Why Buying Phillips 66 Partners Positions You For Big Gains

Phillips 66 Partners LP (NYSE:PSX) is a master limited partnership involved in operating and developing midstream energy infrastructures. The midstream assets that are being operated by the partnership include terminals and pipelines for transporting oil, natural gas liquids, and refined petroleum products. Notably, the partnership is a subsidiary of Phillips 66 (NYSE:PSX) .

The stock has gained 7.6% in the past year against a 20.5% decline of the industry it belongs to. Notably, it should be on investors’ portfolio as the partnership has more room for growth. In fact, two analysts have raised 2020 estimates for Phillips 66 Partners in the past 60 days, while none have downwardly revised the same.

What Makes Phillips 66 Partners a Compelling Buy?

Revenue Stability

It is least exposed to fluctuations in commodity prices since it generates stable fee-based revenues under long-term contracts from diverse midstream energy assets across the Gulf Coast, Central, Western and Atlantic areas of the United States. Thus, by providing transportation services to third parties and Phillips 66, the partnership’s cash flows are highly stable and predictable.

Lucrative Distribution Yield

The partnership raised distribution for the December quarter of 2019 to 87.5 cents, marking the 25th straight quarter of distribution hikes since its initial public offering in 2013. It currently has a distribution yield of 6.5%, higher than 5.4% of the energy sector. The partnership is likely to continue increasing cash distributions since it has a solid backlog of organic growth projects.

Growth Projects to Boost Profits

Phillips 66 Partners has various ongoing projects that are backed by long-term volume commitments and are expected to deliver significant midstream returns.

The Gray Oak pipeline is operating in sync with expectations and is anticipated to reach full service in second-quarter 2020. It has already commenced initial operations in the 900,000-barrel per day pipeline. It will transport crude oil from the Permian and Eagle Ford to Texas Gulf Coast destinations. Phillips 66 Partners has a 42.25% ownership in the pipeline.

The Sweeny to Pasadena capacity expansion project will add 80,000 BPD of pipeline capacity, providing additional naphtha offtake from the Sweeny fractionators. In addition, product storage capacity will increase by 300,000 barrels at the Pasadena Terminal. The project is expected to start by second-quarter 2020.

The South Texas Gateway Terminal, in which Phillips 66 Partners owns a 25% interest, is expected to be completed by third-quarter 2020. The marine export terminal will have two deep-water docks, with storage capacity of 8.5 million barrels and up to 800,000 BPD of throughput capacity.

Notably, the partnership has earmarked total capex of $867 million for 2020, which includes $734 million for growth projects and $133 million of maintenance capital. It expects to exit 2020 with EBITDA run rate of $1.5 billion.

Last Thoughts

The partnership’s debt load surged from $430 million in 2014-end to $3.5 billion as of Dec 31, 2019. This rising debt load can restrict its financial flexibility. Still, it is also to be noted that it has no debt maturity before 2024, giving management ample time to recover balance sheet strength and focus on project executions. Moreover, it has $749 million available under the revolving credit facility, which will likely support the partnership’s growth initiatives.

Zacks Rank & Other Stocks to Consider

Phillips 66 Partners currently has a Zacks Rank #2 (Buy). Other top-ranked stocks in the energy sector include Superior Energy Services, Inc. (NYSE:SPN) and Hess Corporation (NYSE:HES) , each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Superior Energy’s bottom line for first-quarter 2020 is expected to rise 42.9% year over year.

Hess’ bottom line for 2020 is expected to rise 91.6% year over year.

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