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What Drove Andeavor Logistics’ Strong Earnings Growth in 1Q18?

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Acquisitions drove ANDX’s YoY earnings growth

Andeavor Logistics (ANDX), a midstream MLP[1. Master limited partnership] subsidiary of Andeavor (ANDV), reported adjusted EBITDA[2. Earnings before interest, tax, depreciation, and amortization] of $273 million in 1Q18, compared to $212 million in 1Q17, representing a YoY[3. Year-over-year] rise of 28.8%. Moreover, the partnership met its 1Q18 EBITDA estimate of $274.2 million.

The YoY jump in the partnership’s earnings was mainly due to the acquisition of North Dakota Gathering and Processing assets, the acquisition of Western Refining Logistics, and a drop-down of Anacortes Logistics assets from Andeavor in 2017. The partnership expects similar dropdowns this year. It expects to invest $400 million to $500 million in dropdowns in 2018. This plan might continue to drive ANDX’s strong EBITDA growth in 2018

The partnership expects adjusted EBITDA to lie between $1.2 billion and $1.3 billion in 2018. This range, at the mid-point, represents 28% YoY EBITDA growth. This growth is expected to be driven by drop-downs and other organic expansion opportunities.

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1Q18 distribution

Andeavor Logistics declared a distribution per unit of $1.015 for the first quarter of 2018, which represents a QoQ[4. Quarter-over-quarter] and YoY increase of 1.5% and 8.0%, respectively. However, the partnership’s low distribution coverage (0.97x in 1Q18) remains a slight concern. ANDX expects to grow its distribution by 6% in 2018 while maintaining a distribution coverage of 1.1x. Based on its current distribution, ANDX is trading at an attractive distribution yield of 9.0%.

Analysts’ recommendations

ANDX has seen four rating updates since the start of this year, including three rating downgrades following the announcement of a merger between Marathon Petroleum (MPC) and Andeavor (ANDV).

Now 56.3% of analysts surveyed by Reuters rate Andeavor Logistics a “hold,” and the remaining 43.7% rate it a “buy.” ANDX’s average target price of $54.2 implies ~20% upside potential from the current price.

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