12 Straight Distribution Hikes, 9% Yield, Record Earnings - Solid LP Goes Ex-Dividend This Week

Summary

• This LP yields 9.41%, with very strong 1.38x distribution coverage.
• Management has raised the distribution for 12 straight quarters.
• It just reported record revenue, EBITDA, and distributable cash flow for Q3 2017.
• It goes ex-dividend this week.

Looking for a standout midstream pipeline company with an attractive yield? Maybe you should consider PBF Logistics (PBFX), an LP we've covered in some previous articles. PBFX and its parent company, PBF Energy (NYSE:PBF), both just reported strong Q3 earnings this week.

PBFX is the yieldco arm of PBF - both companies are managed by the same executives, and PBF owns 100% of the GP of PBFX and 44% of the LP interests of PBFX.

PBF Profile:

PBF is one of the largest independent petroleum refiners and suppliers of unbranded transportation fuels, heating oil, petrochemical feedstocks, lubricants, and other petroleum products in the US. It's the fourth largest refiner and the second most complex independent refiner in the US. It produces gasoline, ultra-low-sulfur diesel, heating oil, diesel fuel, jet fuel, lubricants, petrochemicals, and asphalt, as well as unbranded transportation fuels, petrochemical feedstocks, blending components, and other petroleum products. PBF Energy Inc. was founded in 2008 and is based in Parsippany, New Jersey.

The company sells its products in Northeast, Midwest, Gulf Coast, and West Coast of the United States, as well as in other regions of the United States and Canada. It also offers various rail, truck, and marine terminaling services, as well as pipeline transportation and storage services

(Source: PBF site)

PBFX Profile:

PBF formed PBFX in order to monetize and support its refining operations with logistics services and assets. PBFX's business model is based upon long-term, fee-based contracts with PBF and acquiring dropdown assets from its parent/sponsor, in addition to outside acquisitions. PBFX's contracts currently have a remaining term of ~7 to 10 years left.

(Source: PBFX site)

Distributions:

PBFX's management declared its 12th straight distribution hike this week, raising the payout to $.48/unit. PBFX goes ex-dividend on 11/9/17 and pays on 11/29/17.

PBFX has the strongest distribution coverage we've found in the high yield midstream pipeline universe, averaging 1.4x over the past four quarters:

You can track PBFX's current price and dividend yield in the Basic Materials section of our High Dividend Stocks By Sector Tables.

Options:

We added this trade to our Cash Secured Puts Table, where you also can see details for over 25 other income-producing trades.

The April $20.00 put has a bid of $.95, with a $19.25 breakeven, but you may be able to sell for much more - the ask was $1.75 at press time:

PBFX's covered call option yields aren't currently attractive, but you can see details for over 25 other trades on our Covered Calls Table.

Earnings:

Like GasLog Partners LP (GLOP), the focus stock in yesterday's article, PBFX had record earnings in Q3 and has had very impressive growth over the past four quarters, as it added new assets to its operations.

On April 17, 2017, a wholly owned subsidiary of PBFX acquired the Toledo, Ohio, refined products terminal assets of Sunoco Logistics Partners L.P. for $10.0M in cash. Located adjacent to PBF Energy's Toledo refinery, the Toledo Terminal is comprised of a 10-bay truck rack and over 110,000 barrels of chemicals, clean product, and additive storage capacity.

PBFX also benefited from all five of parent PBF's refineries being open for Q3 '17.

As management noted on the Q3 earnings call,

"In August, we completed the Paulsboro natural gas pipeline, I think on the exact day of our last, (Q2), earnings call. And I’m happy to report today on this call that the Chalmette storage tank project is complete, and began contributing to the Partnership earning yesterday. The two projects together will increase Partnership EBITDA by approximately $12 million, and importantly improve the Partnership’s customer, i.e. PBF Energy’s, business as well.

(Source: PBFX site)

Q3 '17 had records for revenue, adjusted EBITDA, DCF, and net income/unit:

Management has grown the distribution/unit 9.4% over the past four quarters and has improved its distribution coverage to 1.4x from 1.31x, even with 6.8% unit growth.

"On June 1, 2017, the requirements under PBFX's partnership agreement for the conversion of all subordinated units into common units were satisfied and the subordination period ended. As a result, each of the Partnership’s 15,886,553 outstanding subordinated units converted into common units and began participating pro rata with the other common units in distributions of available cash. The conversion did not impact the amount of the cash distribution paid or the total number of the Partnership’s outstanding units representing limited partner interests." (Source: PBFX site)

Growth Prospects - When asked on the earnings call about future growth prospects for its NJ pipeline, management responded,

"the (NJ) pipeline we completed in August as Phase 1 internally, that implies there is probably going to be a Phase 2 and we’re actively working with counterparties and assessing the market in terms of how we grow that business. But we view it absolutely as a strategic asset in that it crosses the Delaware River, which is no small feat for anyone to accomplish. So I think the asset has tremendous possibilities to grow certainly beyond ahead of the refinery where it is today."

