May 20, 2021
[8 min Read]
PBF Logistics owns, leases, acquires, develops, and operates crude oil and refined petroleum products, terminals, pipelines, and other assets in the United States of America. PBF operates under two main segments Transportation/Terminaling, and Storage.
PBF Logistics owns many assets such as DCR rail terminal (double loop track), DCR West Rack (oil unloading facility), Toledo Storage Facility (propane storage and loading facility), DCR Products Pipeline (petroleum products pipeline), DCR Truck Rack (truck loading rack), numerous gas/natural gas pipelines, and more.
PBF Logistics receives, handles, stores, and transfers crude oil and natural gas products. DCF currently has 5 refineries, that refine over 650M barrels/year. PBF has drop-down inventory of assets, which protects them if the price of the underlying asset (in this case oil) in case of a sudden market price decrease. PBF expects this safety to help them reach their future growth potential and increase their current EBITDA by over $200M.
PBF as a history of acquisitions and investments in the oil refinery space, and the are looking to extend this history this year by buying out the remaining 50% stake in the Torrance Valley Pipeline.
If you read my last analysis (on Global Ship lease $GSL) you would know that the demand for marine shipping (and shipping in general) is surging right now and is not expected to subside for at least a year. This is very good news for oil drillers, producers, transporters, refiners etc. as all of these means of transportation/shipping run on oil.
Furthermore, both OPEC (Organization of Petroleum Exporting Countries) and the IAC (International Energy Agency) says that there is currently a growing demand for oil that is not matched by supply and estimate that suppliers need to supply 2M more barrels per day to be at equilibrium with demand. Additionally, they also stated that they think oil producers will need to increase their supply by almost 6M barrels per day to meet the forecasted demand at the end of 2021. Essentially, this just tells us that the demand for oil is starting to pick back up, and that this increased demand may lead to increased oil prices later this year.
Also, as more people are getting vaccinated and countries are starting to open back up, individuals will be demanding more oil to get to/from work as many workers have been working from home over the course of the pandemic. This individual demand for oil should also be priced in.
Lastly, yesterday (May 18th) the IEA stated that there should be no new oil and gas investments after 2021. If this were to happen the supply for oil would decrease or remain stagnant, while the demand for oil will increase (and is expected to increase big time). This will most likely result in an imbalance between the supply of oil (from producers) and the demand for oil (by companies and individuals). Since supply will not be able to increase very much, demand will have to fall in order to have supply and demand levels in equilibrium, and the best way to do this is via a price increase. Such an increase would benefit oil companies like $PBFX.
PBF highlighted in their investor presentation that they expect their cash flows to be predictable and stable over the next 8 years, due to their long-term agreements having a weighted average life of 8 years. Additionally, they have downside protection if the price of oil suddenly fell (as previously mentioned), which will help decrease the volatility in their revenues. As a result of these factors, PBF has estimated that their historic CAGR of 12% will remain intact.
According to their growth plan (found in their investor presentation), if they meet all of their goals that they set out in this plan their EBITDA will grow to $315M by 2024-2025. This is consistent with the DCF model that I created, which can be found in the “valuation” section of this report.
As previously mentioned, PBF acquired the remaining 50% of Torrance Valley Pipeline Company (TVPC) for roughly $200M. In order to fund this acquisition PBF raised $135M via a direct offering. This deal closed in Q2 2019, and the shares have been diluted as a result. This deal helped PBF acquire 11 new pipelines and increase their refinery capacity by 75,000 bpd. With one of PBF's main strategies for growth being acquisition, dilution is something that we should look out for in future acquisitions.
To find $PBFX's competition, I used Finviz's screener and searched for small cap, American, Oil & Gas Midstream stocks. Out of these stocks I chose 4 of their best/closest competitors, these companies are BP Midstream Partners ($BPMP), Delek Logistics Partners ($DKL), Global Partners ($GLP), and Oasis Midstream Partners ($OMP).
All of these companies and some information about their stock can be found in the comparable analysis, which will be covered later in this report (under the “valuation” section).
This section will be used to explain where I got the information for my DCF model, and why I chose to use it.
I found the Weighted Average Cost of Capital from a website called “Financial Modelling Prep”. On this site they went through the steps that they took to arrive at the WACC for $PBLX. Their calculation came out to a WACC of 11.56%, which I used in the DCF model.
This figure was found in PBF Logistics most recent investor presentation, in which they estimated their CAGR to be 12.00%. As stated earlier, their 2024- 2025 EBITDA projection lines up my DCF model, which further validates the accuracy of this figure.
Interest Expense Growth Rate:
In order to arrive at this figure, I averaged the growth rate of $PBFX's interest expense over the past 4 years. I got this interest expense information on ycharts.com, and my calculation yielded an interest expense increase rate of 11.45%.
In one of $PBFX's SEC Filings they noted that they pay the standard American Corporate Tax Rate, which is 21%.
Investment Valuation and Plan:
In order to value $PBFX, I underwent a DCF model, a comparable analysis, and an Intrinsic Value to Market Value comparison.
In order to build out my DCF model I used the inputs found in the “valuation information” section of this report. The implied upside according to my DCF model is 35.01%, which implies the share price to rise to $20.31. To verify these numbers, I decided to do a comparable analysis.
In order to get the best idea of what $PBFX should be valued at I compared their EV/EBITDA, EV/Revenue, and P/E multiples to that of their competitors (listed in the “competitors' section”).
I decided to compare this multiple because it is standard practice in investment banking. This comparable implies a share price increase of 29.06% to a price of $19.42/share. This is consistent with the DCF valuation and increases my confidence in this valuation.
Once again, the EV/Revenue multiple is commonly used in valuations, however it is especially used during acquisitions, and as we know PBF Logistics has embarked on several acquisitions and plan to undergo more in the future to sustain growth. With that being said, this comparable implied a share price increase of 31.49% to a price of $19.78. This is consistent with the previous two valuations and supports their conclusion.
The P/E ratio helps to group different types of companies (fast growers, volatile, stable etc.) all into one basket with consistent information. The P/E comparable implies a share price increase of 28.89% to a share price of $19.39. Once again this is consistent with the other valuations and increase my conviction that this stock will reach these prices.
I was able to calculate the intrinsic value of this stock by taking the EV, adding cash, and subtracting their debt. This valuation implied a 2.25% share price increase to $15.38/share. This is not in line with the other valuations. However, it is consistent with the consensus that $PBFX is undervalued.
My plan for this investment is to seek an entrance into a position anywhere under the $15.38 (Intrinsic Value) point.
If this investment were to reach between $19.40-19.80, I would sell my shares, and lock in a gain of 29-32%
If this investment were to drop was to drop below $13.27, I would sell and move on. (11% downside)
Essentially you are risking an 11% decrease, for the potential 32% increase. This implies a risk to reward ratio of about 3:1.