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Strong Buy on Oiltanking Partners

Zacks Equity Research

On Aug 16, Zacks Investment Research upgraded Oiltanking Partners L.P. (OILT) to a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

This partnership provides pipeline and related services to the oil and gas operators in the U.S. The oil and gas pipeline operator registered back-to-back earnings surprises with an average beat of 23.43%. The expected long-term earnings growth rate of this pipeline operator is 28.7%.

This pipeline operator registered a positive earnings surprise of 29.8% in the second quarter on the back of a solid sales surprise of 26.2%. The higher storage and throughput fee revenues boosted the top-line performance of the partnership.

The partnership has been investing steadily to expand its existing operations and storage capabilities. It will invest in the range of $135 million to $145 million in 2013 to execute its ongoing growth projects. Oiltanking Partners is presently working on the Appelt Phase crude storage expansion project. This project will increase total storage capacity by 3.3 million barrels to 25 million barrels, once it is completed by 2014 end.

In addition to ongoing development projects, the partnership is evaluating the possibility of new projects that will further strengthen its Houston terminal. Moreover, the partnership is assessing its option to start a project in Beaumont given increasing customer interest in the region. Oiltanking Partners’ transportation and storage capabilities in key production areas are likely to spur demand for its services going forward.

The strong performance is also reflected in its cash distribution. Oiltanking Partners has consistently increased its distribution every quarter since going public in the third quarter of 2011. In Jul 2013, the partnership increased the quarterly distribution rate to 42.5 cents per unit, reflecting a sequential increase of 4.9% and a year-over-year increase of 18.1%.

The present valuation also makes Oiltanking Partners attractive. The forward P/E multiple of the partnership is 20.9%, in line with the peer group average. The ROE of the partnership is 12.4%, which is 117.5% higher than the peer group average of 5.7%.  

The Zacks Consensus Estimate for 2013 has risen 8.4% in the last 7 days to $2.31per share, reflecting year-over-year growth of 47.04%. For 2014, the Zacks Consensus Estimate increased 14.6% in the past one week to $2.75, reflecting year-over-year growth of 19.1%.

Besides Oiltanking Partners, other operators in the sector having a favorable Zacks Rank are Magellan Midstream Partners L.P. (MMP), Pembina Pipeline Corp. (PBA) and Delek Logistics Partners, L.P. (DKL). Magellan Midstream Partners currently has a Zacks Rank #1 (Strong buy), while Pembina Pipeline and Delek Logistics carry a Zacks Rank #2 (Buy).

Read the Full Research Report on MMP

Read the Full Research Report on OILT

Read the Full Research Report on PBA

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