August 7th, 2014
Investing Daily Article of the Week
by Robert Rapier, Investing Daily
This week should see the debut of three new publicly traded partnerships.
Westlake Chemical Partners (expected ticker WLKP) was recently formed by Westlake Chemical (NYSE: WLK) to operate, acquire and develop ethylene production facilities and related assets. WLK is a manufacturer and supplier of petrochemicals, vinyls, polymers and building products produced at 16 plants across North America and one in China.
Westlake Chemical Partners’ business and operations will be conducted through OpCo, a new Westlake affiliate in which WLKP will initially own a 10% limited partner stake as well as the general partner interest. WLK retained a 90% limited partner (LP) interest in OpCo and will own WLKP’s general partner and 55.7% of WLKP’s limited partner units, along with the incentive distribution rights.
OpCo’s assets will be comprised of three production facilities that convert ethane into ethylene, which is the world’s most widely used petrochemical in terms by volume. Aggregate annual capacity of the facilities is approximately 3.4 billion pounds. Assets also include the Longview Pipeline, a 200-mile ethylene pipeline with a capacity of 3.5 million pounds per day that runs from Mont Belvieu, Texas to the Longview, Texas chemical complex.
The new MLP will derive substantially all of its revenue from its ethylene production facilities. Westlake’s downstream polyethylene (PE) and polyvinyl chloride (PVC) production facilities will consume a substantial majority of the ethylene produced by OpCo. In connection with the IPO, OpCo will enter into a 12-year ethylene sales agreement with Westlake, under which Westlake will agree to purchase 95% of OpCo’s planned ethylene production each year on a cost-plus basis that is projected to generate a fixed margin of $0.10 per pound.
The offering is expected to price on July 29 in a range of $19.00 to $21.00, generating estimated proceeds of $225 million. WLKP’s partnership agreement provides for a minimum quarterly distribution of $0.2750 per unit for each whole quarter, or $1.10 per unit on an annualized basis. At the midpoint of the offering price, this projects to an annual yield of 5.5%.
Transocean Partners (NYSE:RIGP) is a Marshall Islands growth-oriented limited liability company recently formed by Transocean (NYSE: RIG), to own and operate a fleet of offshore drilling rigs.
Transocean owns or has partial ownership interests in 77 mobile offshore drilling units, and specializes in operations in technically demanding regions of the global offshore drilling industry, with a particular focus on ultra-deepwater and harsh environment drilling services.
Initially, Transocean Partners is to own 51% of three ultra-deepwater drilling rigs currently operating in the US Gulf of Mexico. Transocean will own the remaining 49% of each. The rigs currently operate under long-term contracts with Chevron (NYSE: CVX) and BP (NYSE: BP) with an average remaining contract term of approximately four years.
The partnership plans to grow quarterly distributions by making strategic acquisitions from Transocean or third parties. The partnership agreement calls for Transocean to grant a right of first offer to Transocean Partners for its remaining ownership interests in each of the three rigs should Transocean decide to sell such interests. Transocean is also required to offer the partnership the opportunity to purchase a least a 51% interest in four additional drillships within five years following the closing of the IPO.
The IPO will market 17.5 million shares in a projected range of $19 to $21, and was expected to price on July 30. The partnership agreement calls for an initial quarterly distribution of $0.3625 per unit for each whole quarter, or $1.45 per unit on an annualized basis, for a projected yield at the IPO midpoint of 7.25%. Notably, like many other partnerships with significant foreign or marine operations, the partnership has chosen to pay taxes as a corporation, which means distributions will be 1099 income. (To better understand why a partnership would elect to be taxed as a corporation, see Marshalling the Marines.)
VTTI Energy Partners (NYSE:VTTI) is a Marshall Islands limited partnership formed by VTTI, one of the world’s largest independent energy terminaling businesses, to provide long-term, fee-based terminaling services for customers engaged in the production, processing, distribution, and marketing of refined petroleum products and crude oil. VTTI was formed in 2006 by Vitol — one of the world’s largest independent energy traders — and MISC, one of the leading maritime shippers of refined petroleum products and crude oil.
Initial assets of the partnership consist of a 36% interest in VTTI Operating, a VTTI subsidiary which owns a portfolio of six terminals with 396 tanks and 35.5 million barrels of refined petroleum product and crude oil storage capacity located in Europe, the Middle East, Asia, and North America.
The parent VTTI has increased its operating storage capacity by 47.6 million barrels through organic development projects, greenfield construction and acquisitions. VTTI Energy Partners plans to continue to grow through acquisitions from VTTI or third parties, organic development opportunities, greenfield construction and optimization of existing assets.
The offering is exactly the same size as the Transocean Partners IPO — 17.5 million shares at a projected offering range of $19-$21 — and was expected to price on July 31. The partnership agreement calls for an initial quarterly distribution of $0.2625 per unit for each complete quarter, or $1.05 per unit on an annualized basis, for a projected yield at the IPO midpoint of 5.25%. Also, as in the case of Transocean Partners, VTTI Energy Partners has chosen to be taxed as a corporation and will pay 1099 income.