MLP with Strong Dropdown and Distribution Growth Upside, Backed By Strong Sponsor
VTTI Energy Partners LP (NYSE: VTTI) is a limited partnership that was formed in April 2014 by parent/sponsor VTTI B.V. as the growth vehicle for global petroleum and crude oil terminals and related infrastructure, with initial assets contributed by VTTI B.V.
4.75% Distribution Yield, Compelling Distribution Upside, Favorable 1099 Reporting
VTTI plans to pay a minimum quarterly distribution of $0.2625 per unit ($1.05 annualized) to common, subordinated and general partner units, for a distribution yield of 4.75% based on the closing price of $22.10 per unit as of August 1, 2014. Over time, VTTI expects to increase distributions in-line with CAFD growth (cash available for distribution) as its asset base grows through dropdowns from its sponsor and potential acquisitions. Dropdowns alone could quadruple its asset base and distributions in the years to come. Unitholders will receive IRS Form-1099 distributions with a tax rate of up to 20% and benefit from return of capital.
IPO – Liquidity Event for Sponsor
VTTI went public on August 1, 2014. The IPO was a liquidity event for its sponsor, which sold 17.5 million common units at $21 per unit (the high end of its $19 – $21 initial filing range) and granted overallotment on 2,625,000 common units. All units were offered by VTTI B.V. Units commenced trading on August 1, 2014, and were up 5% to close at $22.10. VTTI will not receive any proceeds from the offering.
Units Offer Compelling Investment Value at $22.10
With 41,071,429 units outstanding, VTTI has a market capitalization of $907.7 million. Relative to financial projections for the 12-months ending June 30, 2015, VTTI’s market cap reflects valuation ratios of 1.4x total owners’ equity, 2.9x revenue, 7.7x operating income and 12.8x net income. On valuation, VTTI units offer compelling value with capital appreciation and yield upside as the company’s asset base grows and it continues to be a major player in the crude oil supply chain for decades to come.
Public unitholders own a 49% limited partner interest (assuming full exercise of in-the-money overallotment shares), VTTI’s sponsor owns a 49% limited partner interest and the General Partner owns a 2% LP stake in VTTI.
Management Team Has Significant Terminal Operations and Business Growth Experience
VTTI will be led by industry veterans with over 20 years of relevant experience, with Rob Nijst as CEO and Rubel Yilmaz as interim CFO and head of business development and strategy. In addition, the company has a highly capable and experienced Board.
VTTI sponsors – Vitol and MISC – have extensive insight into global commodity flows and give VTTI a major competitive advantage, with strong incentives to promote and support VTTI given their high collective LP and GP stake.
VTTI B.V.’s high quality assets are predominantly located in major global energy market hubs where oil and refined product flows converge, with numerous interconnections to sea, road, pipeline and railroad. The company has several newly constructed and retrofitted terminals with fully automated advanced technology.
VTTI is expected to benefit from energy supply and demand imbalances with continued growth in refined product demand globally, a surge in global shale oil and gas production, continued refinery closures in OECD countries and differential quality specifications between and within regions.
The chart below shows growing deficits in Europe and Asia, and growing surpluses in the Middle East and North America, which will drive the need for terminaling infrastructure to meet regional imbalances.
The company’s global terminaling network is difficult to replicate given long approval cycles, high construction and compliance costs and low land availability at strategic locations. VTTI, with expertise from its sponsors, can execute large scale projects in any region of the world.
Its sponsors have increased storage capacity about 17x since formation in 2006, with demonstrated ability to grow through organic expansions and acquisitions. The company has a seasoned management and terminal operations team with decades of successful global execution experience.
The company gets 100% of its revenue from long-term fee-based take-or-pay contracts with creditworthy counterparties and remaining contract terms of four years or more, with no direct commodity price exposure. This translates into long-term revenue visibility and cash flow stability.
Most of its revenues come from storage and liquid throughput handling fees with fixed monthly payments that are independent of actual capacity usage. In addition, VTTI receives excess throughput fees if volumes exceed contracted amounts and ancillary fees for mixing, blending, heating and transferring products between tanks and transport.
Its sponsor holds 37.7 million barrels of storage capacity on which VTTI has Right of First Offer (ROFO) and will likely be dropped down to VTTI in a phased manner. In addition, VTTI plans to selectively consolidate its highly fragmented industry through selective acquisitions.
