EUR 850.00 For Business Accounts Only

Morningstar | Andeavor Logistics Reports Decent Results; Marathon's Influence Means Changes Are Coming

Andeavor Logistics reported a solid third quarter that met our expectations, and we plan to maintain our $45 fair value estimate and narrow moat rating. Results mainly benefited from drop-downs recently completed as well as the closure of the Western Refining Logistics deal last year. EBITDA increased 27% to $309 million.

As Marathon Petroleum now owns Andeavor, Andeavor Logistics' parent, it now also owns a majority stake in the master limited partnership, and its influence is quickly being felt. After 29 straight quarters of distribution per unit payout increases, the distribution was held flat this quarter. And the focus has shifted toward boosting distribution coverage to self-funding levels (1.25 times or higher, in our view), lower leverage (below 4 times EBITDA), and no planned equity issuances. Broadly, we think this means Andeavor's targets laid out at its 2017 analyst day, which include investing about $1.0 billion-$1.1 billion annually via organic investment and drop-downs, a 2020 EBITDA target of $1.4 billion-$1.5 billion, and minimal equity issuances in 2019 and 2020, would need to be revised. The major constraint, in our view, would be the revised leverage ratio of below 4 times, as the partnership's prior plans relied heavily on debt to the extent that we expected leverage to approach 5 times in the coming years.

We would expect a revised plan to include some or all of the following: a distribution cut, a sharp reduction in planned capital spending, cost cuts, and asset sales. The EBITDA target of $1.4 billion-$1.5 billion becomes more of stretch target as substantial capital spending and investments would need to come on line to meet it. We also view Andeavor Logistics' asset base as one of the weaker ones in our coverage with its large exposure to California and potential declines in refined product demand and smaller relative exposure to the Permian. Given that the scale of the revisions is likely to be substantial with a weaker asset base, we think it makes it more likely that MPLX will acquire Andeavor Logistics (or vice versa) shortly, so it can make the changes more efficiently with full control of the assets.