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Morningstar | Valero Energy Partners Reports Solid 3Q Results; Waits for Valero Merger to Close

Valero Energy Partners reported solid third-quarter results that met our expectations. We plan to maintain our $42.25 fair value estimate, which reflects Valero's cash offer for the units, and our narrow moat rating. Results mainly benefited from drop-downs of Port Arthur terminal and the Parkway pipeline last year, as revenue increased 28% to $141 million. Similarly, EBITDA improved 32% over the same time frame to $104 million, which was helped by higher volumes at Valero Energy Partners' other pipelines, and a higher average revenue per barrel, thanks to the Parkway pipeline. The partnership's financial health remains strong with minimal capital expenditures, nearly $900 million in liquidity in cash and a revolving credit facility, and a distribution ratio of 1.6 times.

We see the merger transaction announced last week as a reasonable one for unitholders. Valero management has mentioned on a few occasions that essentially, Valero Energy Partners units were not trading at a valuation that it deemed valuable enough to take units as currency in a drop-down transaction. In short, Valero Energy Partners was not an attractive financing vehicle for Valero Energy, which is a major reason why the limited partnership exists in the first place. Negative investor sentiment around master limited partnerships in general, and the existence of both incentive distribution rights and a distribution growth target that seemed out of touch with investors' desires toward eliminating IDRs and a focus on self-funding, helped seal the partnership's fate, in our view.

We don't see this transaction as having implications for the other refinery MLPs we cover that include Phillips 66 Partners, MPLX, and Andeavor Logistics. These entities are much larger and more diversified with a more active sponsor from a drop-down perspective. Though, we do expect Andeavor Logistics to eventually be acquired by MPLX because of the merger of its two parents, versus being acquired because of its inability to serve as a suitable capital-raising vehicle for its parent.