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Morningstar | Andeavor Logistics Reports Solid 4Q; We Remain Concerned About Outlook

Andeavor Logistics' fourth-quarter results were solid, in our view, though we continue to harbor concerns about its outlook, given the prospects of reduced processing spreads, limited organic growth, and optimistic guidance. We plan to maintain our $39.50 fair value estimate and narrow moat rating. Fourth-quarter EBITDA of $333 million mainly benefited from 2018 drop-downs, which contributed $50 million in incremental EBITDA, while the core operations added $2 million. The gathering and processing operations have struggled during the quarter, as EBITDA fell $16 million year over year (excluding drop-downs), primarily due to lower Rockies volumes. 2019 and 2020 guidance of $1.4 billion and $1.6 billion in EBITDA with $600 million of capital spending each year appears optimistic, as a 7 times investment multiple implies $85 million in incremental EBITDA, and the remaining $115 million in EBITDA would need to come from organic growth. Given the current pace of growth, this implies a substantial level of acceleration, or alternatively, a deep level of cost-cutting without affecting growth. Given the partnership's valuation, we believe drop-downs from its parent Marathon Petroleum are unlikely, as the units are not valued highly enough.

Marathon Petroleum has firmly exerted control over the partnership since the Andeavor merger was completed and has put in place clear plans to keep leverage below 4 times, issue no equity, and require limited parent support. We continue to believe this means any further distribution increases are very unlikely for the near to medium term, and the ultimate outcome here is that MPLX and Andeavor Logistics will merge. Such a transaction would provide deeper opportunities for restructuring Andeavor Logistics' weaker portfolio of assets, reducing costs and optimizing integration between the two asset networks.