This week has not been an auspicious start for BP (LON:BP) Midstream Partners LP (NYSE:BPMP), as its IPO stumbled out of the gate. The spinoff of British energy giant BP PLC ADR (NYSE:BP) priced its IPO at $18 per share according to Reuters, and the stock has failed to even reach that price since debuting on Thursday at the time of this writing. The stock has so far hovered between $16 and $18, which still values the company at nearly $2 billion.
Given problems within the current energy market as well as this poor performance, investors may consider looking elsewhere. But in fact, BP Midstream is a very interesting stock over the extremely long turn. Pipelines are a reliable source of income, and BPMP is a profitable company that can grow if the parent company chooses to place more pipelines under BPMP’s control.
Nevertheless, investors should continue to wait and see BPMP’s fortunes over the next few months instead of just assuming that now is the time to get in on the ground floor. The company has a great deal of problems to contend with, and more time and data is needed to see if they can be addressed.
The Power of Pipelines
Investors need to first understand what BP Midstream is and its relationship with BP. The idea behind BP Midstream is that it controls pipelines and other midstream assets which send crude oil to BP refineries. These assets are aimed at carrying oil to the Whiting Refinery in Indiana, the largest in the Midwest region.
BP Midstream is thus not an independent company, but a master limited partnership of BP itself. BP also controls somewhere between 50 to 60 percent of BPMP’s shares.
So why did BP even create this spinoff company to begin with? The answer is that the smaller BPMP can raise more money and attract investors who are solely interested in BP’s pipelines as opposed to the entire business. Furthermore, BP can slough a portion of its debt onto the subsidiary company.
The emphasis on pipelines is crucial given the current state of the global energy market. Oil prices have continued to remain low and hover around $50 since a high of over $100 in since 2014, and companies have suffered as a result. While BP’s stock has done well over the past 12 months, it is still significantly below its high in 2014 and has more than $50 billion in debt.
But while the energy market as a whole faces problems, pipelines are still a reliable, steady source of income as companies will still need to transport oil quickly and efficiently. Investors should view BPMP not as some hotshot tech company with room for massive expansion, but as a company which can offer a reliable, profitable dividend.
A look at BPMP’s financial numbers further shows this to be the case. BPMP points out in its SEC filing that the company was only formally created in May 2017, and thus the company looked at the value of its assets to create an estimate. It finds that the while revenue declined from 2015 to 2017, likely due to falling oil prices, operating and net income remained very high. For example, BPMP’s assets in the first six months of 2017 had a revenue of $53 million compared to $58 million in the same time period in 2016, but receiving an operating income of nearly $41 million and a net income of $24 million. Numbers like that show just how profitable pipelines can be and has potential than many tech companies in the current climate.
Even the declining growth totals are of no big concern. BPMP only controls a tiny portion of BP’s pipeline network, and the parent company could decide to let BPMP control more pipelines over time. That growth potential is limited as BP will only let BPMP control so much and there is no indication BP will do that. But in the best case scenario, BPMP is a profitable, reliable company which can grow if things break right for them.
Very Long-Term Potential
If BP decides to sell BP Midstream partners a larger portion of the U.S. pipeline network or if energy prices rise again, then BPMP should do well as it will continue to own a large number of assets and remain profitable.
But that remains merely an “if,” and investors cannot just brush aside this IPO’s poor start as well as the health of the current energy market. BPMP is dependent on BP to grow and thrive, and investors should wait and see how BP will be treating its spin-off and whether it will receive additional pipelines and assets. Pass on this IPO for now, but consider buying it later if BP does start distributing pipelines.