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Phillips 66 Plans to Raise $400 Million in 2013 Pipeline IPO

Phillips 66 Plans to Raise $400 Million in 2013 Pipeline IPO
A Phillips 66 logo is seen on a gas pump as a car is filled at a gas station in Princeton, Illinois. Photographer: Daniel Acker/Bloomberg

Dec. 13 (Bloomberg) -- Phillips 66, the crude refiner that was spun off from ConocoPhillips in May, plans to raise as much as $400 million in an initial public offering next year for a minority interest in some of its pipeline and logistics assets.

Phillips 66 plans to hold the IPO in the second half of 2013 for units in a master-limited partnership, or MLP, and use the proceeds to pay for expansion of its oil and natural gas transportation operations, the Houston-based company said today in a statement.

“We think it’s going to be good for Phillips 66 shareholders,” Chairman and Chief Executive Officer Greg Garland told reporters today after the company held its first annual investor meeting in New York. “Having that MLP vehicle in our toolbox, we can accelerate investments in infrastructure in the U.S.”

The company fell 1.6 percent to $52.21 at the close in New York, the biggest decline for a U.S. refiner. The size of the MLP may be smaller than some investors expected, and the timing further off, Phil Weiss, an analyst at Argus Research Co., said today in a telephone interview.

Investors may also be cashing out after Phillips 66 has risen 57 percent since its first day of official trading May 1, Brian Youngberg, an analyst at Edward Jones & Co. in St. Louis, said today in an e-mail.

The MLP is “only the start and I would expect it will be a growth vehicle in coming years for the company,” he said. Weiss and Youngberg rate Phillips 66 a buy and don’t own shares.

Shipping Crude

Phillips 66 would become the fourth refiner since 2011 to create or announce plans for a pipeline-related MLP. MLPs, which are usually controlled by a general partner, pay no corporate income tax. They pay most of their cash to owners of limited partnership units, which are traded like shares in a public corporation. The partnership owners become responsible for paying taxes individually.

Once formed, the MLP will try to grow in Phillips 66’s existing areas, such as shipping, storing and transporting crude and refined products. Gathering and processing natural gas liquids will continue to be the domain of DCP Midstream LP, the company’s joint venture with Spectra Energy Corp., Garland said. He declined to give further details about which assets the company would use to create the new MLP, citing regulatory rules governing such discussions in advance of an IPO.

Phillips 66’s transportation and logistics assets generate $200 million annually in earnings before income, taxes, depreciation and amortization, and will grow in the “near term” to $500 million, according to a company presentation made today.

‘Commodity Risk’

“Refiners are subject at the end of the day to commodity risk,” Gianna Bern, president of risk-management consultant Brookshire Advisory & Research Inc. in Chicago, said in a telephone interview today. “Putting in place a structure that provides a stable investment return would be viewed positively amongst investors.”

Refiners have embraced the model as a way to reap more value from pipeline assets for which investors will pay a premium. Marathon Petroleum Corp., which was spun off from Marathon Oil Corp. last year, sold 17.3 million units in MPLX LP on Oct. 25, creating an MLP valued at $2.3 billion, according to data compiled by Bloomberg.

The companies have used the creation of MLPs, share buybacks and dividend increases to lessen earnings volatility inherent in refining and draw investors including Warren Buffett’s Berkshire Hathaway Inc. and BlackRock Inc. As of Sept. 30, Berkshire was one of the largest shareholders of Phillips 66, with 27.2 million shares, or 4.3 percent of the company. BlackRock disclosed Dec. 6 that it holds a 10 percent stake in Marathon Petroleum.

Other Sectors

Phillips 66 and Marathon Petroleum have sought a niche as refiners with growing operations in other energy sectors. Marathon Petroleum plans to grow its pipeline business through new projects tied to its refining operations and acquisitions, Garry Peiffer, president of MPLX, said Dec. 11 in a telephone interview.

Phillips 66, which has stakes in 15 operating refineries, a chemical joint venture with Chevron Corp. and the DCP unit with Spectra, plans $3.7 billion in 2013 capital spending, a 6 percent increase over this year’s estimated total, according to the statement.

About $1.8 billion of that represents Phillips 66’s contribution toward spending by its chemical and pipeline joint ventures for new infrastructure projects, natural gas liquids production and a petrochemical plant.

Tesoro Corp. and Delek U.S. Holdings have already formed pipeline MLPs.

To contact the reporter on this story: Bradley Olson in Houston at bradleyolson@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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