Phillips 66 Partners LP: This 9.5% Yielder Is No Joke

PSXP stock

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At first glance, Phillips 66 Partners LP (NYSE:PSXP) seems like just another high-yield stock from the energy sector. And we all know what that means: when things are good, energy stocks can deliver oversized dividends, but when the commodity price environment becomes less friendly, their payouts often get cut.

But that impression doesn’t really describe what Phillips 66 Partners stock has been doing. Sure, it’s a high-yield energy stock and it does have some exposure to volatility in commodity prices. However, what PSXP stock also has is a rather impressive distribution history.

Phillips 66 Partners LP came into existence in 2013. It’s a master limited partnership (MLP) created by energy company Phillips 66 (NYSE:PSX) to own, operate, develop, and acquire primarily fee-based crude oil, refined petroleum product, and natural gas liquid pipelines; terminals; and other midstream assets.

In the MLP’s own words, its primary business objectives are to “generate stable and predictable cash flows while maintaining a strong balance sheet and disciplined capital allocation.” (Source: “About,” Phillips 66 Partners LP, last accessed August 25, 2021.)

Given the volatile commodity price environment, generating stable and predictable cash flows is no easy feat. But Phillips 66 Partners has found a way to do it: by providing fee-based transportation and midstream services to Phillips 66 and third-party customers. In particular, the partnership has multiple long-term, fee-based commercial agreements with Phillips 66 that contain minimum volume commitments and inflation escalators. This helps reduce the MLP’s direct exposure to the ups and downs in commodity prices.

As mentioned earlier, Phillips 66 Partners stock stands out because of its distribution history.

After Phillips 66 Partners LP went public in July 2013, the company paid its first distribution of $0.1548 per common unit of PSXP stock in November 2013. It was a prorated payout corresponding to the MLP’s minimum quarterly distribution rate of $0.2125 per unit.

Then, from 2014 to 2019, the partnership raised its distribution every single quarter, with its payout reaching $0.865 per unit in November 2019. (Source: “Distribution History,” Phillips 66 Partners LP, last accessed August 25, 2021.)

In February 2020, Phillips 66 Partners delivered another distribution hike, bringing its quarterly payout to $0.875 per common unit.

We know what happened next: the COVID-19 pandemic started sending shock waves around the world, and the energy sector took a serious hit.

Yet Phillips 66 Partners LP continued to pay investors $0.875 per unit on a quarterly basis—until this day.

In other words, during what was arguably one of the most challenging operating environments that the energy sector has ever encountered, Phillips 66 Partners stock maintained its payout at a level that was the result of a series of consecutive quarterly increases.

What’s just as impressive was how the partnership managed to afford its payout.

In the second quarter of 2020—at the height of the pandemic-induced crisis for the energy sector—Phillips 66 Partners generated $218.0 million in distributable cash flow. Its actual cash distribution, on the other hand, totaled $200.0 million for the quarter. That resulted in a distribution coverage ratio of 1.09. (Source: “Phillips 66 Partners Reports Second-Quarter 2020 Financial Results,” Phillips 66 Partners LP, July 31, 2020.)

Therefore, even in that extraordinary economic environment, the MLP was able to outearn its distribution.

Fast-forward to today and we see that the partnership has a wider margin of safety. In the second quarter of 2021, Phillips 66 Partners earned $267.0 million of distributable cash flow while paying $199.0 million in cash distributions to unitholders. Therefore, its distribution coverage ratio has improved to 1.34. (Source: “Phillips 66 Partners Reports Second-Quarter 2021 Financial Results,” Phillips 66 Partners LP, August 3, 2021.)

Bottom Line on Phillips 66 Partners LP

While Phillips 66 Partners LP’s payout has been either increasing or steady, it doesn’t mean PSXP stock is immune to volatility. In fact, Phillips 66 stock plunged during the market crash earlier last year and is yet to make a full recovery.

And due to the inverse relationship between dividend yield and share price, the underperformance of PSXP stock has made it very attractive to income investors right now.

Trading at $36.65 per unit, this midstream energy stock offers an annual distribution yield of 9.5%.

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