Is the 10.7% return real?


Can investors count on this high yielding stock?

At first glance, Phillips 66 Partners LP (NYSE: PSXP) looks like another beaten energy store with an oversized return.

Structured as a Master Limited Partnership (MLP), Phillips 66 Partners LP was established by Phillips 66 (NYSE: PSX) to own, operate, develop and acquire revenue crude oil, refined petroleum products and natural gas liquids pipelines, terminals and other intermediate assets.

We know the energy industry experienced a major downturn at the start of last year. And while the environment for commodity prices has improved since then, many energy stocks have not yet fully recovered. In addition, the downturn has resulted in numerous dividend cuts in the industry.

Phillips 66 Partners stock is trading almost 20% lower than a year ago. However, the partnership has not reduced its payments, even at the height of the economic crisis. PSXP stock had a quarterly payout rate of $ 0.875 per unit at the start of 2020, and it has continued to pay that amount. (Source: “Distribution historyPhillips 66 Partners LP, last accessed April 19, 2021.)

At a given cash payment, there is an inverse relationship between a company’s dividend yield and its share price. Since the Phillips 66 Partners share has maintained its payout, the lower share price means it offers a higher return than before. At the time of this writing, PSXP stock is losing 10.7%.

Now you might be wondering if a double digit return in this market is too good to be true. To answer this question, let’s take a look at the company’s financial data.

In the fourth quarter of 2020, Phillips 66 Partners generated $ 240.0 million in distributable cash flow. Meanwhile, his actual cash distributions totaled $ 200.0 million. This resulted in a payout coverage ratio of 1.2 times. (Source: “Phillips 66 Partners Reports Fourth Quarter 2020 Financial Results”, Phillips 66 Partners LP, January 29, 2021.)

In 2020, Phillips 66 Partners earned $ 970.0 million in distributable cash flow. In contrast, its total cash distributions totaled $ 799.0 million for the year. As a result, its payout coverage ratio was multiplied by 1.2.

Given that 2020 has been a year filled with many operational challenges in the energy industry, Phillips 66 Partners’ ability to maintain its cash distribution and surpass its payout is quite commendable.

So why hasn’t the Phillips 66 Partners share price recovered?

The situation with the Dakota Access Pipeline (DAPL), of which Phillips 66 Partners LP owns 25%, has raised some concerns among investors. Last year, the U.S. District Court for the District of Columbia ordered the pipeline shutdown. The owners appealed and the pipeline remained open – for now.

It was recently reported that DAPL would not be forced to shut down while federal regulators perform a new environmental scan. While the fate of the pipeline is still in the hands of the judge, the absence of a forced shutdown was good news for the owners. PSXP stock has jumped nearly 10% on the news. (Source: “US won’t shut down Dakota’s access pipe amid new environmental review, ” BNN Bloomberg, April 9, 2021.)

Conclusion on Phillips 66 Partners LP

Phillips 66 Partners LP will release its first quarter 2021 financial results on April 30.

In addition to paying attention to usual financial metrics such as distributable cash flow, investors and analysts will want to listen to management’s comments on DAPL’s situation. Once the situation with the pipeline is resolved, we might see more investor enthusiasm for Phillips 66 Partners stock.

About Jennifer R.

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