An Update on Valero Energy Partners LP
In light of the recent volatility in the MLP sector, I am not going to report on a new MLP this week. It’s crazy to see unit prices make 10% swings, both up and down, in a single day’s market session. Consider the focus of this discussion, Valero Energy Partners LP (NYSE:VLP). On September 23, the company announced a very attractive asset purchase from its sponsor, Valero Energy Corp. (NYSE:VLO). From the September 22 closing price until the close on Monday, September 29, the VLP unit price dropped by 13.6%. The good news did nothing to stop VLP from joining the MLP rout. Then today, September 30, the VLP unit price gained 15% in a single day to get back to where it was a week earlier. What do you do with that type of market action?
Let me go over the asset acquisition by Valero Energy Partners. The September 23 press release announced the acquisition of the Corpus Christi Terminal Services Business from a subsidiary of Valero Energy for total consideration of $465 million. The transaction is expected to close effective October 1, 2015. The purchase was financed with $395 million in borrowings under a subordinated loan agreement with Valero, and the issuance of approximately $70 million additional common units and general partner units to Valero subsidiaries. The deal includes a 10-year terminaling agreement with a subsidiary of Valero.
Now the meat of the deal. The new assets will generate $50 million of annual EBITDA for Valero Energy Partners. When I sent out the detailed review of VLP in July, the report showed an annual EBITDA run rate of $95 million, based on the 2014 fourth quarter earnings report. 2015 Q2 EBITDA was $42.7 million. This purchase represents at least a 25% increase in EBITDA.
The asset purchase from Valero is called a drop down in MLP jargon. Valero Energy Partners obtains the assets with very low-cost debt and very little equity dilution. As a result, a large portion of the EBITDA (as much as 90%) will drop to distributable cash flow. According to the press release, VLP has now completed $1.15 billion in drop down transactions this year, which should more than double the EBITDA run rate as 2015 closes out. Management has also repeated their guidance of at least 25% annual distribution growth. Expect a 5% to 7% increase in the distribution rate with a mid-month announcement.
I highlight this transaction to show the power of the growth potential for an MLP with an asset-rich sponsor. Valero Energy has about $1 billion in EBITDA from midstream assets that can be transferred to VLP over time. Since VLO as the general partner and largest unit holder reaps the majority of the benefits from VLP’s distribution growth, there is no reason to expect the growth rate to slow over the next several years. As individual investors and VLP unit owners, we just go along for the growth ride.
Position: Long VLP