Should Income Investors Buy This Recent IPO?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It’s rare that you find a recent IPO that actually has plans to distribute any of their profits to their new owners. Typically a company will go public because they need the cash to expand and returning money to their investors is the furthest thing from their mind. However, the recent IPO of PetroLogistics (NYSE: PDH) gives income focused investors something new to consider. The real question though, should consider adding them to produce some income for your portfolio?
PetroLogisics is a limited partnership that owns the world’s largest propane dehydrogenation facility. Without getting into the technical specifics, using propane as a feedstock they produce propylene which is one of the basic building blocks of petrochemicals that are used to produce a variety of products including paints, clothing and automotive parts. The facility has annual production capacity of 1.45 billion pounds, which is about 4% of total US demand.
For a bit of history, they bought the location for their plant from ExxonMobil (NYSE: XOM) in 2008. The Exxon site was a former ethylene production facility that they partially demoed and so that PetroLogistics could build their PDH facility on the site. The plant started production in October 2010 and they went public in early May at $17 a share. Having just reported their first quarterly earnings and with shares now below $13 we now have some more data upon which to consider an investment in company.
PetroLogisics is unique in that they own but one asset, but with it they sell propylene to a diversified list of the who’s who of petrochemical companies including Dow (NYSE: DOW), Total and BASF. Those customers are all signed to multi-year contracts that expire between 2013 and 2018. At a minimum these customers take 75% of their capacity up to a maximum of 100% of capacity. They are supplied propane solely by Enterprise Products Partners (NYSE: EPD) at market based rates.
They make their money on the spread between what they pay for the propane and where they sell their propylene. As an MLP they’ll be distributing a majority of their income to their unit holders. Because the spread between propane and propylene can change, so can their distributions to unit holders. In fact in the prospectus they point out that there is no guarantee that they will pay and distributions in a given quarter. However, they do expect the spread to increase over the next year which should take the distribution up with it.
My concerns with the company are twofold. First, I’m concerned by the fact that one of their largest customers and their sole supplier of propane would appear to be in the process of becoming direct competitors. Secondly, with just one operating asset new investors are taking on a lot of operational risk by investing in the company. However, I don’t think either risk is detriment.
Even though Dow is building their own plant that could come online in 2015 but they recently extended their contract with PetroLogistics until 2018. Further, while Enterprise is also building a PDH unit, theirs will be a fee based unit and not spread based in which they’ll be taking no commodity risk. Because propylene supply has been contracting over the past few years which propane supplies are increasing and there is a propylene supply gap that’ll need to be filled, PetroLogistics shouldn’t see much if any impact to their spread. Finally, every employee at their PDH plant is a unit holder, which means each employee has a vested interest in the success of the plant. That’ll go a long way in ensuring their operational risks are minimized.
Bottom Line:
With just one plant and without a growth pipeline in place, investors are solely banking on PetroLogistic’s ability to increase the spread to support distribution growth. Further, that distribution isn’t likely going to be stable if the spread tightens. If you’re not afraid of fluctuation distributions then PetroLogistics might be cheap enough for you to consider, otherwise I’m not sold on income investors adding them to their portfolio. I think Enterprise is the better choice here with their growing distributions and $8 billion in projects in the pipeline.
latimerburned owns shares of Enterprise Products Partners L.P. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Enterprise Products Partners L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
