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Extracting Value: Separating the Midstream from the Downstream

By Elliott H. Gue on Dec. 11, 2013

The second-best performing initial public offering (IPO) of a master limited partnership (MLP) this year, Phillips 66 Partners LP made its New York Stock Exchange debut on July 22 and has generated a total return of 46 percent for the lucky investors who were able to obtain an allocation.

What sets Phillips 66 Partners apart from the rest of the MLP class of 2013? Refining giant Phillips 66 (NYSE: PSX) owns a 75 percent equity stake and a general-partner interest in the recent spin-off, incentivizing the parent to drive distribution growth via a series of drop-down transactions.

Favorable price differentials on the Gulf Coast should also benefit Phillips 66’s refineries in the region, leading to higher throughput on its midstream systems and creating demand for a number of new infrastructure projects to provide a flexible slate of crude oils and ample storage for refined products.


Source: Phillips 66 Partners LP, Prospectus

Phillips 66 Partners owns three primary assets, all of which connect to its parent’s refining operations:

  • The Clifton Ridge Crude Oil System in Louisiana;
  • The Sweeny to Pasadena Products System in Texas; and
  • The Hartford Connector Products System in Illinois.

These assets generate reliable cash flow from fee-based contracts with Phillips 66 that include minimum volume commitments and inflation-indexed rate adjustments.

Although all these contracts have at least another five years remaining, the importance of these assets to Phillips 66’s operations can’t be understated: The downstream operator wouldn’t be able to run its refineries without this critical infrastructure and has no viable alternative to the MLP’s pipelines.

Against this backdrop, investors would be hard-pressed to imagine a scenario in which Phillips 66 Partners’ distribution would come under threat.

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