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Tesoro Logistics LP (TLLP) is a relatively new IPO that was spun off from Tesoro (TSO) last spring. It was recently listed by The Motley Fool as one of the five best IPOs of 2011. TLLP owns, operates, develops, and acquires assets involving oil and petroleum products logistics. TLLP’s assets are used to gather, transport, and store crude oil and to distribute, transport, and store refined products (eight refined product terminals in the Western US). Its initial assets were a crude oil gathering system in the Bakken/Williston Basin area of North Dakota and Montana, eight refined products terminals in the Midwestern and Western US, a crude oil and refined products storage facility, and five related short haul pipelines in Utah. It expects to acquire the Martinez Crude Oil Marine Terminal from Tesoro Corp. in 2012 - an advantageous drop down from the parent company. TLLP projects an increase of $8 million annually in EBITDA from this acquisition. More “drop downs” are expected over time. TLLP expects to drive EBITDA to $100+ million in 2013. The company is based in San Antonio, Texas. It operates as a subsidiary of Tesoro Corporation. It has been rising straight upward since October (see the YTD chart below - click to expand).

The slow stochastic sub chart shows that TLLP is over bought in the near term. It is also far above its 50-day SMA. TLLP seems likely to come back down toward its 50-day SMA in the near term, especially if the market goes down. However, TLLP seems likely to be a great long-term performer. The Bakken fields have little pipeline infrastructure. TLLP should be able to get as much business there as it can handle. TLLP is the sole supplier to Tesoro’s North Dakota refinery. Plus there is plenty of opportunity for growth in the Bakken as the oil companies develop the area.

The near-term fundamental financial data agree with the over bought condition indicated by the chart above. The company is currently trading at a PE of 74.79 and an FPE of 17.53. The PE is high compared with the industry norms. The earnings and revenue growth and the dividend are floating this boat. The dividend yield is 4.70%. This is better than the US Treasury 30-year bond yield of roughly 3% (3.10% as of Friday Dec. 9, 2011). On top of that the EPS estimates for both FY2011 and FY2012 have been trending upward strongly over the last three months. For the astute investor this means one wants to wait for TLLP’s stock price to fall to a more reasonable price before buying it. There is a minor support point at approximately $28. There is strong support at approximately $25. If the overall market falls on the EU credit crisis (and China’s recently seen weakness), it is likely you will be able to pick up this stock at one or both of the support points, especially since TLLP is currently over bought. You might start averaging in at $28. If you prefer more safety in this uncertain market, you could wait to try to pick TLLP up at nearer to $25.

Why wouldn’t you just forget about TLLP, if it is over bought? The reason is that it pays a great dividend. Plus it has a great growth/expansion plan, which seems to be working well. TLLP plans to increase its EBITDA from $53 million (the IPO EBITDA) to $100+ million in 2013. It has already added $8M through optimization of assets use. It plans to get another $11M from already announced projects. It plans to grow system volumes to over 100,000 bpd by 2013 (roughly double the IPO level). TLLP plans to grow terminal ling volumes by over 40,000 bpd by year-end 2013. In all this should result in a 87% growth in EBITDA by some time in 2013. Plus TLLP has stability due to its long-term contracts with Tesoro. In other words the effect of a severe downturn on TLLP can only be slight in the next several years. Instead of contracting, TLLP is forecast to have 81.80% earnings growth in 2012, and it has a five-year percentage earnings growth per annum forecast of 10.00%. This is great growth for a high dividend payer.

The table below contains comparison data for some of the other high-dividend paying pipeline stocks, some of the cigarette stocks and some of the staples stocks.

Stock

Dividend Yield

PE

FPE

FY2012 % EPS Growth

5 yr. % EPS Growth per annum

Tesoro Logistics LP (TLLP)

4.70%

74.79

17.53

81.80%

10.00%

Enbridge Energy Partners LP (EEP)

7.00%

30.24

19.18

12.70%

4.67%

Enbridge Inc. (ENB)

2.80%

27.87

22.04

9.40%

8.30%

Kinder Morgan Energy Partners LP (KMP)

5.90%

565.50

34.57

27.20%

9.77%

Kinder Morgan Inc. (KMI)

3.90%

43.75

23.78

N/A

26.06%

Enterprise Products Partners LP (EPD)

5.30%

23.45

20.18

7.60%

9.05%

Energy Transfer Partners LP (ETP)

8.00%

33.84

17.74

56.20%

18.81%

TransCanada Corp. (TRP)

4.00%

20.66

16.95

6.60%

7.20%

Cigarette Co.’s

Altria Group Inc. (MO)

5.70%

17.28

13.18

7.40%

8.03%

Phillip Morris International Inc. (PM)

4.10%

15.94

14.37

7.40%

12.46%

Lorillard Inc. (LO)

4.70%

14.66

12.75

11.60%

10.10%

Reynolds American Inc. (RAI)

5.40%

17.76

13.62

6.50%

6.00%

Staples

McDonald's Inc. (MCD)

2.90%

19.32

17.25

9.40%

10.02%

Kraft Foods Inc. (KFT)

3.20%

19.87

14.40

11.50%

10.62%

Procter & Gamble Co. (PG)

3.20%

16.33

14.10

8.60%

8.77%

Johnson & Johnson (JNJ)

3.60%

15.49

12.12

5.40%

6.05%

Kimberley-Clark Corp. (KMB)

4.00%

16.70

13.32

8.90%

6.17%

As you can see from the data, many of these stocks are over bought compared with what many would consider more reasonable valuations. This is likely due to the extreme volatility we have experienced in the US markets for the last 6+ months. At some point, these are all likely to fall significantly. If the EU crisis causes that crash in the near term, it might be a good time to pick up many of the above. In the case of TLLP, it should be more subject to the vagaries of the US markets than most or all of the above stocks. It is a recent IPO. It is trading at a much higher PE than almost all of the above stocks. Plus it has a very short dividend payout history. If you keep this stock on your watch list, you should be able to pick it up at a much cheaper price (see advice above). Doing so may be well worth you efforts. It shows every sign of being a great long-term hold, especially with a recession or worse looming in the EU (and possibly elsewhere).

Source: Great EPS, Revenue And A Great Dividend Make Tesoro Logistics Attractive