Phillips 66 Partners: Hamstrung By The IDRs

10/19/18

Summary

Partnership has raised the distribution 5.3% twice in 2018.

The forward annual payout is now $3.008/unit, which equates to a current yield of 5.9%.

With an investment-grade GP, a vast inventory of drop-down-ready assets, and organic growth projects, the future should be bright.

But with rising interest rates and an out-of-favor MLP business model, capital appreciation potential looks muted.

When will PSX do as MPC did and modify (or better yet, abolish) the MLP's IDR arrangement?

Like nearly all names in the sector, Phillips 66's (PSX) MLP - Phillips 66 Partners (PSXP) - has been a severe underperformer as compared to the broad S&P 500 and even the energy sector itself. MLPs have been out of favor for years now as investors in several high-profile names have gotten burned, and Wall Street analysts continue to question a business model in which many limited partners ("LPs") have to finance 100% of organic growth projects and dropdowns only to receive less than 100% of the resulting distributable cash flow. That's because LPs typically much pay incentive distribution rights ("IDRs") up to the general partners ("GPs"). At the current IDR 50/50 "high splits," PSXP is certainly no exception. That's one reason (among others) that PSXP is still down significantly from its all-time high of almost $79/unit almost three years ago:

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