When Phillips 66 (NYSE: PSX ) spun off its midstream assets into a master limited partnership, the market was thrilled. The spin off, PSXP, had the third-biggest MLP IPO pop in history as investors flocked to the idea of a mature business generating stable revenue. Based on previous announcements, there is potential that at least three more refiners will attempt a similar move between now and the end of next year.
With that in mind, today we're examining a few refining midstream spin-offs that have been on the Street for a bit, to see if there really is long term value for investors.
The upside to spin
Before we get into the numbers, let's address the logical upside to midstream spin-offs from an investing perspective. First and foremost, these are mature businesses. While the master limited partnership business structure may be new to these companies, running an oil and refined products logistics operation is not. In most cases, management has already proved itself, and that is comforting.
The second upside is a clear plan for growth. Many of the parent company refiners start up their MLPs with midstream assets that don't constitute their entire logistics footprint. This allows for drop-downs, or sales from the parent to the MLP, which grow the footprint and, accordingly, the distributions. Parent companies own the general partner stake and incentive distribution rights in the MLPs, which encourages them to continue to grow the MLPs' asset bases. Generally, the more transparent the growth plan, the more favorably the market reacts to the MLP over time.
Existing spin offs
Outside of PSXP, there are four major midstream MLPs borne of refiners. As of this writing, only two of them are outperforming the 18.52% year-to-date total return of the S&P 500:
| MPLX (NYSE: MPLX ) | 3.30% | 16.7% |
| Tesoro Logistics | 3.80% | 28.0% |
| Holly Energy Partners (NYSE: HEP ) | 5.30% | 14.4% |
| Sunoco Logistics (NYSE: SXL ) | 3.70% | 36.8% |
Source: Yahoo! Finance, Ycharts .
MPLX and Holly Energy Partners lag the market slightly, while Tesoro Logistics and Sunoco Logistics are trouncing it.
As the year-to-date performances vary, so do the post-IPO performances of these MLPs:
| MPLX | 2012 | 29.2% |
| Tesoro Logistics | 2011 | 133.3% |
| Holly Energy Partners | 2004 | 194.1% |
| Sunoco Logistics | 2002 | 796.5% |
Source: Yahoo! Finance, Ycharts.
Clearly, MPLX is at a relative disadvantage given its brief publicly traded life, but Sunoco Logistics is head and shoulders above the rest of the crowd. The best explanation for its outperformance can be found in our next table, which shows the distribution growth over the lifetime of the MLP:
| MPLX | 61.1% |
| Tesoro Logistics | 108.3% |
| Holly Energy Partners | 123.0% |
| Sunoco Logistics | 592.3% |
Source: Ycharts.
Despite having a seven-year head start, Holly Energy Partners has a similar lifetime performance record as Tesoro Logistics, likely due to very similar numbers for lifetime distribution growth. Clearly, when analysts and management go on and on about distribution growth, it's for a reason: It is the No. 1 driver of MLP performance, and this group reflects that.
It's important to note one other specific fact about the group above regarding the success of Sunoco Logistics: Its parent company, Sunoco, exited the refining business altogether in 2011. Energy Transfer Partners (NYSE: ETP ) bought out what was left of the company last year, picking up 32% of Sunoco Logistics' limited partner units, a 2% general partner stake, and all of its incentive distribution rights along the way. Through the first six months of the year, Sunoco Logistics handed over $94 million to Energy Transfer in distributions.
The lesson is that a well-built midstream network can provide value that lasts, even if the parent company doesn't.
Bottom line
Distribution growth is the No. 1 performance driver for any MLP. It's important to keep this tenet in mind as more MLPs hit the market. If an MLP is able to grow its distribution, then investors win twice when the share price appreciates right along with it.
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