In a Jan. 31 research note, Raymond James analyst Justin Jenkins reported that for Phillips 66 Partners LP (PSXP:NYSE), "upside in Q4/19 set the pace for 2020 visibility."
"With the ability to layer growth onto steady base business cash flow (e.g., little 'replacement' capex needs), investors should have a high degree of confidence in multiyear financial performance/flexibility," added the analyst.
Due to a solid Q4/19 performance and several positive project updates, Raymond James raised its 2020 EBITDA and discounted cash flow estimates on the master limited partnership (MLP) to $1,450 and $1,139 million, and $1,580 and $1,244 million for 2021 EBITDA/discounted cash flow.
Jenkins provided the bullet points from Q4/19 and discussed future growth.
Regarding its Q4/19 results, the MLP's EBITDA was a beat and discounted cash flow was in line. Specifically, EBITDA was $345 million compared to Raymond James and consensus' estimates of $327 and $326 million, respectively. The beat was due to strong terminal volumes. Discounted cash flow of $254 million was around Raymond James and the Street's forecasts of $256 and $255 million, respectively.
Operationally during the quarter, the Gray Oak Pipeline commenced flowing and ramp-up will continue through Q2/20.
Jenkins highlighted "capital allocation decision-making as a key differentiator to the credit of Phillips 66 Partners." How much to spend and on what are currently being debated throughout the midstream space. At this MLP, the discussion centers on the speed of distribution growth and whether organic growth can be supplanted by dropdown growth.
Looking forward, Jenkins noted that growth for the LP will be an "attractive" mix of primarily dropdown growth plus a smaller portion of organic growth. Organic growth will likely be capital efficient given the relationship to existing assets, and this is significant.
Dropdown growth will occur from the numerous projects in its sponsor, Phillips 66's (PSX:NYSE), portfolio that it continues to develop, including Red Oak, Liberty, Sweeny fracks 2 through 4 and possibly frack 5. Its Gray Oak Pipeline commenced flowing in November 2019, and ramp-up will continue through Q2/20. "These assets provide an attractive growth runway and should transition to the MLP over time," wrote Jenkins.
Other growth opportunities could come from mergers and acquisitions, expansions, integrations, bolt-ons and the like.
Finally, Jenkins pointed out that the MLP trades at a higher multiple than its large-cap peers. It is warranted, he added, due to its "impressive asset base, strong financial footing and supporting relationship with a very high-quality sponsor."
Raymond James has an Outperform rating and a $67 per share target price on Phillips 66 Partners, whose stock has been trading at around $62.30 per share.
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Disclosures from Raymond James, Phillips 66 Partners LP, January 31, 2020
ANALYST INFORMATION
Analysts Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination, including quality and performance of research product, the analyst's success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks.
The analysts Justin Jenkins and J.R. Weston, primarily responsible for the preparation of this research report, attest to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers and (2) that no part of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this research report. In addition, said analyst(s) has not received compensation from any subject company in the last 12 months.
RAYMOND JAMES RELATIONSHIP DISCLOSURES
Raymond James & Associates, Inc. makes a market in the shares of Phillips 66 Partners L.P.
