Oiltanking, historically has received 75% of its revenues based upon providing storage services.
- Throughput Fees: These are fees paid by non-storage companies who pay OILT for delivery, service at the OILT properties. The fees charged range upon the volume delivered and withdrawn for 3rd party customers. These fees were 20% of OILT's revenues for the year ending December 31, 2010.
- Ancillary Services Fees: These fees amounted to 5% of OILT's revenues for the year ending December 31st, 2010. These services include the heating, mixing and blending of OILT's customers' products which are held within OILT's tanks, and transferred amongst 3rd party storage tanks.
Strong Parent - Oiltanking GmbH
Oiltanking GmbH is the parent of OILT. Oiltanking GmbH owns, operates, and manages crude oil and petroleum products at terminals in Europe, North and South America, Middle East, India, and Asia.
OILT is in strong hands with its parent Oiltanking GmbH. Oiltanking GmbH is the world's second largest independent storage provider. OILT investors should be aware that the the parent remains significant control over OILT's purse strings:
- Oiltanking GmbH is the General Partner of OILT,
- Oiltanking GmbH owns OILT's Incentive Distribution Rights.
OILT is Oiltanking Gmbh's planned growth opportunity in North America. Per page 101-102 of the prospectus, OILT's focus is spelled out in Oiltanking GmbH's strategy:
In addition, Oiltanking GmbH has a growth prospect, for OILT operations, currently in formation (page 99):
These type of growth prospects will add to the potential of OILT's distributions, while increasing over time.
Investing in Oiltanking Partners (OILT) requires a review of its peers. There are quantitative data measurements which can quantify whether an investment is appropriate. Qualitative data, such as OILT's parent, can be as material as balance sheet information.
Holly Energy Partners LP (HEP)
Holly offers investors a higher annual yield than its peers. The debt percentage also has a 40% debt to equity level, which is a good combination to see. Holly's terminals are based in the growing Southwest, Rocky Mountain and Mid-West regions of the country. Holly is tied to the success of a parent company, HollyFrontier Corp. (HFC). Many of Holly's storage terminals are near the HollyFrontier refineries. The location of HEP's refineries are strategically located to mesh with the refinery and growth business model of subsidiaries.
Kinder Morgan Energy Partners LP (KMP)
KMP is truly not an apple-to-apple comparison to OILT. KMP is worthy of a fee-based terminal consideration due to its major MLP market cap. The $23-billion overwhelms, in terms of market cap, the other large sized storage partners. The partnership has 180-terminals, but the partnership also has 37,000 miles of pipeline. 20% of KMP's 2010 operating income were derived from terminals. The 6.3% yield is a little higher than OILT's 5.7% yield. OILT is likely to experience significant distribution growth rate.
Plains All American Pipeline LP (PAA)
PAA's debt levels and unit distribution, 6.10%, all match up with its typical peer. PAA manages over 20 million barrels of above ground terminal and storage facilities. The company has been effective in managing its fee based portfolio. Plains has been active in pipeline deals. Plains did announce plans to increase its quarterly distributions by 4.2%. PAA retains a 50% ownership in the PAA/Vulcan Gas Storage LLC. PAA is also working on building a marine terminal facility, with over 1 million barrels of storage capacity, in the Eagle Ford, Texas production area.
Sunoco Logistics Partners LP (SXL)
The company's Terminal Facilities business unit operates over forty refined product terminals. The total storage capacity is over 7 million barrels. Sunoco (SUN) is the general partner of Sunoco Logistics Partners. This is a strong comparison to OILT. A strong parent relationship provides opportunities for distribution growth and shareholder value creation. SXL purchased, on June 29th, an Eagle Point tank farm from ConocpPhillips (COP). The Eagle Point tank farm offers 5 million barrels of active clean products and dark oils. These actions are aimed to continue to increase SXL's distribution level.
Tesoro Logistics LP (TLLP)
I have been waiting for TLLP to drop down to sub-$22.50 since May as I discussed in my article titled "Master Limited Partnership Tesoro Logistics' Future Shines Bright". TLLP compares to OILT in context to its association to its high-quality parent. TLLP's parent, Tesoro (TSO), will provide significant drop-down opportunities for TLLP to grow its dividends and earnings stream. TLLP's lack of debt is a short-term position, as a fee-based asset is typically better off with a certain percentage of debt on its balance sheet. Synergies and cost benefits can exist with a larger sized partnership. The 5.3% yield is acceptable due to the lack of debt on the company's capital structure.