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Morningstar | Andeavor Logistics Reports Good 2Q, Accelerates Drop-Downs

Narrow-moat Andeavor Logistics reported a good second quarter, and we may boost our $43 fair value estimate modestly to reflect higher EBITDA in the near term after factoring in a more aggressive drop-down schedule. The partnership reported EBITDA of $289 million compared with $240 million last year, with the increase mainly attributable to drop-downs and the addition of Western Refining Logistics assets.

Andeavor Logistics also announced that it has agreed to drop down $1.6 billion of assets, significantly more than $500 million or so expected annually from 2018-20 announced at its recent analyst day. We believe the acceleration in drop-downs could be related to our expectation that Andeavor Logistics will shortly merge with MPLX after the parent merger is completed later this year. As MPLX has already received all of its drop-downs from Marathon Petroleum, accelerating the drop-downs at Andeavor Logistics is likely to give the combined entity more incremental investment opportunities around the larger asset base initially. It also bumps up the initial price paid by MPLX to acquire Andeavor Logistics. These drop-down assets include pipeline and storage assets in the Permian Basin, the majority of Andeavor's remaining refining, terminalling, transportation, and storage assets, as well as the Conan crude-oil gathering system. The new assets are eventually expected to generate $195 million-$205 million in 2019 EBITDA, and Andeavor Logistics plans to invest about $150 million in 2018 and 2019. It is worth noting that the deal was 80% funded by equity versus the usual 50/50 split, indicating that Andeavor wanted to retain more of the upside from these assets than in most GP/LP transactions.