Valero Energy Partners LP (NYSE:VLP)
- IPO Date: December 11, 2013
- Market Cap: $3.05 billion
- Annual adjusted EBITDA: $95 million (Q4 2014 annualized)
- GP/Sponsor: Valero Energy Corp. (NYSE:VLO)
Distribution Facts
- Current yield: 2.2%
- TTM distribution growth: 30.6%
- Forecast annual distribution growth rate: 25%
Business Operations
Valero Energy Partners owns and operates energy midstream assets that support Valero Energy’s refinery operations. These assets include crude and refined product pipelines and crude oil and products terminals. 2014 revenue was 56% from pipelines and 44% from terminal services. All revenue sources are on 10-year contracts with Valero Energy with 5-year renewal terms. About 85% of projected fee revenue is guaranteed with minimum volume commitments.
The VLP assets and operations were part of Valero Energy until the December 2013 IPO of the MLP. At that time VLP received assets that would generate about $80 million of annual EBITDA. Valero Energy Partners will grow its business through periodic purchases of additional midstream assets from Valero Energy. As an independent company, Valero Energy Partners could also make third party acquisitions.
Growth Prospects
Valero Energy Partners operates under what is becoming the classic business model for high growth rate MLPs. As the general partner and sponsor, Valero Energy makes periodic sales of assets, called drop downs in MLP jargon, to ensure that the MLPs revenues and free cash flow grows at a rate that allows the MLP to hit its targeted distribution growth rate. As of the 2014 fourth quarter, VLP had an annual EBITDA run rate $95 million. With a couple of drop downs in 2015, the EBITDA run rate will be $200 million by the fourth quarter of this year. This rate of EBITDA growth will allow VLP to increase its distribution rate by at least 20%. Distributions are bumped up every quarter.
At the time of the VLP IPO, Valero Energy retained midstream assets capable of generating $800 million of annual EBITDA. Since the launch of VLP, the companies have completed two drop downs for a total of $90 million in annual EBITDA. However, VLO continues to invest capital in logistics projects, growing the asset base available to transfer to Valero Energy Partners. Currently Valero reports an inventory of $814 million of annual EBITDA assets available for drop down to VLP.
As the general partner and owner of about 70% of the VLP limited partner units, VLO is the primary beneficiary of distribution growth from the MLP. This means that VLO is highly motivated to continue to monetize midstream assets through the MLP drop down process. The VLO/VLP relationship and VLO’s portfolio of midstream assets almost ensures that VLP will produce 20% to 25% distribution growth for at least the next 3 to 5 years.
The primary risk for investors is the potential for the market to decide that VLO should carry a yield higher than the current 2% rate. To get a higher yield, the unit price must fall, at least until the distribution growth catches up with the unit price decline. While distribution growth from VLP will be very linear, the market does not work that way, so a plan to accumulate units on energy sector sell-offs will lower your average cost and increase the total return over time. The goal with ownership of VLP units is to generate a high total return of unit price gains fueled by distribution growth and a small level of income from the distributions.
Recommendation: Buy and Accumulate VLP. VLP is in the Total Return MLP portfolio for Tax-Smart Income Hunter.
Editor Position: Long VLP
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