EUR 850.00 For Business Accounts Only

Morningstar | PSXP Updated Forecasts and Estimates from 13 Mar 2019

Of the refinery master limited partnerships we cover, we think Phillips 66 Partners’ asset footprint is the most attractive because of its more extensive ownership of oil and refined product pipelines, which are the highest-quality midstream assets. Further, the partnership’s drop-down portfolio is more heavily weighted than peers toward the Gulf Coast, where we expect exports of oil, gas, and natural gas liquids over the next few years to keep asset utilization levels high. We like the fact that parent Phillips 66 has aggressively dropped down assets to keep Phillips 66 Partners on a steep distribution growth trajectory, and we expect EBITDA to top $1.3 billion in 2019 versus under $150 million in 2014. The quicker pace of drop-downs has allowed the firm more room than refinery MLP peers to pursue attractive organic investment opportunities in its existing assets, which can be completed at lower multiples than drop-downs and therefore generate more attractive returns, in our view. The most important recent opportunity has been the Gray Oak pipeline, as it comes online in 2019 with 900,000 barrels per day of capacity and is expandable up to 1 million barrels per day. The most important remaining assets visible in Phillips 66’s drop-down portfolio are the Freeport LPG export and related fractionation assets, as the system could generate potential EBITDA of around $500 million by management estimates but is generating less than half that amount currently due to weak differentials between the U.S. and European propane prices. This system is likely one of the most important components of the $700 million-$900 million EBITDA left available for drop-downs at Phillips 66. Adding the system and related assets would give Phillips 66 Partners direct exposure to NGL exports, further differentiating it from refinery MLP peers. We would also expect a long-term fee-based contract to be signed with Phillips 66 for the LPG assets, effectively eliminating the current commodity price exposure that is affecting the facilities.