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Andeavor Logistics merger could put it on inside track to better credit

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Andeavor Logistics merger could put it on inside track to better credit

The move to acquire Western Refining Logistics LP would expand Andeavor Logistics LP's Permian Basin position and rationalize the finances of the group of companies formerly known as Tesoro, executives and analysts said, as the companies seek more investment-grade credit ratings.

"We plan to spend at least $500 million to $600 million per year on organic growth and acquisitions," Andeavor Logistics CEO and President Gregory Goff said during an Aug. 14 conference call. "We already have an inventory of $800 million to $900 million of identified organic growth projects for 2018 and 2019 throughout our expanded network. ... We believe we have substantially more organic growth in the Permian in the near term and beyond with numerous additional projects in various stages of development."

Andeavor Logistics struck a unit-for-unit merger deal worth about $1.8 billion with Western Refining Logistics after parent companies Andeavor formerly Tesoro Corp. and Western Refining Inc. completed their own merger in June. Andeavor also announced that it initiated a financial repositioning of Andeavor Logistics through a $3.8 billion buy-in of the partnership's incentive distribution rights.

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"We think the transactions make a lot of sense, as they broaden the drop-down portfolio to $750 million of EBITDA earnings from around $500 million, substantially lower Andeavor Logistics' cost of capital and reduce complexity by eliminating the second master limited partnership," Morningstar Inc. analysts said in an Aug. 14 note to clients about the MLP merger. "We also see opportunities to boost distributions via greater exposure to the Permian Basin."

According to Goff, Andeavor Logistics is aiming for at least 6% annual distribution growth and a 1.1x distribution coverage ratio. He added that any future M&A transactions will focus on smaller-scale opportunities that will be "the most complementary to our existing infrastructure."

While the partnership has an investment-grade BBB- rating from Fitch Ratings, S&P Global Ratings and Moody's rate it as junk. Fitch on Aug. 14 affirmed Andeavor Logistics' outlook as stable due to secure cash flows, growth opportunities and sufficient liquidity, and CFO Steven Sterin said he is "optimistic" about upgrades from the other two agencies.

Still, some industry observers were not convinced that the acquisition of Western Refining Logistics would enable Andeavor Logistics to reach its stated financial goals.

"While we look favorably on the cleaner structure, [parent company] support, & articulated growth strategy, we continue to see relatively little upside to [Andeavor Logistics]; we expect [additional] acquisitions may be needed" for Andeavor Logistics to attain its EBITDA target for 2018, Jefferies LLC analysts said in an Aug. 14 note.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.