Phillips 66 Partners LP could become the next midstream M&A target amid the Dakota Access LLC crude oil pipeline's operational uncertainty and sponsor Phillips 66's hesitation to use the partnership as a drop-down vehicle, some analysts said in response to a recent filing.
In a Feb. 24 SEC filing, Phillips 66 Partners amended language about the refiner's 74% interest in the firm to include the potential for "extraordinary corporate transactions involving the partnership, including, among other things: a merger, reorganization, consolidation or other take-private transaction that could result in the de-listing or de-registration of the common units."
While the language change is not an official proposal, analysts at Mizuho Securities USA LLC said the timing seems tied to a potential shutdown of Dakota Access pipeline, which carries oil from North Dakota to a terminal near Patoka, Ill., as the U.S. Army Corps of Engineers completes a court-ordered environmental impact statement review that could easily extend into 2022.
"We think the amended language is yet another sign that [Phillips 66] is leaning toward a 'take-private' transaction, especially if there is an adverse outcome on DAPL," Mizuho analysts told clients Feb. 25. "We believe the timing might indicate that [Phillips 66] desires to consummate an agreement before any DAPL hearing."
The pipeline began operating in 2017, but an April 9 federal court hearing will determine whether it will be forced to temporarily shutter. Phillips 66 Partners owns a 25% stake in the pipeline, while Energy Transfer LP owns the other 75%.
Height Securities LLC analysts, however, said on Feb. 16 they expect "the ultimate outcome will be favorable to DAPL owners," while analysts at Credit Suisse said Feb. 24 that "status quo" also remains an option for Phillips 66 Partners even if the pipeline is forced to empty out.
Kevin Mitchell — executive vice president and CFO of Phillips 66 and Phillips 66 Partner's general partner — told investors during a Jan. 29 fourth-quarter earnings conference call that in such a scenario, "from a financial standpoint there's really two main levers, and that's growth capital and the distribution. The growth capital has already come down significantly."
Still, Phillips 66 may be interested in buying out its master limited partnership regardless of what happens with Dakota Access, some said. With midstream growth spending anticipated to slow down significantly in 2021 and beyond, Phillips 66 Partners may have outlived its usefulness as the financing vehicle it was created to be. The last asset the refiner dropped down to the partnership was a 50% interest in the Liberty pipeline project in early 2020 before oil prices crashed.
"It no longer serves that purpose," Morningstar's Travis Miller said in an interview. "I think [a roll-up] makes sense."
The Mizuho analysts agreed that the MLP's "role within the [Phillips 66] corporate structure has arguably lost its raison d'etre."
Fellow refiners CVR Energy Inc. and Valero Energy Corp. have both rolled up their pipeline partnerships in recent years.
