What Drove Phillips 66 Partners’ Strong Earnings Growth in 3Q17
Earnings in 3Q17
Phillips 66 Partners (PSXP), the midstream MLP formed by Phillips 66 (PSX), continued to post strong earnings growth in 3Q17. PSXP’s 3Q17 adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) rose 51.4% to $168 million in 3Q17 from $111 million in 3Q16. However, PSXP still missed its 3Q17 EBITDA estimate by a marginal 0.6%.
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The partnership’s strong earnings growth was driven by its strong crude oil throughput volumes and “improved equity earnings from the Bayou Bridge Pipeline joint venture,” as noted in its 3Q17 earnings release. PSXP owns a 40% stake in the joint venture. The growth was slightly offset by the impact of hurricanes on the partnership’s operations.
The partnership recently completed the dropdown of Phillips 66’s 25% stake in the Bakken Pipeline, which includes the controversial Dakota Access Pipeline. Moreover, PSXP has acquired a coke processing unit from its sponsor.
Distribution in 3Q17
PSXP declared a distribution of $0.65 per unit in 3Q17, which represents a 5.1% rise from 2Q17 and a 21.7% rise from 3Q16. Despite its industry-leading distribution growth, PSXP continued to cover its distribution in the third quarter.
Goldman Sachs upgraded PSXP to “neutral” from “sell” last month. Overall, the partnership has seen three rating updates in 2017—all upgrades. Of the analysts covering PSXP, 78.6% recommend “buy,” while the remaining 21.4% recommend “hold.” The partnership is currently trading below the low range ($51) of analysts’ target price. PSXP’s average target price of $60.30 implies a ~26% potential upside based on its current price.