Description

PBFX VIC

Please note this write up was completed with the price around $19 – since yesterday afternoon the price has moved 10% for no reason I can find. I am posting this now because it is still timely. I was waiting to confirm a few things with IR regarding the incremental margins of some of their assets.

PBF Logistics (“PBFX”) is a MLP that was IPO’ed from PBF Energy (“PBF”) in May 2014. PBFX was formed “to own or lease, operate, develop and acquire crude oil and refined petroleum products terminals, pipelines, storage facilities and similar logistics assets.”

PBFX was priced at $23 share and a run rate distribution of $1.20 (5.22% yield). Since that time, PBFX has completed two distributions that by my estimate have raised the forward distribution almost 50% to a 9.5% yield, while the stock is down more than 20%.

PBFX takes no commodity price or marketing risk and its current run-rate dividend is nearly entirely supported through minimum volume commitments creating additional upside through increased asset utilization. Furthermore, PBFX has sufficient liquidity to complete additional drop-downs that should raise the run-rate distribution to over 10% in the near future.

I believe this opportunity exists for a few reasons:

1. The general malaise in the energy sector has created volatility across a number of names. PBFX is a prime example of “throwing out the baby with the bathwater”.

2. PBFX HAS NOT YET raised its dividend even though it has completed two drop downs. The first drop-down was completed on September 30^th and the second was completed in early December. For the drop-down completed September 30th, the 3^rd quarter financials do not include any revenues, just the asset’s expenses which depressed Q3 results.

3. The company went public in May and its pro-forma financials understate their assets earnings power due to capital expenditures completed in 2013 and 2014. Therefore, the forward looking numbers even for their IPO’ed assets are not screen-able.

4. This is a smaller idea which on average trades about $1m per day.

I believe PBFX’s valuation is just too cheap with its peer group on average trading 20x last quarter annualized (“LQA”) EBITDA, LQA 22x CAD, and 4.51% LQA distribution yield.

On run-rate numbers PBFX is trading 10.4x EBITDA, 8.8x CAD, and a 9.5% distribution yield

*PBFX numbers are pro-forma

I believe that when the distribution is raised the company will re-rate in the range of its peer group. Over the next year, I expect the company to complete at least one additional drop-down raising the distribution to $1.90 / share at a 5.5% yield (wide to both peers and where investors purchased at the IPO) one gets a total return of 88% (1.90 / .055 = 34.55 + 1.20 dividend = $35.75).

To the extent the shares do not rally on an increase in distribution, I am happy to clip a 10% tax advantaged dividend while a committed owner operator (discussed below) seeks to realize the assets significant discount to private market value.

Overview of assets

For an overview of PBF Energy it may be helpful to circle back to vfm242’s 12/30/2013 write-up.

PBFX went public with two assets: Delaware City Rail Terminal (“DC Rail Terminal”) and Toledo Truck Rack and Unloading Terminal “Toledo Truck Rack”.

The DC Rail Terminal commenced operations in February 2013. It just completed an expansion project that will enable it to discharge 130k barrels per day (“bpd”) up from 105k bpd. Starting in Q4 PBFX will earn $2 per barrel on a minimum volume commitment of (“mvc”) of 85k bpd and $0.50 for each additional barrel. It is important to note that when looking at historical financials the previous run-rate through Q3 was approximately 70k bpd.

The Toledo Truck Rack has the capacity to unload 15k bpd. At the time of the IPO, PBFX had a mvc for 4k bpd at $1 per barrel and $1 for each additional barrel. Since the IPO, the mvc has been raised to 5.5k bpd, however; the asset has on average been handling over 10k bpd. In the IPO prospectus, future EBITDA / CAD guidance was based on 4k bpd.

Drop-downs

On September 15^th 2014, PBFX announced that it was purchasing Delaware City Heavy Crude Unloading Rack (“West Rack”) for $150m with consideration of $135m of cash and $15m of LP interests. The West Rack just completed an expansion project that will enable it to discharge 80k bpd of heavy crude up from 40k bpd. Concurrent with the drop-down PBFX entered into a mvc of 40k bpd at $2.20 per barrel and $1.50 for each additional barrel. This drop-down closed on September 30^th 2014.

On December 2^nd 2014, PBFX announced it was purchasing the Toledo Storage Facility (“Tank Farm #2”) for $150m with consideration of $135m of cash and $15m of LP interests. Tank Farm #2 consists of 3.9 million barrels of feedstock and product storage capacity. PBF will pay $0.50 per barrel per month of shell capacity dedicated to PBF Holdings and it entered into a mvc for 4.4k bpd at the propane storage and loading facility for a fee of $2.52 per barrel and $2.52 for each additional barrel up to 17.5k bpd.

