Tremendous EDITDA and Distribution Growth Potential with Expansion of Strategically Located Assets
Oiltanking Partners LP (OILT) is a Delaware limited partnership that was formed by sponsor company Oiltanking Holding Americas, Inc., on March 14, 2011, to independently own and operate terminal, storage and transportation facilities for crude oil, refined petroleum products and liquefied petroleum gas. Oiltanking has two primary assets – wholly owned subsidiaries Oiltanking Houston LP and Oiltanking Beaumont Partners LP – which own and operate storage and terminal assets along the U.S. Gulf Coast on the Houston Ship Channel and in Beaumont, Texas.
The company is actively investing in capacity expansion and has excellent long-term growth prospects that tie into a strong energy environment in the U.S.
Steady Distribution Growth Backed by Stable, Growing Cash Flow
Oiltanking has increased distributions every quarter since it went public. For its quarter ended 3/31/2014, Oiltanking Partners (“Oiltanking”) plans to pay $0.495 per unit ($1.98 per unit annualized) on May 14, 2014 to unitholders on record May 2, 2014. This is the company’s 10th consecutive quarterly increase and is 22% above the $0.405 distribution for Q1 2013. Distributable cash flow provided a comfortable coverage of 1.7x the amount needed to fund common and subordinated distributions and IDRs.
At $94.36 (closing price on 5/16/2013), shares offer a distribution yield of 2.10%, a rich price-to-earnings ratio of 61x and a price-to-book ratio of 8.25x. Oiltanking has a market capitalization of $3.9 billion. Shares are near their 52-week high of $96.12 and currently appear to fully reflect near-term upside. Hence, options may be a prudent way to buttress positions for income and near-term downside protection. That said, the company’s future prospects are very bright, with significant growth opportunities that Oiltanking is capitalizing on.
Steady Revenue Growth despite Crude Price Volatility
Oiltanking has delivered steady revenue growth regardless of market volatility. Revenues have grown at a 14.4% compounded annual rate from $79.1 million in 2008 to $184.9 million in 2013, with steady increases in terminal throughput despite wild fluctuations in the price of crude oil prices over the same period.
Revenue growth was tied to storage capacity expansion and accompanied by a steady 21.5% CAGR in EBITDA over the past five years, which in turn translates into a steady rise in distributable cash.
Multiple Growth Avenues
Oiltanking’s has four avenues for growth and expansion – organic growth, built-in contracted growth, potential drop-downs and acquisitions.
Organic Growth: With North America’s changing energy landscape, logistical needs for refined product and LPG export growth have created opportunities for product hub development and waterborne infrastructure and capabilities. Oiltanking currently has $400 million of identified potential expansion projects in various stages of development and evaluation. Its Appelt I, II and III projects plan to increase crude storage capacity, with completion of Appelt III scheduled for late 2015.
Crossroads Pipeline Projects: Oiltanking recently announced 24-inch and 36-inch pipelines connecting the Houston terminal and Crossroads Junction that provide unprecedented access for customers.
The 24-inch pipeline will connect Oiltanking Houston to Crossroads, a transfer point to Exxon’s Baytown facility and the origination point of Shell’s HoHo pipeline. The eastbound HoHo pipeline allows customers looking to move product to refining and petrochemical facilities centers in East Texas and Louisiana with greater flexibility and opportunity to diversify their marketing. This project will be completed by Q4 2014.
The 36-inch pipeline originating at Crossroads will connect directly with the TransCanada Keystone XL pipeline and tie into Oiltanking Houston, providing strategic connection for new and existing customers to transport crude oil, with expected completion around
Next Wave of Expansion: In addition, the company is in the final evaluation stages of its next wave of organic products. These include: 1) the addition of 5 to 6 MMBbls of additional storage capacity near their Houston terminal; 2) additional storage near their Beaumont facility on strong customer demand for an Oiltanking crude presence in the Beaumont market as pipelines bring higher volumes to an area that has ample acreage for storage expansion and space for additional docks; and 3) a potential splitter project in Beaumont that would process condensate from domestic shale plays, possibly with a joint venture partner.
The company’s locations and connectivity provide an attractive platform for additional growth through the development of deepwater docks at Houston terminal, optimization of their existing and new pipeline infrastructure, and truck and rail loading to facilitate crude movements – all driven by growing domestic and export energy demand and dramatic increases in volume from productive shale plays.
Built-in Contracted Growth: The company’s contracts have inflation escalators built-in to storage service agreement fees. And, over the past 5 years, 95% of contracts have renewed at escalated rates.