Management also said that it plans to issue its long-term growth guidance early next year. (Source: Q3 '17 earnings call)

Risks:

As PBF goes, so goes PBFX, since its contracts are all with PBFX. Accounting wise, PBF'S Q1-2 income statement looked rough, with a -$271M loss vs. an $83M gain in Q1-2 '16. However, this was mainly due to a non-cash inventory adjustment of $167M and a $25M debt extinguishment cost. After eliminating these two expenses, PBF showed adjusted EBITDA of $129M vs. $75M in Q1-2 '16.

More serious, on an operational basis, though, was that PBF was definitely challenged during this period due to three of its five refineries being closed for turnaround maintenance.

This also filtered through to PBF's operating cash flow for this same period, showing -$206M in Q1-2 '17 vs. $148M in Q1-2 '16.

(Source: PBF Q2 '17 10-Q)

Fortunately, all five of PBF's refineries were back online in Q3 '17. As management noted on the PBF Q3 '17 earnings call -

"For the first time since acquiring the Chalmette and Torrance refineries, we had all five of our assets operating for almost an entire quarter. As a result, we were able to capture the benefits of strong third quarter markets."

This resulted in much stronger earnings, with operating income growing 4.6x vs. Q3 '16, and net income/share of $2.85 vs. just $.43 in Q3 '16:

(Source: PBF Q2 '17 10Q)

Management noted on the Q3 earnings call -

"We are still coping with the ongoing pressures of narrow crude differentials and headwinds from the flawed Renewable Fuels Standard. However, the overall macroeconomic picture looks positive for refiners heading into year-end and beyond to 2018. We have strong global demand and economic growth, and inventory levels that have come down to more rational historic averages. For the fourth quarter 2017, we expect East Coast total throughput to average 340,000 to 360,000 barrels per day; Mid-Continent total throughput is expected to average 145,000 to 155,000 barrels per day; Gulf Coast total throughput is expected to average 190,000 to 200,000 barrels per day and West Coast total throughput is expected to average 160,000 to 170,000 barrels per day."

Debt and Dilution:

Like most LPs which pay out a large portion of their cash flow, PBFX's management must go to the debt and equity markets periodically to raise more capital for future growth. Thus far, though, it has done a good job of not getting overloaded with debt. As you'll see in the financials section below, both of PBFX's key debt leverage metrics have improved over the past four quarters. One other potential conflict of interest stems from the fact that PBFX shares management with PBF, so there may be a temptation to charge PBFX too high of a price for dropdown assets, resulting in overburdening it with debt. This can be solved with a conflicts committee reviewing prospective dropdown deals. So far, it hasn't been a problem.

Valuations:

We've updated this midstream valuations table with PBFX's new Q3 valuations. It also includes some midstream firms we've covered in recent articles, such as Holly Energy Partners LP (HEP), MPLX LP (NYSE:MPLX), Green Plains Partners LP (NASDAQ:GPP), Martin Midstream Partners (NASDAQ:MMLP), Delek Logistics Partners LP (DKL), Summit Midstream Partners LP (NYSE:SMLP), Plains All America Partners (PAA), and Arc Logistics Partners (NYSE:ARCX).

Although it's not the highest yielder in this small group, PBFX wins the prize for distribution coverage, at 1.38x, which gives it room to grow its payouts further. Like HEP, it's getting a premium price/book valuation from the market. However, its price/DCF is the third-cheapest in this group and is way below the 9.88 group average:

Analysts' Price Targets:

PBFX is currently 7.3% below analysts' lowest price target and 15% below the average $15.00 price target. How about a little respect, Mr. Market?

PBFX has greatly outperformed the benchmark Alerian MLP ETF (AMLP) over the past year and year to date, but it has lagged the general market by around 300 basis points. However, when you consider its total return, including its ~9% yield, it has returned ~21% over the past year vs. ~17% for the S&P 500. We'll gladly trade a few basis points for that 9% yield.

Financials:

Management has made good progress on ROA and ROE over the past four quarters and also has lowered both the debt/equity ratio, down to 3.47, and the net debt/EBITDA leverage ratio, down to 3.38, vs. 3.83 in Q4 '16:

PBFX has the best ROE in the group, and its ROA and operating margin are both above average. It has the second-lowest net debt/EBITDA leverage in this group:

Debt and Liquidity:

PBFX ended the quarter with approximately $207 million in liquidity, including $39 million of cash and approximately $167 million of availability under a revolving credit facility. As a result, net debt to EBITDA ratio was approximately 3.1 times on an annualized basis.

"Subsequent to the end of the quarter, the Partnership successfully raised $175 million through a senior notes offering, which closed in the first week of October. The proceeds of the offering were used to repay the majority of the outstanding balance on our revolver. Following the transaction, our revolver availability increased to $346 million and our pro forma liquidity is approximately $385 million." (Source: PBFX Q3 '17 earnings call)

Summary:

We rate PBFX a Buy, based upon its attractive, well-supported distribution yield, its growth prospects, and its good management.

All tables furnished by DoubleDividendStocks.com, unless otherwise noted.

Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Articles posted on SA aren't meant to be all-inclusive white papers by any means. Please practice due diligence before investing in any investment vehicle mentioned in this article.

Analyst’s Disclosure: I am/we are long PBFX, GLOP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.