Valuation

Pulling from page 68 of their S-1, we can see that PBFX estimated June 2015 EBITDA of $47.4 million and CAD of $43.8 million based on running the DC Rail Terminal at 75k bpd through September 2014 and at 85k each quarter thereafter. They assumed they would operate the Toledo Truck Rack at 4k bpd.

Increasing the DC Rail Terminal from 75k to 85k bpd should increase annual EBITDA and CAD by $1.8 million (10k bpd * $2.00 * 90). Increasing the Toledo Truck Rack from 4k to 5.5k should increase EBITDA and CAD by $500k (1500 * $1.00 *360). Furthermore, it should be noted that Toledo Truck Rack has been handling over 10k bpd in the last quarter and after a planned turn-around this quarter it should be back to those levels. Running at 10k bpd would add another $1.8 million of EBITDA and CAD. (EBITDA / CAD assumptions assume 100% incremental margins. Consistent with $ .6 million TOTAL step up in Operating and Maintenance expenses from 2013 through June 30^th 2015)

At drop-down, the West Rack was forecasted to generate $15 million EBITDA and $11.05 of CAD on the 40k mvc. Estimated EBITDA (8K filing 9/9/14) $15m – interest expense $2.2 million – maintenance capital expenditures $1.25 – incremental G&A $.5 million = $11.5 CAD

These numbers seem very conservative and do not even account for upside through increases of throughput consistent with PBF Energy forecasting to run 50k bpd of heavy crude in Q4.

At 40k bpd at $2.20 per barrel the West Rack should generate 40k * 2.2 * 360 = $31 million of revenue. In the pro-forma financials for the West Rack, filed in 3Q 10Q, the DCR West Rack Predecessor is attributed $2.6 million in quarterly operating costs. Even with a step-up rate of $12 million of annual operating expenses EBITDA should be closer to $19 million. An additional 10k bpd that are being run in 4Q would generate an additional $5.4 million of revenue over the course of the year

At drop-down the Tank Farm #2 was forecasted to generate $15 million of EBITDA and $7.7 million of CAD. From the 8-K (filed 12/5/14) $9 million net income + $2.7 D&A + $3.4 Interest = $15.1 EBITDA - $3 capital expenditures - $3.4 interest expense - $1 increase in G&A = $7.7 CAD

I am assuming there is an additional $6 million of CAD above mvc’s

IPO assets: $43.8 million + $2.3 ($1.8 increase in DC Rail Terminal + $ .5 increase in Toledo Truck Rack) + $18.75 CAD from drop-downs + $6 million in increase from asset utilization (this could come from a lot of places as enumerated above)

= $70.9 CAD

Coverage ratio = 1.15x

Total distribution = $61.6 million

LP units fully converted 32.98 million

LP distribution of $1.74 (GP distribution of $ .14 per LP unit)

Current yield:

1.74 / 18.6 = 9.50%

Upside from additional throughput

The Delware Rail Terminal is being utilized at 65% of total capacity. It can run up to 130k bpd. Each 10k bpd increase of throughput generates $1.8 million of annual revenue. At full capacity the system would generate an additional $9 million of revenue.

The Toledo Truck Rack mvc is at 37% utilization. It is currently being run at 67% (10k bpd) and can handle 15k bpd. Each 1k bpd increases revenue by $.32 million. At full capacity it would generate an additional $3.3 million of revenue.

The West Rack can run up to 80k bpd. Each 10k bpd above the mvc would generate $4.9 million of revenue. At full capacity the West Rack would generate an additional $19 million of revenue.

PBF is opportunistic in sourcing its crude slate. At the current mvc the East Coast refineries (Delaware and Paulsboro) are only committing to 35% of its crude slate by rail. The amount of throughput above the mvc at the Delaware Rail Terminal and the West Rack will be a function of crude differentials in the Bakken and heavy oil Canada.

Additional drop-downs

PBF has additional MLP-able EBITDA of $85 to $100 million (asset list at end of write-up). PBFX currently has over $140 million of unused credit facility capacity. Another drop-down at the previous terms ($135 of debt and $15m of LP interests would generate an additional .30 cents of CAD

This would generate an additional .17 cents of CAD (.08 cents gets them to $1.80 (.06 LP / .02 GP which is the high splits and then distributions are split 50 / 50: .22 * .5 = .11 + .06 = .17)

This would add .15 cents to the distribution (.17 / 1.15)

At this point the run rate yield would be 10%.

