EUR 850.00 For Business Accounts Only

Morningstar | Andeavor Logistics operates gas and oil logistics assets to support its refining sponsor.

With the elimination of its incentive distribution rights and the completion of the Western Refining merger, Andeavor Logistics is ready to chart its path as a fairly independent master limited partnership. While parent Andeavor owns 59% of the new entity, growth expenditures will be split about 50/50 between drop-downs and potentially more attractive organic investments. With 10-year minimum volume contracts underpinning about 44% of revenue, Andeavor has a steady stream of cash to build out its network and reduce its reliance on no-moat gathering and processing operations, which make up 45% of EBITDA.Beyond the makeup of the assets, the locations are also less than ideal, and the partnership’s asset portfolio is the weakest of the refinery MLPs we cover. About half of its storage capacity is in California, where the California Energy Commission forecasts a nearly 20% drop in gasoline demand by 2030. The firm’s major gathering systems serve the Bakken and Green River basins, where we see middling economics and limited growth prospects. Andeavor is investing in rail projects to move cost-advantaged crude to its Washington and California assets over the next few years, which we think will benefit refinery margins for Andeavor and provide volume security for Andeavor Logistics. However, the Western Refining merger was critical because it adds much more attractive investment assets east of the Rockies, including a small Permian system that is being built out already with the Conan crude pipeline. The Permian is one of the key growth areas for the partnership, and Andeavor Logistics is targeting $200 million-plus in EBITDA from the basin by 2020, up from around $50 million-$60 million in 2017. The recent drop-down completed in August 2018 includes virtually all of Andeavor's Permian assets, allowing the LP to more efficiently optimize the portfolio. This effort is critical to reach the entity's goal of $1.6 billion in EBITDA, which we see as achievable.Future drop-downs from Andeavor are about $500 million in EBITDA by our estimates. These drop-downs include $250 million in EBITDA associated with wholesale fuel distribution, a low-margin yet high-returning business.