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Master Limited Partnerships: Coming Through Slaughter

By Peter Staas on Mar. 27, 2018

Shell Midstream Partners’ dramatic underperformance stands in sharp contrast to Gaslog Partners LP (NYSE: GLOP), another partnership that relies heavily on drop-down transactions to drive cash flow and distribution growth.

This divergenct performance reflects Gaslog Partners’ ability to fund acquisitions by issuing perpetual preferred units, an option that’s not feasible for a drop-down program as large as the one pursued by Shell Midstream Partners.

Among the other drop-down MLPs, Phillips 66 Partners LP (NYSE: PSXP) looks attractive after giving up more than 10 percent of its value this year.

The partnership increased its fourth-quarter payout by 4.95 percent sequentially and 21.5 percent year over year, after a full quarter’s contribution from the $2.4 billion drop-down of a 25 percent interest in the Bakken Pipeline subsidiary and a 100 percent interest in a fuel-grade coke-processing unit that operates under a 15-year contract.

Management asserts that Phillips 66 Partners’ strong balance sheet–leverage stands at 3.2 times operating cash flow—and slate of organic growth projects should enable the MLP to grow its payout by 20 percent this year without issuing significant amounts of equity to support a drop-down transaction.

Projects coming on stream this year include an expansion to the Sand Hills NGL pipeline in which it owns a one-third interest and the Bayou Bridge pipeline extension from Lake Charles to St. James, Louisiana. Phillips 66 Partners’ Sacagawea joint venture in the Bakken Shale also expects to complete a natural-gas pipeline later this year.

Strong distribution coverage and a healthy balance sheet, coupled with Phillips 66’s (NYSE: PSX) extensive petrochemical and refining operations, position Phillips 66 Partners to participate in joint ventures or to buy assets from distressed sellers.

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