Description

[Writeup last updated for yesterday’s (6/4/20) closing price of $11.97… apologies for significant appreciation so far today, along with most of the market!] 

PBF Logistics (PBFX) was last written up in 2014 by aaron16.

We believe PBF Logistics (PBFX) represents a compelling opportunity at the current price with potential upside of ~40% to ~65% (not taking into account the 10% dividend yield and anticipated distribution growth) as it currently trades at ~7.5x EBITDA and under 5x LTM Distributable Cash Flow (DCF) despite a majority of its cash flows being supported by multi-year, take-or-pay agreements with a supportive sponsor.

PBFX, the master limited partnership formed by PBF Energy (PBF), has sold off along with the overall energy MLP sector and remains down ~40% YTD (vs. Alerian MLP Index down -30% YTD). We believe the initial sell-off in March was likely exacerbated by forced selling pressure from dedicated MLP and high-yield funds, including closed-end fund deleveraging.

Contrary to what the magnitude of the recent sell-off would imply, PBFX should be well positioned given its lack of direct commodity price exposure, and the fact that ~80% of its revenue stream is supported by long-term, fee-based agreements with a supportive sponsor (see breakdown of contractual agreements with PBF Energy below). Unlike other MLPs that have meaningful exposure to oil producer activity, PBFX’s asset base primarily consists of crude and product storage, pipelines, and distribution/unloading facilities that are closely integrated with PBF’s operating refineries and therefore essential to the refining operations of the parent. The revenue stream from PBF is underpinned by multi-year, take-or-pay agreements (minimum volume commitments) with approx. 7-year weighted average base contract life. PBF owns ~48% of PBFX Logistics and 100% of the General Partner (GP), creating a close alignment of interests.

Source: PBFX investor presentation (May 2019)

Below is a table outlining the timing and estimated EBITDA contributions associated with PBFX’s Dropdowns/Organic growth projects and Third Party Acquisitions based on disclosures, press releases and commentary by management. In some cases, the EBITDA contribution associated with certain organic projects and third party acquisitions was not specified, but the list below should provide a reasonable representation.

Based on the information above, the EBITDA generated under agreements with PBF Energy at the East Coast Terminals (Est. ~$5mm) would potentially be up for renewal first since the contracts associated with those assets range between 1 to 5 years in length. The two largest sets of agreements with PBF Energy, the Rail Agreements and the Torrance Valley Pipeline agreement, which collectively represent over $100mm of EBITDA expire in late 2025/2026. The rail agreements (primarily related to the Delaware City Rail Terminal asset included in the IPO assets, and the DCR West Rack asset dropped down in September 2014) collectively amount to approx. ~$65mm in EBITDA. Those agreements were scheduled to expire in December 2021 but PBFX/PBF preemptively extended those agreements to December 2025; the extension period (2022-2025) agreement contains lower MVC volumes so the minimum EBITDA associated with those rail agreements would likely decline from ~$65mm to ~$50mm beginning in 2022.

As you can see in the table below, we estimate that roughly ~$25mm of the contracted EBITDA with PBF Energy, or less than 15% of PBFX’s LTM EBITDA will be subject to contract expirations by 2023. The majority of PBFX’s contractual agreements with PBF expire between 2025-2027.

PBFX’s exposure to PBF Energy does present a degree of counterparty risk but that risk has been substantially reduced as a result of recent efforts by PBF Energy to improve its liquidity position. In response to the challenging near-term product demand and refining margin environment, PBF Energy announced that it was suspending its dividend, reducing 2020 capex by ~$350mm, and selling five hydrogen plants for cash proceeds of $530mm to Air Products & Chemicals. We believe the hydrogen plants were sold for 8x-10x EBITDA, indicating that PBF was not a distressed seller and our checks suggest that the company has additional assets that could be monetized if necessary. In connection with its earnings call in mid-May, PBF disclosed that it had $2bn of liquidity as of May 1st pro-forma for the $1bn notes offering in May, including ~$800mm of cash (excl. cash held at PBFX) and ~$150mm of additional borrowing capacity under the revolver. While working capital changes was a headwind to refiner liquidity in Q1’20 as a result of the sharp decline in commodity prices, rising prices are expected to provide an incremental benefit to liquidity going forward (see commentary below)

PBF CFO on Q1’20 call: “Assuming current commodity prices remain relatively constant. We expect our liquidity to improve as working capital continues to normalize in May, and our revolving credit facility borrowing base increases."

 PBFX announced in mid-May that it was reducing its distribution by ~40% and that cash flows would be re-directed towards de-leveraging, substantially improving its distribution coverage, and increasing its financial resources to fund growth projects and/or strategic acquisitions. Given the strong contract support for the majority of its cash flows, the cut in PBFX’s quarterly distribution from $0.52/unit to $0.30/unit was not based on the company’s performance or outlook, but rather out of an abundance of caution and by what management described as a “move to conservativism”.

Despite its focus on de-leveraging, it is worth noting that PBFX does not have any debt maturities until 2023 and its standalone net leverage of 3.4x annualized Q1’20 EBITDA (3.7x LTM EBITDA) compares favorable to most peers and implies that the company has covenant headroom of approx. 1x turn (the company’s leverage was temporarily elevated in 2019 due to the borrowing required to fund a drop-down from PBF).

As a result of its distribution reduction, PBFX does not screen as inexpensive relative to peers on a dividend yield basis (PBFX trades at a 10% dividend yield). However, we believe valuing PBFX on the dividend yield alone would be overly punitive given its superior distribution coverage (>2x in Q1’20 vs. peer average of ~1.4x), which ensures that PBFX has plenty of runway to grow the distribution from the current level. In connection with the distribution reduction announcement, PBFX mentioned that this represented a “short term shift in [its] distribution strategy” and we believe the excess coverage should allow for stable distribution growth in the +5%-10% range. PBFX trades at 4.9x LTM Distributable Cash Flow (DCF) compared to peers at ~7.4x. Valuing PBFX at 7x-7.5x LTM DCF would imply a unit price of $17-$18 (implies ~40%-50% upside before taking the dividend yield into account).

PBFX currently trades at ~7.5x EBITDA, a meaningful discount to MLPs with similar asset quality and contract support (peer average: 9.7x EBITDA). Valuing PBFX at 9x-10x EBITDA (vs. long-term average for peers closer to 12x EBITDA) would imply a unit price of $17.00 to $20.00, representing potential upside of ~40% to ~65% from here.

It is our understanding that PBF/PBFX management is frustrated by PBFX’s mispricing in the market and could consider redeploying a portion of the cash flow savings from the distribution cut towards unit repurchases, which could be a way to build shareholder value over time if unit prices persist trading at a steep discount to intrinsic value. 

We believe the risk-reward is compelling at this price given that the majority of PBFX’s revenue stream is supported by long-term agreements (with MVCs), counterparty risk has been substantially reduced as a result of PBF’s efforts to improve its liquidity profile, and the company has now provided clarity regarding its distribution policy. Valuing PBFX more in line with peers would imply a unit price of $17.00+, or >40% upside from the current price. In the meantime, we will be paid to wait as PBFX is paying out a ~10% dividend yield, and excess coverage should allow for distribution growth in the +5%-10% range.

Catalyst

PBF's survival

Distribution increases at PBFX accommodated by excess coverage

Ultimately, return to higher valuation and re-establishment of win/win dropdowns with parent, through which PBF can arbitrage valuation on acquired logistics assets, and PBFX can sustainably grow its distributable free cash flow and distribution to unitholders