EUR 850.00 For Business Accounts Only

Morningstar | Valero Energy Partners Reports Solid 2Q; Waiting for 2018 Drop-Down

Valero Energy Partners delivered solid second-quarter results, and we plan to maintain our narrow moat rating and $45 fair value estimate. Thanks to the prior acquisitions of the Parkway Pipeline and Port Arthur terminal in November 2017, EBITDA increased to $98 million from $80 million last year. The partnership's results are tracking our expectations. We do assume a $800 million drop-down is completed in the latter stages of the year to set up incremental growth for 2019. The Diamond Pipeline, which moves 200,000 barrels per day of oil between Memphis and Cushing, remains an ideal candidate due to its contracted flows. Valero has a $460 million stake representing 50% of the project. Another potential effort includes refined product pipelines and storage assets in Central Texas, but the projects won't be completed until early 2020, making them less ideal as a drop-down project at the moment.

Valero Energy Partners continues to have ample liquidity to finance a deal, with $750 million available on its credit facility and $100 million in cash. The distribution was increased 4.5% to $0.551 per unit, keeping the partnership on track to reach its 20% distribution growth goal for the year. With master limited partnership investors' preferences shifting, we think Valero Energy Partners should focus more on acquiring drop-downs or making organic investments of its own, eliminating its incentive distribution rights, and perhaps increasing its distribution in the 5%-10% range. With a coverage ratio over 1.4 times and plenty of capital available, this strikes us as a reasonable balance.