I'm always happy to discover a high-quality stock sporting a rich dividend. But what really makes my day is finding both of these features in a company that also produces double-digit income growth.
It's this rare combination that makes Tesoro TLLP) so appealing.LP (NYSE:
Tesoro Logistics is a master-limited partnership (MLP) that went public last April as a spinoff from the nation's second-largest independent refiner, Tesoro Corp. (NYSE: TSO), which retains a 56% stake in the MLP. The new company owns fuel-gathering and transportation assets, and derives all its revenue from Tesoro Corp. under long-term, fee-based agreements. The ultimate reason for the spinoff is for the MLP to offer logistic services to third parties as well.
Tesoro Logistics offers an attractive 4.2% yield, but an even better reason to own this MLP is its win-win partnership with Tesoro Corp., giving the MLP access to pipelines in close proximity to a major oil discovery and its outstanding growth prospects.
Tesoro Logistics operates a crude-oil gathering system serving the Bakken/Williston Basin area of North Dakota and Montana that currently moves 23,000 barrels a day. In Western and Midwestern states, the MLP owns 700 miles of pipeline and eight refined-products terminals that process 229,000 barrels a day. The terminals distribute gasoline from Tesoro Corp.'s refineries to service stations in California, Utah, Washington State, North Dakota and Alaska.
The Bakken formation oil fields, which many experts are calling the largest U.S. oil discovery since Alaska's Prudhoe Bay, are estimated to hold as much as 4 billion barrels of recoverable reserves. There is lots of drilling activity in the Bakken region, but very little established pipeline infrastructure, so Tesoro Logistics should be able to quickly gain as much transportation business as it can handle.
Growth prospects for Tesoro Logistics have already taken a step forward as Tesoro Corp. is expanding its North Dakota refinery from 58,000 barrels to 68,000 barrels per day. The MLP is the sole supplier to this refinery, so the expansion -- which is scheduled for completion in June -- will result in an immediate boost to fee income.
Since last year's IPO, Tesoro Logistics has added $8 million to income from improved utilization of assets. Another $11 million boost in income should result from projects that are set to be concluded by the end of 2013, when Tesoro Logistics plans to expand system capacity to more than 100,000 barrels per day and increase terminal capacity by more than 40,000 barrels per day.
In addition, Tesoro Logistics recently announced plans for $100 million of capital investment in the next two years, which will include the purchase of the Martinez Crude Oil Marine Terminal from Tesoro Corp this year. The terminal acquisition is projected to add another $8 million to annual EBITDA. More asset acquisitions from its former parent are expected over time.
All of this is expected to increase the MLP's annual EBITDA from $53 million at the time of the IPO to more than $100 million in 2013 -- that's more than 88% growth in three years. Analysts say Tesoro Logistics can easily deliver income gains of 10% in each of the next five years. For a pipeline company, this is an exceptional outlook.
EBITDA for the first nine months of 2011 grew 33% compared with the same period in 2010 to $23.5 million. Distributable cash flow improved 31% to $22.5 million as a result of higher throughput and capacity utilization. The partnership has used that cash flow to pay two distributions since the IPO, and recently hiked the annualized distribution by 4% last quarter from $1.35 to $1.40 per unit.
Tesoro Logistics has a strong balance sheet (debt totaling only $50 million compared with $106.4 million of shareholder equity) and stable cash flow resulting from its long-term contracts with Tesoro Corp. Another thing to remember is that its revenue is based on fees, not crude oil prices. In other words, as long as the parent company's refineries continue operating at or near capacity, Tesoro Logistics' cash flow should be consistent and predictable.
Risks to consider: The main risk is that Tesoro Logistics derives virtually all its revenue from its parent company. This means a minor setback for Tesoro Corp. could cause major ripples for the MLP. Also, Tesoro Logistics will need to borrow about $3 million this year to pay distributions and budgeted capital expenditures, which is not a huge amount, but should be monitored. Preferably, in the long-term, the company should be covering distributions and capital expenditures entirely from operating cash flow.
Action to take --> Tesoro Logistics is recommended for investors who want a nice dividend and above-average growth. Units yield 4% currently, but if distributions grow in line with income, Tesoro Logistics could be paying a $1.98 distribution within five years. That would result in a 6.3% forward yield on units purchased today.