Potential Dropdowns: The company’s sponsor has several Oiltanking North America terminals and facilities and other potential Oiltanking Group assets that could be acquired down the road.
Acquisitions: Oiltanking expects to also grow through acquisitions of third-party assets (alone or with a partner), joint ventures and Midstream opportunities closer to the wellhead.
Recent Growth Initiatives
LPG Export Terminal Agreement: In January 2014, Oiltanking announced a further expansion of its terminal service agreement with Enterprise Products Partners (EPD) to handle higher volumes of LPG exports at Oiltanking’s Houston terminal. Under the amended agreement, the primary contract term was extended to 50 years from the February 1, 2014, effective date, and the exclusivity provisions relating to the Houston Ship Channel in the prior agreement were expanded to cover all of the U.S. Gulf Coast. The throughput rates and margin sharing provisions in the amended agreement remain unchanged from the prior terminal service agreement. This expansion underscores deep integration with customers for long-term stability and growth, and reflects the company’s unique operating expertise and reliability.
Expansion Projects and Assets Placed into Service: In January 2014, Oiltanking completed its $104.0 million “Appelt I” expansion project with the completion of its last storage tank (210,000 barrel capacity) on its Appelt property near the Houston terminal. As part of this project, Oiltanking placed into service nine new crude oil storage tanks with a total capacity of 2,970,000 barrels during 2013.
Lease with the Port of Houston: In April 2014, Oiltanking exercised an option to lease approximately 58 acres of undeveloped property adjacent to its Houston terminal from the Port of Houston Authority of Harris County, Texas (the “Port of Houston”). Under terms of the 24-year lease, Oiltanking will pay the Port of Houston monthly rental fees commencing May 1, 2014, until the expiration of the lease on October 31, 2038. Oiltanking is evaluating a number of potential expansion projects that would be located on the leased property if approved.
Strategically Located Assets, Well Positioned For Growth, Stable Revenues
Oiltanking is a critical logistical link between the upstream and downstream segments of America’s rapidly expanding crude oil, chemical and natural gas liquids industries.
Oiltanking has strategically located assets with unmatched connectivity on the U.S. Gulf Coast, with excellent deepwater access and dock infrastructure and pipeline connectivity with 23 key facilities, major ports, refineries, trading hubs, end users, and truck and rail loading.
Oiltanking is well-positioned for changing crude oil logistics in the dynamic U.S. energy sector. The company’s facilities serve as highly-connected hubs for crude oil movements from shale plays and Canada. Oiltanking’s footprint of terminals facilitates future growth, they have additional waterfront available for development and land to add new tank capacity.
Technologically, their facilities have the ability to handle a variety of grades or blends, with blending and heating capability in all tanks.
Stable, Predictable Fee-Based Cash Flow
The company’s revenues are tied to long-term contracts with stable, fee-based cash flow, with no direct commodity exposure. 97% of the company’s active storage capacity is currently under contract with a weighted-average life of about 6 years on current contracts.
cash flow come from storage service fees (fixed monthly fees based on contracted storage volumes), throughput revenue fees (fixed fees for moving products through the facility, based on activity level, in excess of minimum commitments, with incremental revenue based on product margins without downside price exposure) and ancillary services fees that are specified in each contract based on activity levels and typically include heating, mixing, blending, recirculating and transferring between tanks. And long-term contracts have built-in inflation escalators.
Diversified Sources of Revenue
The company has diversified sources of revenue that include crude, feedstock, LPG, refined petroleum products and vacuum gas oils (heavy oils left over from the petroleum distillation process that can be further refined). Oiltanking has long-term relationships with high-quality customers (80% of which are investment grade), with average customer relationships of over 15 years and 95% historical re-contracting rates.
Oiltanking has the financial flexibility to fund growth projects or acquisitions, including the funding of over $400 million in identified expansion projects. The company has a long-term focus on a balanced capital structure with a $150 million revolver credit line (expandable to $225 million) and plenty of dry powder to fund growth from its November 2013 $160 million public equity offering. Its current leverage ratio is less than 2x EBITDA with $175 million in long-term financing with maturities in 2022 and beyond.
The company is backed by a world-class sponsor – Oiltanking Group – which is the world’s second-largest independent logistic services provider for crude oil, refined products, liquid chemicals and gases, with extensive knowledge of global market and trade flows.
Oiltanking Group (part of privately-held Marquard & Bahls) operates 73 terminals in 22 countries with 130 MMBbls of capacity, seven U.S. locations and 19 joint ventures.
