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Master Limited Partnerships

Key Quotes from Midstream MLPs’ Second-Quarter Earnings Calls

By Peter Staas, on Aug. 28, 2016

The Alerian MLP Index, a capitalization-weighted basket of 50 prominent master limited partnerships (MLP), has delivered a total return of almost 16 percent this year, topping the 6.9 percent gain posted by the Philadelphia Oil Service Sector Index and the 28 percent loss posted by the Bloomberg North American Refining and Marketing Index.

(Click graph to enlarge.)YTD Energy TRA

However, MLPs have lagged the Bloomberg North American Independent E&P Index, which has rallied 34.13 percent and includes only a minimal contribution from dividends.

After successive waves of indiscriminate selling and buying, the easy money has been made in the MLP space; going forward, investors must have a firm grasp on underlying fundamentals to achieve differentiated returns.

Second-quarter earnings season is done and dusted for midstream master limited partners (MLP) that own pipelines, processing and fractionation capacity.

As always, we scrutinized financial results and earnings calls from every midstream MLP; the most recent issue of Energy & Income Advisor highlights our key takeaways from this exhaustive (and exhausting process) as well as our updated takes and buy targets for all of these names.

While reading through conference calls, we compiled a series of quotes from management teams that provide insight into some of the macro trends that will continue to drive returns and opportunities in the space.

Subscribe to Energy & Income Advisor for more analysis of the rapidly evolving energy sector and our best investment ideas.

Evergreen 2015

Boardwalk Pipeline Partners LP (NYSE: BWP)

CEO Stan Horton: “I’ve said in the past that I kind of look at the deal flow that goes through our commercial group, not every deal that they work on is going to wind up into fruition, but if you kind of look at the deal flow from time-to-time on things that they’re working on, I’m pretty bullish that we’re going to continue to see these kind of projects in the future. We’re still seeing a lot of demand growth in electric generation, not every LNG facility has every bit of contracts that they need. I do believe in the years ahead, there’ll be additional ones constructed. We’re seeing some growth in the River Corridor area for industrial.”

  • Opportunities on the demand side for natural gas will continue as utilities and industrial users transition away from coal and the rollout of renewable energy requires additional baseload power.

DCP Midstream Partners LP (NYSE: DPM)

CFO Sean O’Brien: “In our ongoing targeted discussions with producers, we are beginning to hear a change in their tenor to cautious optimism ar

ound the potential for growth opportunities, foremost in the DJ and Permian Basins.”

CEO Wouter van Kempen: “With our focus on utilization, we’ll continue to optimize and rationalize our systems consolidating or idling less efficient plants and compressors and potentially selling non-strategic assets.”

  • DCP Midstream Partners idled 320 million cubic feet per day of processing capacity in the Eagle Ford Shale, routing volumes to its most efficient plants. Expect similar moves from MLPs with processing capacity in areas where throughput remains under pressure.

CEO Wouter van Kempen: “With these commodity prices, overall, the oil and gas business is not sustainable. So we continue to look and talk with producers and say you need to have prices that are probably on the crude lines, somewhere in the mid to high $50s or low $60s per barrel high, depending on where you are to really have a sustainable long-term kind of approach from producers where they’re willing to commit to new capacity.”

CEO Wouter van Kempen: “It’s not a question of if it [ethane demand] will come, it’s a question of when it will come.”

  • MLPs with significant gathering and processing capacity continue to play up the coming increase in domestic ethane demand as an opportunity to add volumes to their systems and benefit (for a time) from improved prices.

Enbridge Energy Partners LP (NYSE: EEP)

Guy Jarvis, President Liquids Pipelines: “I think really what we’re focused on is opportunities that aren’t so capital intensive, A, because obviously we can squeeze out cheaper capacity and we’ve got across the system a known toll, they’ll be more profitable. Also because we’re looking to try and find ways to add capacity in manners that minimize the amount of permitting that’s required. And again, generally those projects are going to be smaller scale to eke out capacity in the corners of our system.”

  • Management teams have refocused on balance sheet improvement after taking on considerable leverage to support the shale oil and gas revolution. Doing more with less is critical during a period of intense competition for incremental volumes and growth opportunities.

Energy Transfer Partners LP (NYSE: ETP)

CFO Thomas Long: “We’re looking at a lot of opportunities that would fit ETP, SUN, SXL. We will continue that, but they’re hard. Those transactions are yet to be harder and harder to do. We think we’re pretty good at it. And we’re going to hopefully have some news within the next six months to 12 months that will reflect that we are back in the M&A business.”

  • Acquisitions remain part of the Energy Transfer family’s strategy, despite the disastrous effort to purchase Williams Companies (NYSE: WMB).

