Phillips 66 Partners (PSXP) is in the midst of an ambitious growth plan. The company intends to increase its EBITDA (earnings before interest, taxes, depreciation, and amortization) up to an annual run rate of $1.1 billion by the end of next year, which will support its ability to deliver 30% compound annual distribution growth from the end of 2013 through the end of next year. While the company has already made tremendous progress on that ambitious growth plan, it still has a long way to grow given its current EBITDA run rate of $625 million. That gap between its earnings and goal suggest that the company will likely need to complete several drop-down transactions with Phillips 66 (PSX -0.66%), which will keep its parent busy over the next year.
The steady climb
Phillips 66 and Phillips 66 Partners have already worked together on several drop-down transactions over the past few years. The deal flow started in early 2014 when Phillips 66 Partners made its first acquisition since going public, buying the Gold Line Products System from its parent for $700 million. One of the draws of the transaction was that these assets would supply the company with $65 million to $70 million of annual EBITDA.
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The transaction stream continued in early 2015 when Phillips 66 sold interests in three pipelines to its MLP for around $1 billion, handing it $115 million of annual EBITDA. Meanwhile, in 2016 the companies completed several deals, including the largest in Phillips 66 Partners' history. The company paid $1.3 billion in a transaction that included 30 assets, which generate $150 million of annual EBITDA.
In addition, Phillips 66 Partners has been working on several other strategic initiatives to grow earnings without the direct support of its parent. For example, last year it formed a joint venture with Plains All American Pipeline (PAA 1.11%), investing $50 million for a stake in a storage facility and pipeline, which the partners are in the process of expanding. The company is also part of a joint venture with Energy Transfer Partners (ETP) and Sunoco Logistics Partners (NYSE: SXL) to construct the Bayou Bridge Pipeline. The first phase of that project entered service last year, and the second phase should start flowing later this year.
More work to do
While Phillips 66 Partners' expansion projects should help supply it with some incremental EBITDA over the next two years, the company will need a lot more to achieve its 2018 EBITDA target. More than likely the bulk of that EBITDA will come from Phillips 66, since it still has an extensive portfolio of midstream assets that it can sell down to its MLP.
One potentially significant drop-down opportunity is Phillips 66's 25% stake in the nearly complete Dakota Access Pipeline and Energy Transfer Crude Oil Pipeline. Phillips 66 and its partners Energy Transfer Partners and Sunoco Logistics Partners spent more than $4.8 billion on the project, implying that Phillips 66 invested $1.2 billion in the effort. However, due to the value created by the project, Energy Transfer Partners and Sunoco Logistics Partners were recently able to monetize a 36.75% stake in the project for $2 billion. That price implies a 13% premium to the project's capital-expenditures cost, suggesting Phillips 66's stake could be worth as much as $1.4 billion.
Another possible dropdown to keep an eye on is Phillips 66's recently completed Freeport LPG Export Terminal. That project was part of a $3 billion midstream investment by the company that also included the Sweeny Fractionator, which it sold along with other assets to Phillips 66 Partners last year for more than $1 billion. Finally, Phillips 66 is putting the finishing touches on its Beaumont Terminal expansion, which it could then drop down to its MLP. Needless to say, the company certainly has the asset base to get Phillips 66 Partners to its goal.
Investor takeaway
Phillips 66 Partners is only about halfway to its ambitious target of growing EBITDA up to an annualized rate of $1.1 billion by the end of next year. That means the company needs to complete several more deals in the near future to remain on pace, suggesting that this could be a busy year for its parent company. That shouldn't be a problem considering that the refining giant is on the cusp of completing several growth projects, which gives it plenty of attractive options to drop down to its MLP.
