IPO Preview: Valero Energy Partners (VLP)

Francis Gaskins |

Valero Energy Partners (VLP) is a fee-based, growth-oriented, traditional master limited partnership recently formed by its parent, Valero (VLO), which has a $25 billion market cap.

Eight other IPOs are scheduled for this week. The full IPO calendar can be found at IPOpremium.

(VLP) scheduled a $300 million IPO with a market capitalization of $1.2 billion at a price range midpoint of $20 for Wednesday, December 11, 2013, on the NYSE.

S-1filings

The Manager & Joint managers are J.P. Morgan, Barclays, Citi, RBC Capital Markets, Wells Fargo Securities. The Co-Managers are Mitsubishi UFJ Securities, SunTrust Robinson Humphrey, Credit Agricole CIB, Credit Suisse, Jefferies & Co., Mizuho Investors, RBS, Scotiabank/Howard Weil

Overview

VLP expects to yield 4.25% at the price range mid-point of $20.  The parent VLO retains all incentive distribution rights.

“Valero will serve as a critical source of our future growth by providing us opportunities to purchase additional transportation and logistics assets that Valero currently owns or may acquire or develop in the future.”   Page 2 S-1.

Valuation

Valuation Ratios

Mrkt

Price /

Price /

Price /

Price /

Dividend

12 mos, Sept '13

Cap (mm)

Sls

Erngs

BkVlue

TanBV

Yield

Valero Energy Partners LP (VLP)

$1,180

12.7

26.8

2.2

2.2

4.25%

Valero Energy (VLO)



$24,590

0.2

10.1

1.3

1.3

1.98%

Glossary

The rating ispositive.  These kind of parent/spinoffs generally work, because there is a segment of VLO’s shareholders who will be enticed by a 4.25% yield versus 1.98% from the parent company,VLO.

Business

VLP is a fee-based, growth-oriented, traditional master limited partnership recently formed by Valero -- $25 billion market cap (VLO) -- to own, operate, develop and acquire crude oil and refined petroleum products pipelines, terminals and other transportation and logistics assets. VLP will serve as Valero’s primary vehicle to expand the transportation and logistics assets supporting its business.

VLP’s initial assets consist of crude oil and refined petroleum products pipeline and terminal systems in the Gulf Coast and Mid-Continent regions of the United States (“U.S.”) that are integral to the operations of Valero’s refinery located in Port Arthur, Texas, its McKee refinery located in Sunray, Texas, and its refinery located in Memphis, Tennessee.

VLP generates revenue by charging tariffs and fees for transporting crude oil and refined petroleum products through its pipelines and terminals. Because VLP does not take ownership of or receive any payments based on the value of the crude oil or refined petroleum products that it handles and does not engage in the trading of any commodities, VLP has no direct exposure to commodity price fluctuations.

At the closing of this offering, VLP will enter into a master transportation services agreement with Valero with respect to VLP’s pipelines and a master terminal services agreement with Valero with respect to VLP’s terminals. These fee-based commercial agreements will initially be the source of all of VLP’s revenues and will have minimum quarterly throughput commitments, inflation escalators and initial terms of 10 years, which VLP believes will promote stable and predictable cash flows.

Competition

As a result of VLP’s contractual relationship with Valero under its commercial agreements and its direct connections to three of Valero’s refineries, VLP believes that its crude oil and refined petroleum product pipelines, terminals and storage facilities will not face significant competition from other pipelines, terminals and storage facilities for Valero’s crude oil or refined petroleum products transportation requirements to and from the refineries VLP supports.

Dividends

VLP intends to pay minimum quarterly distributions of $0.2125 per unit ($0.85 per unit on an annualized basis) to the extent it has sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to VLP’s general partner..

5% stockholders

Valero (VLO) is the parent.

Use of proceeds

VLP expects to net $277.9 million from its IPO. Proceeds are allocated as follows:

to pay revolving credit facility issuance costs of $1.7 million, and VLP will retain the remainder of the net proceeds of this offering for general partnership purposes, which may include funding potential future acquisitions from Valero and third parties and potential future organic expansion capital expenditures.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
VLP Valero Energy Partners LP representing limited par 42.18 -0.13 -0.31 28,007 Trade
JKNMZ Jpmorgan Chse Bk Welspun n/a n/a n/a 0

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