Phillips 66 announces IPO for midstream assets

Phillips 66 has registered for an initial public offering for a midstream partnership, following up on an announcement CEO Greg Garland had previously made to investors and analysts.

The refining company, which is based in Houston, is the latest to consider forming a master limited partnership, which has a number of tax advantages.

The offering is expected to raise $300 million and occur in the second half of 2013, according to the company’s announcement.

Phillips 66 Partners LP, a subsidiary of Phillips 66, said its initial assets will include the Clifton Ridge crude oil pipeline, terminal and storage system in Louisiana; the Sweeny to Pasadena refined petroleum product pipeline, terminal and storage system in the Houston area; and the Hartford Connector refined petroleum product pipeline, terminal and storage system in Illinois.

Those assets were previously owned by Phillips 66 and were transferred to the partnership.

Tesoro Corp. and Marathon Petroleum are among other refiners that have launched master limited partnerships for pipelines and other midstream assets.

“They’re all doing it,” said Andrew Lipow, president of Lipow Oil Associates. “The MLP is taxed at a lower rate as the distributions flow directly to the shareholders. As a result, they unlock value for their shareholders.”

The risk is that business slows and the cash distributions drop, but Lipow said companies traditionally place fee-based businesses in the partnerships, including pipelines and terminals. That helps to keep the returns constant.

Phillips 66 said in its announcement that the common units will trade on the New York Stock Exchange under the ticker symbol PSXP but that the number of units to be offered and the price range have not been determined.

Phillips 66, like other refiners, is currently enjoying strong earnings, at least in part because of the increased use of cheaper crude oil from shale plays in the United States. The company has been investing in midstream transportation efforts to boost its use of those crude oils.

Garland said in December that the company was considering launching a master limited partnership.

“We expect to use the master limited partnership as an efficient vehicle to fund growth investments in the transportation and midstream sectors,” he said at the time.

The partnerships trade like stocks but offer certain tax advantages.

According to the SEC filing, the partnership said it expects Phillips 66 “will offer us opportunities to purchase additional transportation and midstream assets that it may acquire or develop in the future or that it currently owns. We also may have opportunities to pursue the acquisition or development of additional assets jointly with Phillips 66.”

Lipow said the move was a sound strategy. “It makes sense, given what we’re seeing their competition doing,” he said.