There is no commercial value chain in which you wouldn’t want your customers feeling flush and suppliers desperate. That pretty much explains our attraction to the downstream energy sector, which predates the oil crash but has only grown since.

Crude refiners tend to do well when the price of their raw material is low, especially if it’s not low because the economy’s in the tank, because then low fuel prices can really pump up demand. And what’s good for refiners is also good for their logistics providers, as well as fuel wholesalers, retailers and shippers.

The market doesn’t disagree, which is why the prices of refiners and other downstream businesses have recently run up while drilling stocks have been discounted.

So if you can find a relatively new downstream asset that’s maybe gotten lost in the shuffle a little bit and still offers both a solid yield and the high certainty of rapid near-term growth, you really might have something.

We think we do in PBF Logistics (NYSE: PBFX), spun off last May by PBF Energy (NYSE: PBF), owner of two big East Coast refineries and a smaller one in the Midwest.

PBFX supports crude oil logistics for those refineries. And while it lacks the scale of investor favorites Phillips 66 Partners (NYSE: PSXP) and MPLX (NYSE: MPLX), it does offer a lower valuation and a much higher yield as well as plenty of growth from a less demanding base.

PBFX went public as owner of a light crude rail unloading terminal at PBF’s Delaware City, Delaware refinery that also serves the company’s Paulsboro, New Jersey, refinery a little further up the Delaware River. Also included in PBFX’s dowry for the initial public offering was the crude oil truck unloading terminal at PBF’s refinery in Toledo, Ohio, supplying crude to all three PBF refineries.


Source: PBF Logistics presentation

The Delaware City Rail Terminal has since been expanded to an unloading capacity of 130,000 barrels per day (bpd), and PBF Logistics has in the meantime acquired the Delaware City West Rack and the Toledo Storage Facility from PBF Energy. These dropdowns are projected to boost the earnings run rate of the partnership by more than 70% relative to that in the third quarter of 2014.

The Delaware City West Rack is a rail yard at the Delaware City refinery capable of unloading 40,000 bpd of crude. It was acquired for $150 million and is expected to contribute $15 million of EBITDA (earnings before interest, taxes, depreciation and amortization) annually to the partnership. The transaction closed on Sept. 30.

The Toledo Storage Facility is located next to the Toledo refinery and provides approximately 3.9 million barrels of combined feedstock and product storage capacity, including a propane storage and loading facility. The tank farm and propane loading activities are expected to contribute approximately $15 million of EBITDA annually, and are supported by a 10-year terminaling and throughput agreement. This facility was also acquired for $150 million; the transaction closed on Dec. 11.

The $30 million in EBITDA these two acquisitions are expected to add is a substantial number considering that annualized EBITDA for Q3 2014 was $42 million. Even though Q4 results only reflected a 20-day contribution from the Toledo Storage Facility, annualized EBITDA rose to $70.4 million. That was enough to produce 1.6x coverage on a distribution of 33 cents per unit, 3 cents above what PBFX paid in the immediately prior quarter that was its first full one as a public company.

On the conference call following the fourth-quarter earnings, management said it’s targeting annual distribution growth in the mid-teens. Fueling that will be assets generating $100 million to $125 million of annual EBITDA for the parent that are available to be dropped down to PBFX. Among them are marine terminals on the East Coast, additional storage facilities at Delaware City and Paulsboro, refined products pipelines, a heavy crude terminal, and miscellaneous rail terminals, truck racks and liquefied petroleum gas (LPG) loading and unloading facilities. Given the expected ~$72 million of EBITDA in 2015 from current assets, the eventual dropdown of assets contributing an additional $100 million or more implies strong growth for many years.

PBF Energy has retained 52.1% of limited partner interests in PBFX, 100% of the general partner interest and incentive distribution rights (IDRs). The latter give it incentive to accelerate the distribution growth at its affiliate.

Like other refinery logistics MLPs, PBF Logistics is protected by long-term, fixed-fee contracts with its sponsor that contain minimum volume commitments and annual inflation escalators.

The valuation of PBFX is very attractive relative to aforementioned peers PSXP and MPLX. Based on expected EBITDA in 2015 of $72 million (before additional drop-downs), PBFX trades at an Enterprise Value (EV) to EBITDA ratio of ~16. By contrast, PSXP trades at a trailing EV/EBITDA ratio of 41, while MPLX has a trailing EV/EBITDA ratio of ~26. PSXP and MPLX sport annualized yields below 2%, while PBFX now yields a respectable 5.5%.

Perhaps a better comparison for PBFX is Growth Portfolio recommendation Delek Logistics (NYSE: DKL), another fast-growing recent logistics IPO from a small operator of refineries. It offers comparable growth and distribution coverage and a yield of 5.2%.

Holly Energy Partners (NYSE: HEP), another refinery logistics MLP we like, now yields 6.4%, but as a more mature operator it lacks the near-term growth potential of DKL or PBFX.

Despite the 10% distribution increase in Q4, the 5.5% yield and an impressive portfolio of assets still to be dropped down, PBF Logistics is still trading 15% below its May IPO price. We’re adding it to the Growth Portfolio. Buy PBFX below $28.