VTTI plans to supplement drop downs with organic growth and third-party acquisitions. The company currently has two organic projects with 3.4 MMBbls of greenfield storage development in Cyprus and 1.6 MMBbls of expansion in Malaysia. VTTI B.V. acquired 16.8 MMBbls of capacity since 2006 and its strong base of operations provides a platform for further strategic growth.
VTTI has solid HSE performance (health, safety and environment) with incident rates that are consistently lower than industry averages. VTTI shares and deploys HSE practices globally through an internal auditing program.
Strong Sponsors, High Growth Potential
VTTI and its sponsor own and operate leading global energy terminaling infrastructure on five continents and are a vital, reputed and established component of the global energy supply chain. VTTI’s assets are strategic and core to Vitol’s energy trading business.
VTTI has two world class sponsors – Vitol and MISC – with unparalleled business insight and industry relationships that will enable future asset growth. Vitol is one of the world’s largest independent energy traders and MISC is a leading global shipping and logistics expert.
VTTI B.V. has acquired six terminals, developed seven greenfield projects and executed eight terminal expansions since 2006, and has a proven track record with 43% annual capacity growth since inception. This experience will be instrumental in driving VTTI growth and expansion through deep industry insights and a network of relationships to source and evaluate growth opportunities.
VTTI B.V. is a large and fast- growing independent energy storage business with gross storage capacity of 51 million barrels across 12 terminals on five continents, mostly 100% or majority owned. VTTI B.V. is jointly owned by Vitol and MISC. Vitol is one of the world’s largest independent energy traders with 2013 revenues of $307 billion on over 5 million barrels traded per day, with physical assets across the value chain and investment grade credit rating. MISC is one of the world’s largest international shipping and maritime conglomerates; MISC is majority owned by Malaysia’s national oil company, PETRONAS, and operates 120 vessels. MISC too has an investment grade rating (BBB/Baa2). Vitol and MISC initiated their terminaling partnership in 2008 and formed VTTI B.V. as a 50/50 joint venture in 2010.
VTTI is a relatively low-risk play for income seeking investors with 100% fee-based services, no commodity price exposure and long-term contracts with 4+ years of average contract life that offer revenue visibility and distribution stability.
Dropdowns are expected to deliver
4x capacity growth from 13 million barrels of terminal storage capacity (at IPO time) to over 50 million barrels based on current dropdown inventory. VTTI B.V., independently or in partnership with VTTI, also has the financial and operational ability to grow through selective acquisitions in a highly fragmented global market.
VTTI is a differentiated MLP opportunity and offers exposure to a growing and highly fragmented market. International oil trade flows have grown steadily over the last three decades and are driving the need for up-to-date infrastructure, and top 10 independent terminal operators own only 16% of the international market (vs. 53% top 10 ownership in the U.S.). So VTTI will serve as the strategic vehicle to accelerate consolidation of international assets.
Strong Financial Performance, Favorable Tax Structure
VTTI plans to continue its focus on long-term fee-based growth opportunities with creditworthy counterparties, and maintain multi-year foreign exchange and interest rate hedging programs to counter global currency risk and hedge its 55 USD /45 Euro split in cash flow.
Management is focused on maintaining prudent distribution coverage and has significant liquidity and financial flexibility to grow distributions, with a business model that is designed to produce consistent and stable cash flows. If needed, VTTI B.V. has the ability to lend money to VTTI.
The company plans to maintain distribution coverage at about 1.1x and restrict consolidated leverage to 3x – 4x Debt/NTM EBITDA, with commitment to a balanced capital structure. As of March 31, 2014, VTTI had total debt of $600 million from a revolving credit facility.
The table below shows expected NTM EBITDA of $200.5 million and CAFD of $47.6 million which will support $1.05 in annualized distributions to all units with 1.1x coverage.
VTTI Energy Partners (“VTTI”) has strong, experienced, well capitalized and well networked sponsors, with ROFO that could grow its asset base four-fold from 12.8 MMBbls to over 51 MMBbls, and boost distributions to unitholders fairly quickly. Units are priced close to owners’ equity and offer compelling value and distribution growth potential, with long-term revenue and zero commodity risk. Investors should take advantage of the marginal 5% post-IPO increase in unit price and purchase units for stable long-term income and capital appreciation. This is a straight buy for income and growth.