Refiners have used MLP spinoffs to turn energy transport and storage infrastructure assets into high growth, income generating securities, explains Tim Plaehn, editor of The Dividend Hunter.
The partnerships are structured to generate a growing cash flow back to the corporate sponsor and investors in the MLP units get to go along for the ride.
Our top speculative idea for the coming year is Tesoro Logistics Partners LP (TLLP), a midstream master limited partnership that was spun off from refiner Tesoro Corporation (TSO).
Growth at Tesoro Logistics Partners comes from two sources. First, parent Tesoro Corp. sells midstream assets to the MLP in pieces, called 'drop downs' in MLP jargon.
Drop downs are sized and priced to allow TLLP to produce a growing EBITDA history, with parallel growth in free cash flow and distributions to unit investors. Second, TLLP itself can develop or acquire additional midstream assets.
Growth projects at both the sponsor and MLP levels will increase future EBITDA amounts.
In December 2014, TLLP acquired privately owned QEP Field Services. The QEP purchase expands TLLP's business into the Rocky Mountains natural gas gathering and processing business.
Tesoro Corp. has agreed to assume the risk of natural gas prices, allowing TLLP to lock in future cash flow growth from the QEP assets.
The 2014 fourth quarter crude oil selloff resulted in a 25% drop in the TLLP unit price. However, the partnership revenues are not crude price dependent and the company will continue to grow its quarterly distribution by an 18% to 20% annualized rate.
Adding this level of growth to the current 5% yield means that investors have a good chance of 30% or better total return from TLLP in 2015.
