It’s no secret that master limited partnerships are hot these days. Investor interest in MLPs has never been higher, and firms continue to spin off various assets into this corporate structure. No wonder, then, that sector stalwart Valero (VLO) plans its own offering, in the form of a Valero Energy Partners IPO.
There’s plenty of reasons to be giddy on the MLP sector. By placing pipeline, storage and terminal assets into this partnership, the sponsoring firms can avoid taxes and receive generous distribution payments. For investors, high, tax-deferred dividends await.
The biggest issuer of new MLP subsidiaries hasn’t been traditional midstream pipelines, but refiners. Sensing a tougher regulatory environment going forward, many of the largest refiners have recently spun off “cracker” assets and chemical plants, as well as pipelines that feed these facilities into MLPs. Almost all have been warmly welcomed by investors.
Valero’s recently proposed MLP — Valero Energy Partners, LP — could be the biggest of them all.
Valero Energy Partners IPO Could Raise $345M
Valero, the country’s largest independent refiner, is ready to follow in the lead of rivals like HollyFrontier (HFC) and Tesoro (TSO) by spinning off a MLP subsidiary. Dubbed Valero Energy Partners, LP — with the proposed ticker “VLP” — the new firm will initially own pipelines and terminal systems in America’s Gulf Coast and Mid-Continent regions. Those midstream systems support two Valero refineries in Texas and one in Tennessee.
VLP was formed back in July by the refinery operator and makes money by charging tariffs/fees for transporting petroleum products to and from Valero’s various facilities. Its refiner parent will account for all of the MLP’s revenue, and Valero Logistics will sign 10-year agreements for fee pricing once the IPO launches.
While Valero hasn’t actually set an IPO date — just vaguely pointing toward early next year — or given an actual share count, the firm estimates it’ll raise about $345 million with the offering. VLO hopes to raise some money for new acquisitions for the MLP as well as pay down revolving credit lines, which can then be used for expansion.
Why Investors Should Expect Big Things
Despite the fact that the Valero Energy Partners IPO filing was a bit vague on the details, MLP investors should get excited … for several reasons.
First, like many other recent MLP IPOs, Valero Energy Partners will benefit greatly from the “drop-down” relationship with its parent. General partners often pass along prime assets into their MLPs after they acquire new pipelines or gathering facilities. These asset sales are then priced to guarantee cash flow accretion for the MLPs, which allows the partnership to raise distributions more rapidly.
That’s a big win for investors in both MLP and general partner.
Valero already has some serious midstream assets under its wing. This includes more than $600 million worth of pipelines, gathering systems, terminals, docks and rail facilities that feed its 16 refineries, as well as the nearly 9,000 tank rail cars it owns to carry cheap crude oil from regions like the Bakken shale.
Analysts also estimate that Valero will be able to contribute its 10 ethanol plants, its wind farm and facilities related to its Diamond Green Diesel joint venture with Darling International (DAR). This also doesn’t include anything else it picks up with the IPO proceeds.
Overall, Valero Energy Partners looks like it’s setting itself up for growth down the line.
Of course, investors might not even need that growth “down the line,” if history is any indication. The here and now might do just fine for early shareholders.
The Valero Energy Partners IPO could surge when it launches, just like some of its predecessors. Phillips 66 Partners (PSXP) improved 30% the day of its offering — the third-biggest first-day jump for an MLP IPO. Meanwhile, Marathon Petroleum (MPC) spinoff MPLX (MPLX) closed 23% higher on its first day of trading. Both PSXP and MPLX have gone on to trounce the S&P 500 since they came public.
Even smaller refining MLP Western Refining Logistics (WNRL) managed a 10% pop on its first day.
With Valero being a “name brand” and top energy firm, VLP should pop quite nicely in the weeks after the Valero Energy Partners IPO. That will certainly benefit early investors in VLP, even before the potential high distributions kick in. After all, Valero is a stable business that generates stable cash flows for investors.
Valero’s proposed MLP spinoff could be one of the best bets to ring in the New Year once its IPO launches and VLP starts trading.
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As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.