At the end of the previous quarter, it was really starting to look like Holly Energy Partners (NYSE: HEP) was approaching the end of its days as a publicly traded entity. Management's despondent responses to analyst questions suggested that its parent company HollyFrontier (NYSE: HFC) would acquire it in a move similar to other refiners recently.
The quarter has gone by, though, and there aren't any new signs that management has any plans other than to stay the course. So let's look at Holly Energy Partners' most recent results to see what "staying the course" means for investors.
Image source: Getty Images.
By the numbers
|Metric||Q4 2018||Q3 2018||Q4 2017|
|Revenue||$132.7 million||$125.8 million||$129.2 million|
|EBITDA||$89.9 million||$86.9 million||$124.6 million|
|Distributable cash flow||$64.2 million||$66.6 million||$65.5 million|
Data source: Holly Energy Partners earnings release.
As is the case with all other master limited partnerships, the most important number in Holly Energy Partners' results is distributable cash flow. Even though EBITDA declined significantly compared with this time last year, that was largely a product of a one-time gain related to a remeasurement of pre-existing equity interests. Overall, the company's distributable cash flow number was steady but declined slightly because of some downtime at its refinery unit at the Woods Cross refinery.
Data source: Holly Energy Partners.
During the quarter, management announced its 57th consecutive quarterly distribution increase. While that sounds great on paper, it also resulted in a distribution coverage of 0.94 times for the quarter and 0.98 for the year. As modest as Holly Energy Partner's distribution increases have been lately (the most recent one was a 3% increase versus last year), it hasn't been able to grow cash flow fast enough to cover those increases.
For 2019, management projects it will be able to achieve a coverage ratio of 1.0 thanks to higher tariff rates built into contracts that will take effect in the second half of the year. Again, that sounds good on paper, but it leaves the company little wiggle room should anything go wrong.
What management had to say
On the company's brief conference call, CEO George Damiris highlighted some of the company's smaller, quick-hit capital investments and how Holly Energy Partners expects to use these types of investments to grow the business in the near term.
During the quarter, we completed several small organic projects that expanded the capacity of our Permian crude oil gathering system to approximately 160,000 barrels per day. In January, we completed the construction of the diesel truck loading rack in Orla, Texas. This diesel rack is a prime example of a win-win project, for HEP Partners with HFC to capitalize on commercial opportunities that benefit and add value to both companies.
Looking ahead to 2019, we will continue to leverage our existing footprint to execute organic projects. As production continues to increase in the Permian, we'll pursue opportunities to expand our crude gathering and product distribution systems in the region.
A 9% yield all by itself isn't that bad
So here's the bad news when it comes to Holly Energy Partners stock. You probably aren't going to get a lot of growth from the business or substantial price appreciation. Management's capital allocation plans are modest at best, and unless it or HollyFrontier does some sort of acquisition in the near future, it's fair to say that the company isn't going to grow much faster than this.
Having said that, a 9% yield that is backed by incredibly consistent revenue and cash flow isn't that bad of a value proposition. Someone looking for income could certainly do a lot worse. While Holly Energy Partners stock is by no means for everyone, someone looking for a quarterly income check may want to give it a look.
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