U.S. refiner Phillips 66 agreed to buy the rest of its pipeline affiliate that it doesn’t already own in an all-stock-deal valued at about $3.4 billion, the latest effort to streamline midstream operations.
Investors in the affiliate, Phillips 66 Partners, will get 0.5 of a Phillips 66 share, the companies said Wednesday in a statement. The Partnership’s preferred units will be converted into common units at a premium to the original issuance price prior to exchange for Phillips 66 common stock. After the deal closes, which is expected in the first quarter of 2022, the pipeline operator will be a full subsidiary of Phillips 66.
The deal is the latest blow to the tax-efficient master limited partnership model once popular in the energy industry. Spinning out pipeline businesses into separately-listed MPLs was a well-trodden path for companies to attract capital, but the structure has lost the favor of investors since the crude-market crash of 2014-2016 and a change to U.S. tax policy that pummeled MLP stock prices. The number of MLPs have dwindled, with companies including TC Energy Corp. rolling up their sponsored pipeline operations.
“We believe this acquisition will allow both PSX shareholders and PSXP unitholders to participate in the value creation of the combined entities,” Phillips 66 Chief Executive Officer Greg Garland said in a statement.
The deal also comes as Phillips 66, the second largest U.S. refiner by market value, recovers from pandemic lockdowns that drastically reduced fuel demand last year.
A simplified story can help Phillips 66 resonate further with investors as energy markets recover, Justin Jenkins, an analyst at Raymond James & Associates Inc.,said in a note to clients, adding that some investors may have reservations about the timing or the valuation of the transaction.
Phillips 66 shares fell 2.2% as of 9 a.m. in New York before regular trading hours.