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Phillips 66 Partners Remains Bullish on Major Expansion Projects

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PSXP missed EBITDA estimate

Phillips 66 Partners (PSXP), the midstream MLP formed by one of US largest refiners, Phillips 66 (PSX), posted strong earnings growth in the second quarter.

PSXP’s adjusted EBITDA increased to $244 million in the second quarter from $170 million in the second quarter of 2017, a YoY (year-over-year) rise of 43.5%. However, PSXP missed its second-quarter EBITDA estimate by 3.3%.

The partnership’s strong YoY earnings growth was driven by strong volumes growth at its wholly owned pipelines and higher equity earnings from joint ventures, including the Sand Hills and Bakken Pipelines.

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Strong distribution coverage

PSXP maintained strong distribution coverage of 1.38x during the quarter despite a quarterly distribution increase. This strong coverage was the result of strong distributable cash flow growth. The partnership declared a distribution of $0.752 per unit for the second quarter, a 5.3% increase compared to the previous quarter. The partnership expects to use the extra cash to fund its huge capital spending plan.

Optimistic on growth projects

Phillips 66 Partners remains optimistic about its organic expansion despite recent trade war tensions. The partnership recently announced the completion of open season for the Gray Oak Pipeline system. The pipeline system will have an initial capacity of 800,000 bpd (barrels per day) and be expandable up to 1 million bpd. According to the partnership’s second-quarter earnings release, “Gray Oak will provide crude oil transportation from the Permian and Eagle Ford to destinations in Corpus Christi and Sweeny/Freeport, including the Phillips 66 Sweeny Refinery.” The project is expected to come online in late 2019.

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The partnership’s other major expansion projects include the expansion of NGLs (natural gas liquids) fractionation capacity at the Sweeny Hub, the expansion of storage capacity at Clemens Caverns, and the extensions of Energy Transfer Partners’ (ETP) Bayou Bridge Pipeline and DCP Midstream’s (DCP) Sand Hills NGL Pipeline. PSXP is a joint venture partner in the Gray Oak Pipeline system, the Bayou Bridge Pipeline, and the Sand Hills NGL Pipeline.

Wall Street analysts expect 40.9%, 14.2%, and 17.1% EBITDA rises for the partnership in the next three years. PSXP is currently trading at a forward EV-to-EBITDA multiple of 7.6x, below its historical average of 14.1x.

Analysts’ recommendations

A total of 73.3% of analysts have rated PSXP as a “buy,” while the remaining 26.7% have rated it as a “hold” as of August 10. Deutsche Bank last initiated coverage on PSXP with a “hold” rating. PSXP’s average target price of $57.5 implies ~8% upside potential from its current price level.

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