Phillips 66 Downgraded By Morgan Stanley On Valuation

Phillips 66 Partners LP PSXP, a master limited partnership that owns, operates, develops and acquires mostly fee-based crude oil and other products, boasts a strong underlying business that's overshadowed by stock's premium valuation, according to Morgan Stanley.

The Analyst

Morgan Stanley's Tom Abrams downgraded Phillips 66 Partners from Equal-weight to Underweight with a price target lowered from $55 to $50.

The Thesis

Phillips 66 offers an attractive underlying integrated business with the potential for a high-single-digit organic growth rate, Abrams said in the downgrade note. (See the analyst's track record here.)

The company is well ahead of its dropdown-driven MLPs peers, as it has already completed a necessary shift to focus on organic growth, the analyst said. Some of the company's organic projects that will support a "top-tier" growth profile of 10-12 percent include Sand Hills and Bayou Bridge, he said. 

The company is now at the end of a six-year period where it oversaw 30-percent compounded annual growth in distribution with a best-in-class organic growth profile, Abrams said.

A revision to the stock's rating may be appropriate, as Phillips 66's stock is trading at 14.7 times 2019 estimated EV/EBITDA and 14.5 times 2021 estimated EV/EBITDA, the analyst said. Both of these are one to two turns higher than some of the company's more mature peers with similar growth expectations, he said. 

Morgan Stanley's new $50 price target is based on a combination of the following assumptions: an 11-percent discount rate; 13 times 2019 estimated EV/EBITDA; 12 times 2019 P/DCF and a 6.25-percent yield.

Price Action

Shares of Phillips 66 Partners were trading lower by 0.35 percent at the time of publication Friday. 

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