Phillips 66 Partners' Assets Are Appealing
Despite a high uncertainty rating, this narrow-moat refinery MLP's Gulf Coast exposure should provide a benefit over the coming years.
After updating our model to reflect Phillips 66 Partners' (PSXP) latest results and dropdowns, we are maintaining our $55 fair value estimate and narrow moat. Our fair value estimate implies a 2018 EV/EBITDA multiple of 12 times and a LP distribution yield of 6%. We see units as slightly undervalued, reflecting investors' shift away from awarding premium multiples to MLPs with high growth in distributions. However, we've raised our fair value uncertainty rating to high from medium due to the uncertainty surrounding the timing and profitability of the $700 million-$900 million in EBITDA in the drop-down portfolio as well as the expected eventual incentive distribution rights elimination.
We believe Phillips 66 Partners has a narrow economic moat due to an efficient scale moat source. Phillips 66 has a solid collection of pipeline, terminal, marine, and NGL assets, and projected future dropdowns from Phillips 66 look to be of similar quality and focused mainly around oil and refined product pipelines, and NGL assets (export terminals, fractionation units, and loading terminals) located on the Gulf Coast. The moat for these assets is based on their location, either directly part of a Phillips 66 refinery or close by, and usually the asset is the only one of its type serving the refinery and handles all of its needs, making it uneconomic for competitors to enter the space. Due to the asset network’s concentration within the Gulf Coast and the Midcontinent, the narrower network should provide attractive investment opportunities to build new connections and control barrels better once they enter the system versus a more geographically disperse network of pipelines.
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Stephen Ellis does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.