Phillips 66 Partners LP (PSXP - Free Report) is well poised to grow on the back of its stable fee-based revenue generating prowess and major growth projects. However, the partnership’s balance sheet weakness is a persistent concern.
Phillips 66 Partners — headquartered in Houston, TX — is a master limited partnership (MLP) that is involved in operating and developing midstream energy infrastructures. It was created by Phillips 66 (PSX - Free Report) , a leading refining player in the global market. The partnership, with a market cap of more than $6.5 billion, has an expected earnings growth rate of 4% for the next five years. It has gained 26.3% year to date compared with 5.8% rise of the industry it belongs to.
Let’s delve deeper to find out why this Zacks Rank #3 (Hold) stock is worth retaining at the moment.
What’s Favoring the Stock?
Phillips 66 Partners 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, and Central, Western and Atlantic areas of the United States. Thus, the partnership’s cash flows are highly stable and predictable as it provides transportation services to third parties and Phillips 66.
From fourth-quarter 2013 to fourth-quarter 2018, Phillips 66 Partners had raised quarterly cash distribution by 30% at a compound annual growth rate. The partnership also raised distribution for the June quarter of 2019, marking the 23rd straight quarter of distribution raise since its initial public offering in 2013. The partnership is likely to continue increasing cash distributions, since it has a solid backlog of organic growth projects, and boosting unitholder value.
Through 2019, Phillips 66 Partners is planning to complete four major organic projects — Bayou Bridge Pipeline (segments I and II), Lake Charles products pipeline, Lake Charles isomerization unit and Gray Oak Pipeline. In 2020, the partnership plans to bring online three more organic projects, namely Sweeny to Pasadena products expansion, South Texas Gateway Terminal and Clemens Caverns expansion. All these projects are expected to enable the partnership to grow further and boost earning capabilities in the coming days.
However, there are a few factors that are impeding the stock’s growth lately.
Compared with only $18 million in long-term debt as of 2014-end, the partnership’s long-term debt load was recorded at $3.3 billion on Jun 30, 2019, reflecting a massive increase over the years. Also, compared with $185 million in cash and cash equivalents as of 2017-end, its cash balance plunged to only $130 million in the last reported quarter. Although the partnership is trying to improve its leverage scenario, surging debt loads and declining cash balance reflect weakness in the balance sheet, which can affect financial flexibility. This, in turn, can affect its growth projects.
Phillips 66 Partners earlier projected 2019 capital spending to be $1.2 billion. However, for financing a portion of the $2.2-billion Gray Oak pipeline project, the partnership has halved its capital budget through 2019 to $601 million. The significant reduction in capital spending may hurt the partnership’s pipeline and terminal throughput volume.
To Sum Up
Despite riding on significant growth prospects, balance sheet weakness is a significant concern for the partnership. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.
Which Way are Estimates Headed?
The Zacks Consensus Estimate for 2019 earnings per unit is $4.42, which has witnessed one upward movement and four downside estimate revisions in the past 60 days. The estimated figure indicates a 10.5% rise year over year. Notably, the partnership missed estimates just once in the trailing four quarters, delivering a positive average earnings surprise of 4%.
Stocks to Consider
Some better-ranked stocks in the energy sector are given below:
NuStar Energy L.P. (NS - Free Report) is one of the largest independent liquids terminal and pipeline operators in the United States. Its third-quarter earnings per unit are expected to surge more than 100% year over year. It has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Pembina Pipeline Corp. (PBA - Free Report) operates as an energy transportation and service provider. Its full-year 2019 earnings per unit are expected to grow more than 15% year over year. The company has a Zacks Rank #2 (Buy).
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