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Morningstar | Phillips 66 Partners Reports Good 3Q; Benefits From Strong Sand Hills Volumes

Phillips 66 Partners reported a solid third quarter that was in line with our expectations, and so we plan to maintain our narrow moat rating and $55 fair value estimate. The partnership's EBITDA increased to $305 million from $276 million sequentially, as the Sand Hills and Bakken pipelines delivered record volumes. The Sand Hills pipeline is moving natural gas liquids, or NGLs, to Mont Belvieu, Texas, from the Permian Basin, while the Bakken pipeline is transporting oil to Patoka, Illinois, from the Bakken. Phillips 66 Partners also benefited from strong volumes from pipelines serving up midcontinent crude to Phillips 66 refineries. Permian crude is cheap and thus very profitable for refineries, given that differentials have widened due to pipeline capacity constraints. We expect all of these trends to continue benefiting the entity in the near term. From a financial perspective, the partnership has ample capacity to pursue further investments, with an estimated debt/equity ratio under 2.5 times, though we expect it still has substantial commitments left to complete construction on Grey Oaks.

The Grey Oaks pipeline, which is a crown jewel in Phillips 66 Partners' portfolio, has been expanded once again to 900,000 barrels per day from 800,000 bpd from last quarter. Maximum capacity is 1 million bpd, so further expansions are possible for the pipeline, which is expected to come on line at the end of 2019. This pipeline is moving Permian and Eagle Ford oil to Corpus Christi and Sweeny/Freeport. Phillips 66 Partners also owns a 25% stake in the South Texas Gateway terminal, which Grey Oak will connect to, and will have about 3.4 million barrels of capacity.

Finally, we don't see the Valero offer to acquire its partnership, Valero Energy Partners, as having implications for Phillips 66 Partners. Phillips 66 Partners is a far more diversified and larger partnership, and is already pursuing organic investments on its own without relying completely on drop downs from its parent. While we'd like to see the incentive distribution rights eliminated, and believe they will be at some point, we also think there's much less interest and desire on Phillips 66's part in acquiring its partnership. We think it would be more valuable to let the partnership continue to expand its organic investment efforts, and then those investments would ultimately lead Phillips 66's ownership stake in the partnership increasing in value over time.