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October 15, 2017

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Week Thoughts: MLPs in Moderation

Oil prices, natural gas prices, S&P 500, utilities, and U.S. Treasury notes all traded up this week.  MLPs did not.  Distribution surprises (cuts and moderations) were not well received.  The MLP market was firming ahead of earnings but clearly remains skittish when it comes to distributions, which clearly still matter quite a bit to a large portion of the MLP investor base.  Earnings season kicks off this week and is expected to include plenty of Harvey (the hurricane, not the guy) noise and MLP model navel-gazing.

Temperance Movement Continues
MLPs have been slowing distribution growth rates and cutting distributions throughout the oil downturn.   But this week was different because the largest MLP of them all – one with ready access to capital, investment grade rating, no IDRs and generally strong coverage – announced a transition to a self-funding model by way of reducing its payout ratio over time.  EPD cited strong opportunity set and desire to eventually fund the equity portion of an annual $2.5bn capital program entirely with internally generated cash flow.

EPD has been lauded for years for its retained distributable cash flow strategy, but with the transition to a more institutional investor base, EPD wants to push retained cash flow further.  We at CBRE Clarion been pushing for a self-funding business model (see MLP 2.0 whitepaper – March 2016) along with others in the sector, but the transition has taken longer than anyone likes.

But just the inclusion of language about a desire to reach self-funding status is a positive step for the sector.  Of course, there is at least one MLP that has been practicing that model already for nearly a decade (Magellan Midstream).
GEL’s distribution cut was more of the same that we’ve seen from others.  Reducing cash outflows is GEL’s best hope of eventually de-leveraging given limited growth prospects.  There are limited levers MLPs can pull these days to solve such challenges and remain competitive.  Reducing cash to limited partners is not as sticky a lever as it used to be, which is sobering for sure…
Winners & Losers
All the action was on the downside this week.  GEL’s distribution cut sent it to the bottom of group, although its -27.7% total return so far this year doesn’t crack the bottom 5 YTD.  A few others that have high leverage, low coverage and challenged growth prospects (like BPL and NS) followed GEL down.

A few MLPs rallied this week.  Recent IPO OMP is now well above IPO price after floating higher the last few weeks.  A few shipping MLPs made the top 5, helped by higher oil prices, while ARLP may have rallied on natural gas price strength.  TOO made it two straight weeks in the top 5, and USDP bounced back from the bottom last week.

General Partners & Midstream Corporations
GPs and midstream corps outperformed MLPs as a group.  Hopes of NS growing and driving growth at NSH seem to have faded a bit this week.  ENLC was unusual as a leader of the group, because it is similarly positioned to NSH with a high-yielding, low covering MLP subsidiary, but it was the worst performer last week so a bounce was perhaps in order.

LNG and EQGP outperformed for a second straight week.

Canadian Midstream
Canadian midstream corporations didn’t trade with the same dividend angst as MLPs this week, and were free to float higher with oil prices, which each of them did.

TRP passed Pembina for second place year to date.

News of the (MLP) World
Transaction news took a back seat to distribution growth announcements this week, so we’ll start there.

Distribution Announcements
This week’s distribution drama involved 2 of the 3 longest consecutive quarterly distribution growth streaks in the sector.  EPD’s streak now stands at 53 quarters in a row, each quarter since 2004.  GEL’s streak ended at 48 straight quarters.  HEP is second at 49 quarters in a row since 2005.  Other current streaks include: SEP (39), WES (34), MMP (30).

TLP’s distribution growth announcement came at 5pm Friday, so they missed their chance to be included.
Capital Markets

  • Targa Resources (TRGP) priced public offering of $750mm of 5.00% senior notes due 2028 at par (press release)
  • Phillips 66 Partners (PSXP) priced public offering of $650mm of senior notes (press release)
    • $500mm of 3.75% senior notes due 2028 at 99.620% of par
    • $150mm of 4.68% senior notes due 2045 at 100.024% of par

Growth Projects / M&A

  • Private player, Brazos Midstream, acquired a natural gas gathering system in the Southern Delaware Basin from Callon Petroleum (CPE) for an undisclosed sum (press release)
    • Assets will be anchored by long-term dedications for CPE’s acreage under development with an anticipated ramp in activity during Q4
    • Transaction will bring Brazos’ total processing capacity to 260 MMcf/d
  • Williams Partners (WPZ) announced agreements with Southwestern Energy (SWN) to expand its G&P services in the Appalachian Basin of West Virginia (press release)
    • WPZ will provide SWN with 660 MMcf/d of processing capacity to serve a 135,000-acre dedication which will result in WPZ further building out its Oak Grove facility
    • The Oak Grove facility has the ability to expand by an additional 1.8 Bcf/d of gas processing capacity
  • Energy Transfer (ETP) received FERC approval to place Rover Pipeline’s mainline compressor Station 1 into partial service (press release)
    • Rover is expected to be in full service by the end of Q1 2018
  • Cheniere Partners (CQP) announced substantial completion of Train 4 at the Sabine Pass Liquefaction Project (press release)
    • The first commercial delivery for Train 4 of the SPL Project is expected to occur in March 2018

Other

  • A U.S. District Court Judge ruled that DAPL can continue to operate while the Army Corps revises its environmental assessment (AP)

 
 

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