Growth / Management

There is often a reflexive relationship between an MLP’s cost of capital and its expectation for growth. The greater the belief that the MLP can grow in an accretive manner the more likely the company’s cost of capital will be lower which enables the belief of growth to become self-fulfilling. One risk is that after the next drop-down PBFX will be in the high splits with an already high cost of capital (+10% yield). As PBFX enters the high splits in the IDR their cost of capital essentially doubles and at current prices it might be prohibitive to raise equity which means they can’t grow. In my opinion, this is not a broken MLP and that the current high yield will correct itself when the new distribution is announced. To the extent the price does not rally, the GP has the right to re-set the splits which would lower the company’s cost of capital and the GP also has significant flexibility to structure drop-downs at accretive prices to increase the value of the GP. The speed at which they have been able to grow the distribution is actually quite impressive and as we can come into the New Year I believe they will set 2015 guidance at the new run-rate distribution.

Furthermore, PBFX is materially important to Chairmen O’Malley and as he mentioned on the last call:

“[In response to PBFX] Oh, that's something we have a team focused on right now. If you ask me what I'm spending my time on over the next six months, there'll be disproportionate amount of time spent there really for two reasons, of course the idea that PBF could benefit from better midstream infrastructure to service our needs, particularly on the East Coast, but also in Toledo. And then, obviously, from the PBFX point of view, identifying and bringing in some third-party revenue streams will, I believe, enhance the value of those shares. And since I think I'm probably the – I own 4% or 5% of the outstanding shares of that particular entity, I'm really quite interested in seeing that entity prosper. So I think third party activity in the midstream is very, very important for PBFX and it's something we are really focused on.”

And longer-term it is important to understand O’Malley’s view of PBF and its end-game

http://www.wsj.com/articles/boss-talk-pbf-energy-keeps-focus-on-growth-1418766312)

WSJ: You’ve built your businesses by buying refineries when other companies didn’t see their value. Do you see yourself making another big bet?

Mr. O’Malley: I certainly think that any company that doesn’t pay attention to the concept of growth will have a hard time surviving. At PBF we’re interested in growth, but it can’t be growth at any price.

WSJ: Is there anything you’ve bought that you regret

Mr. O’Malley: No more golf courses! I not only buy, I sell. Keep that in mind. It’s not my job to say no. It’s my job to negotiate the best price. If you’re our size, either grow or be a part of somebody else’s growth story. We need to be bigger.

WSJ: So get bought or buy someone else?

Mr. O’Malley: Yeah, or you buy pieces. You’re going to see all the majors selling. I think they’ve decided to go out of the refining business in North America, probably with the exception of Exxon.

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Adding refinery assets will likely increase the amount of logistics assets available for PBF to drop-down and to the extent PBF is not a buyer at current prices PBFX would be materially accretive to all the other refiner sponsored MLPs.

Asset List

1. Delaware City Marine Terminal. Marine terminal located on the Delaware River for receipt of crude oil, feedstocks and products, and shipment of crude oil, feedstocks and products, by the Delaware City Refinery via ship and barge at docks located on the Delaware River.

2. Paulsboro Marine Terminal. Marine terminal located on the Delaware River for receipt of crude oil, feedstocks and products, and shipment of crude oil, feedstocks and products, by the Paulsboro Refinery

3. Delaware City Products Pipeline. The 23.4 mile, 16-inch interstate petroleum products pipeline originating at the Delaware City Refinery with terminus at Sunoco Logistics’ Twin Oaks terminal.

4. Delaware City Truck Rack. 10-bay, 76,000 barrel per day capacity truck loading rack located adjacent to the Delaware City Refinery.

5. Delaware City LPG Rack. LPG rack consisting of a 6 rail loading and unloading LPG rack located adjacent to the Delaware City Refinery.

6. Paulsboro Rail Terminal. Railcar terminal at the Paulsboro refinery used to transport refined products such as lube oils to various locations throughout the Northeast and other regions in the United States.

7. Rail Cars. Owned or leased general purpose and coiled and insulated rail cars.

8. Delaware City Storage Facility. Storage facility with approximately 10.0 million barrels of total storage capacity.

9. Paulsboro Storage Facility. Storage facility with approximately 7.5 million barrels of total storage capacity.

Catalyst

Raising of distribution at next earnings release 1/30/15