January 14, 2017
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MLPs paused their recent rally in the first full week of trading since before Christmas. MLPs faced commodity headwinds Monday, and then equity indigestion Tuesday from the first two big midstream equity offerings of 2017 that combined to raise more than $2.3bn.
Still Pulling Levers
MLPs started pulling levers in 2015 when it became clear oil wasn’t going to have a V-shaped recovery. Those levers continue to be pulled today. Some were never pulled or weren’t really options. Before KMI cut its dividend, some thought maybe Rich Kinder would forego distributions on units he owned before cutting dividends to everyone else. Others speculated that ETE would cut its distribution to support its MLPs or that Kelcy Warren might take a distribution haircut. Those levers were never pulled, and dividend/distribution cuts have become a more palatable option.
The IDR structure has become a problem for the sector, but that problem becomes paralyzing when the IDRs are held within publicly-traded companies. It used to be that a founder or family or small private group owned the GPs of most MLPs. Investment bankers, private equity and IPOs changed all that.
The result is MLPs have levers to pull, but the levers become a “Trolley Problem” situation, where pulling a lever to save one group crushes another.
The remaining MLPs that pay 30% or more of their total distributions to their IDRs: SXL/ETP, WES, TEP, OKS, TLLP, PSXP, HEP, EQM. SEP and DPM are on the cusp as well. Each one of those has either a pure-play publicly-traded G.P. or an affiliated public company with other assets, or in several cases, they have both.
MLP strategies change with each lever pulled. KMI, MPLX, PAA, ETP/SXL, and now WMB have all dramatically changed their financial strategies multiple times over the last few years. They pulled levers one by one, and the resulting changes in strategies are the progression of increasingly dire financial circumstances.
KMI first lowered its growth rate, scaled back capex (after buying Hiland Pipeline), then did a large preferred offering, and finally cut its distribution outright. PAA issued equity, slowed distribution growth, reduced capex, sold non-core assets, and ultimately swapped out its IDRs for new units and cut its distributions.
WMB got a late start, caught in limbo for almost a year as the ETE merger tromped through leaving carnage in its wake. But WMB reduced capex, sold assets, and cut its dividend. Then, after re-vamping its board of directors, swapped out its IDRs for units, issued $1.9bn in common equity and ramped the distribution back up. It’s hard to keep track.
There remain a few MLPs that have yet to pull all their levers and may still need to. The obvious and easy levers have all been pulled.
Winners & Losers
The winners and losers chart shows some larger MLPs near the bottom and smaller cap MLPs near the top. No real themes among trading other than that. There was choppy trading even among MLPs with similar value propositions or sectors this week. DM was among the worst performers, while other drop-down MLPs like VLP, PSXP and other traded up. On the chart below one compression MLP was in the top 5 while another was in the bottom 5. The market continues to sort itself out after analyst upgrades and before earnings season.
YTD Leaderboard
Two weeks in and there is already a wide spread between winners and losers.
Notable that DPM pulled itself out of the hole its strategic transaction put it in last week.
General Partners and Midstream Corporations
WMB was clearly the biggest loser in the sector, dramatically underperforming its MLP (WPZ +3.0%) after its massive equity offering. ETE also issued equity and found itself near the bottom of the group. KMI’s latest approval for the Trans Mountain Pipeline expansion has raised expectations heading into earnings next week. AROC led all GPs and corporations for a second straight week as the market re-discovers the compression business.
News of the (MLP) World
MLP customers continue to trade acreage across hot and cold basins. This week Parsley, WPX added more acreage in the Permian, and Sanchez teamed with Blackstone to take down APC’s Eagle Ford position.
Second tier basin transactions like Sanchez’s have the potential to add activity to areas with low or no expectations of activity. Sanchez plans to run 4-5 rigs vs. none planned if APC retained the acreage, adding up to 100+ more wells than expected. Last year, upstream equity offerings, balance sheet fixes and contract renegotiations drove some MLP performance. This year, new acreage owners will announce plans to deploy fresh capital that should offer greater visibility for some MLPs.
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Growth Projects / M&A
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