On July 19, 2011, Oiltanking Partners (“Oiltanking”) completed its initial public offering of 11,500,000 common units, including 1,500,000 common units issued as underwriters’ over-allotment, at $21.50 per unit. And on that date, the sponsor and its affiliates contributed all of their equity interests in Oiltanking Houston LP and Oiltanking Beaumont Partners LP to Oiltanking Partners in exchange for 7,949,901 common units, 19,449,901 subordinated units and incentive distribution rights (“IDRs”) to the general partner.
As of March 31, 2014, Oiltanking had outstanding (i) 22,049,901 common units and 19,449,901 subordinated units representing limited partner interests, (ii) a 2.0% general partner interest and (iii) IDRs. The sponsor and its affiliates hold 66.0% of all outstanding common and subordinated units (or a 64.7% limited partner interest), and other security holders hold the remaining 34.0% (or a 33.3% limited partner interest). The limited partners collectively hold a 98.0% limited partner interest in Oiltanking, and the general partner holds a 2.0% general partner interest in Oiltanking.
Primary Business Strategy
Oiltanking’s primary business objectives are to generate stable and predictable cash flows to pay quarterly distributions to unitholders and to increase quarterly cash distributions per unit over time.
The company plans to achieve these objectives by anticipating long-term infrastructure needs in the areas they serve and by growing tank terminals and pipeline networks through construction in new markets, the expansion of existing facilities and strategic acquisitions.
Houston and Beaumont Assets
As of March 31, 2014, Oiltanking had approximately 22 million barrels of total active storage capacity at its Houston and Beaumont facilities. These integrated facilities are strategically located and directly connected to 23 key refining, production and storage facilities along the Gulf Coast and the Cushing, Oklahoma, storage interchange through dedicated and common carrier pipelines.
In addition, their facilities give customers deep-water access and international distribution capabilities.
The Houston terminals serve as a regional hub for crude oil and other feedstocks for refineries and petrochemical facilities located in the Gulf Coast region, and also serve as important export facilities for LPG and other refined petroleum products. As of March 31, 2014, the Houston facility had an aggregate active storage capacity of approximately 16.4 million barrels.
The Beaumont terminal serves as a regional hub for refined petroleum products for refineries located in the Gulf Coast region. As of March 31, 2014, this facility had an aggregate active storage capacity of approximately 5.5 million barrels.
Oiltanking is led by Christian Flach who serves as Chairman of the Board, and CEO of parent company Marquard & Bahls AG, which he joined in 1996 and Kenneth F. Owen who serves as President and CEO, and concurrently holds the same titles at Oiltanking Holding Americas LLC. He has a background in energy investment banking and has deep strategic insights into this business. Jonathan Z. Ackerman serves as Vice President and CFO, and has extensive financial and legal experience on energy and energy policy matters.
Q1 2014 Results – Adjusted EBITDA up 57%
For Q1 2014 ended March 31, 2014, revenues were up almost 50% from the year-ago quarter to $59.9 million, with operating income up 64% to $34.9 million and net income up 65% to $33.3 million of which $7 million was allocated to the general partner, $14 million was allocated to common unitholders and $12.3 million to subordinated unitholders. Earnings were up 31% to $0.63 per common unit.
The increase in revenue was primarily due to increases in storage service fees, throughput fees and ancillary services fees, from 4.1 million barrels of new storage capacity placed into service in 2013 and 210,000 barrels placed into service in the first quarter of 2014, with an increase of 22.6% in storage capacity over March 31, 2013. Higher storage fee revenues were also from an escalation of fees under contracts. Throughput fee gains were due to an increase in fees related to LPG exports at Houston terminal in addition to volume-based throughput fees.
Operating activities delivered $38.9 million in cash, with adjusted EBITDA of $40.4 million, up 57%. The company ended the quarter with cash of $26.9 million and total assets of $730.4 million. Long-term debt dipped slightly to $187.5 million, and partners’ capital was $506.2 million (well below the company’s $3.7 billion market cap).
Oiltanking Partners’ units appear fully-priced at current levels and offer significant potential for lucrative options strategies. The rise in units has reduced the company’s distribution yield which masks the steady growth in dividends, with the most recent year-over-year increase of 22%. Oiltanking clearly offers very significant growth potential through four key avenues, and has invested heavily in organic growth as its leading revenue expansion strategy. In addition, the company has strategically well-positioned assets and solid customer and sponsor relationships to grow as market forces shape the rise in America’s energy fortunes. Long-term, this is a very compelling play, even at current levels.