Phillips 66 recently announced deals with three companies to increase the supply of North American crude oil to Phillips’ refineries. This will boost Phillips profits since North American crude is roughly $15/bbl cheaper than Brent crude that Phillips buys for its East Coast refineries. While these deals are important to Phillips, they have their own respectable businesses, too. Let’s take a look at them.

Pipes and rails
Enbridge Energy Partners subsidiary Enbridge Rail (North Dakota) recently announced a three-year deal with Phillips centered on Enbridge’s Berthold rail facility beginning May 1, 2013. This agreement complements nicely another Enbridge Rail venture with Canopy Prospecting centered on its operations in Philadelphia.  

These rail operations help Enbridge’s earnings, but the “meat and potatoes” business centers on its pipeline assets. Not only will Enbridge expand its rail facilities, the company budgeted over $7 billion for pipeline asset expansion. As the map below shows, Enbridge pipelines connect some of the major oil plays in the US to Gulf Coast refineries.

Map taken from EEP Day, Investment Community Conference, New York City, March 6.

As an investment, Enbridge pays a distribution of roughly 7.56%. The payout increased by 15.5% since 2007. Will the income continue? According to its investor presentation, Enbridge expects a 2%-5% distribution growth. However, clean-up costs from a Michigan oil spill may cut into corporate earnings. This could limit both distribution growth and capital gains.

A diversified midstream operation
Targa Resource Partners primarily operates natural gas, gas liquids and oil midstream operations out of Texas. However, the Phillips deal will expand Targa’s geographic reach by supplying the Phillips refineries in Ferndale, Wash., and near San Francisco with oil by rail and barge.

Targa also exports propane and butane from its Houston terminal. This allows the company to capitalize on the spread between US and world propane/butane prices. To expand this activity, Targa recently purchased a dock and rail assets. The hope is Targa’s exports will double by this time next year.

Targa’s expansion plans extend beyond propane exports. The company recently finalized a deal that gives Targa oil and natural gas midstream assets in the Williston Basin in North Dakota. This marks Targa’s entry into the Bakken shale play. As a result of this acquisition, Targa expects a 10%-15% increase in its EBITDA for 2013. This may explain recent insider and institutional buying.

Targa’s MLP offers a distribution yield of about 6.2% with distributions consistently rising since 2007. One red flag for the MLP: for the past two quarters, its distribution coverage was 1.0. Future distribution growth may be hampered.

An alternative investment is Targa Resources that pays a lower yield but boasts an enviable capital gains track record, at least since its IPO in 2010. Earnings increased 35% over the previous year and the Phillips deal, along with Targa’s growing exports, should keep this trend going.

A midstream player with a steadily rising distributions and capital gains
Magellan Midstream Partners not only signed a deal with Phillips 66, it reported record quarterly and annual earnings. Distributions increased 18% for the year. Even better, the coverage ratio was 1.3, more than enough to pay this growing distribution. This distribution growth continues a tradition of rising distributions since 2010.  The company forecasts distribution grow of at least 10% for 2013 and 2014.

Magellan achieves these financial results through its petroleum pipeline and terminal business. It also operates ammonia pipelines, but these make a modest contribution to the company’s earnings. The fee-based transportation of crude oil and refined petroleum products primarily drive the company’s revenues with product storage being the second largest contributor.

Transportation of crude oil currently makes up roughly 10% of the petroleum products shipped by Magellan. In 2013, the company plans significant investments to increase its crude oil shipping capacity. Key oil plays receiving this attention include the Permian and Eagle Ford Basins. Planned acquisitions will put Magellan into the Rocky Mountain oil plays.

Magellan bills itself as an investment grade company and structures its distributions and capex accordingly. The company plans to maintain a coverage ratio of at least 1.1 and finance its acquisitions with current cash or credit facilities. Little wonder why the company stock has gone from roughly $30 per share to $51 share in the past two years.

Final Foolish Thoughts
Investors in Phillips 66 currently enjoy a one-year return of almost 90% and the stock sells for less than 10 times earnings. With the recent sell off, this looks very appealing. If you want some income with your capital gains, Magellan looks like a great investment.  Both the stock and distribution are rising and the company has positioned itself for more growth in Bakken shale oil. Take Enbridge if you need income now. Be careful with Targa given its low coverage ratio.

This article was originally published as 3 Phillips 66 Partners -- Good Investments in Their Own Right?on Fool.com

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