EnLink Midstream Partners LP (NYSE: ENLK)

Ben Lamb, Senior Vice President of Finance and Corporate Development: “What this [joint venture with Natural Gas Partners] does is it gives us the firepower to go and aggressively pursue expansion in the Delaware because the battle for the basin is being fought right now and we see these opportunities in front of us right now. This gives us the ability to go and continue to compete.”

  • Plenty of private-equity money remains on the sideline, waiting to be deployed. Capital and customer relationships are critical to taking market share in the “battle” for the Permian Basin.

EQT Midstream Partners LP (NYSE: EQM)

CEO Dave Porges: “The marketplace from our perspective is littered with sad stories of MLPs that make acquisitions and other MLPs that don’t have a lot of growth. We are trying to create value. And if it spurs more organic growth opportunities, as so many opportunities can’t do, then that is going to look a lot more attractive than if we’re just bulking up.”

  • EQT Midstream Partners’ CEO highlights the appeal of building a midstream portfolio that creates opportunities for organic growth, as opposed to adding cash flow-generating assets that offer minimal upside.

Enterprise Products Partners LP (NYSE: EPD)

CEO James Teague: “These results continue to reflect the fact that we’re being very aggressive in tying up volumes for our assets.”

  • With drilling activity and production volumes on the wane in many basins, Enterprise Products Partners and other blue-chip MLPs continue to do what it takes to shore up volumes by winning market share, ratcheting up the competitive pressure.

CEO James Teague: “We’re building organic projects during the drought period. To me, that speaks volumes about our people’s creativity and the faith our customers have in us. These types of supply projects confirm that there still is demand from producers for new midstream assets or, more importantly, it speaks to the fact that producers don’t necessarily want a one-off project from a niche player, whose business plan is to flip their assets. Producers prefer someone with systems that give them flow assurance and market choices, as do consumers… In addition, virtually every project we do has a knockdown uplift effect across our systems.”

  • Building an integrated midstream system rather than accumulating cash flow gives Enterprise Products Partners a competitive advantage.

CEO James Teague: “We believe the US producer was the first barrel off, but we also believe that the US will be the first barrel back on. When forward prices cross the $50 threshold in the second quarter, we began to see signs that U.S. producers and the capital markets that support them positioning for growth. Producers are hedging, rig counts are creeping up, DUCs [drilled, uncompleted wells] are being completed. More importantly, we’re having a lot of discussions with our customers and our producers and potential acreage buyers about services we can provide.”

  • At this juncture, we’ve seen US independent exploration and production companies ramp up their drilling and completion activity at these price points before. Management’s comment about “potential acreage buyers” suggests that upstream operators will continue to monetize noncore assets and focus on adding exposure to the areas with the best economics. Resetting the economics on less favorable plays can boost their appeal for new operators.

Genesis Energy LP (NYSE: GEL)

CEO Grant Sims: “I mean, it’s our perception that the opportunity set is going to grow over the next six months to 18 months, and taking the affirmative steps to rebuild our financial flexibility at this moment, and this probably was and positions us to be able to take advantage of what we believe to be a larger opportunity set that will occur, given operating fundamentals over the next, as I said, six months to 18 months.”

  • Management expects the opportunity for acquisitions and new growth projects will improve as oil prices stabilize.

CEO Grant Sims: “We now believe the best way to promote unit price appreciation under current conditions is to exercise strong financial discipline, designed primarily to maintain and enhance our financial flexibility across the business cycle.”

  • The market has started to reward MLPs that strengthen their balance sheets instead of pursuing growth at any cost.

Phillips 66 Partners LP (NYSE: PSXP)

Bob Herman, Senior Vice President of Operations: “We still think there’s a need for Frac 2, it’s just not quite as soon as we might have thought two years ago, but as oil prices come back and volumes come up, and ethane comes out of rejection, we see a time in the not too distant future where a frac capacity in the Gulf Coast tightens up and allows us to go forward with those type of opportunities.”

  • Growing domestic for ethane to feed newly started petrochemical capacity on the Gulf Coast should increase demand for fractionation capacity that separates natural gas liquids into discrete components.

Plains All-American Pipeline LP (NYSE: PAA)

CEO Greg Armstrong: “And so, there are people that have a short – they’re long transportation, but they’re short barrels. And so, they’re competing for those incremental barrels to try and minimize the transportation cost. As certain of those contracts expire or get reformatted, that will be a surrogate, if you will, for volume increases.”

  • Plains All-American Pipeline’s CEO highlights the challenges created by minimum volume commitments.

CEO Greg Armstrong: “And if the answer is we’re the swing producer, the Permian is the best place to get it. What we feel pretty good about is, if you recall the upside scenario that we shared at the Analyst Day, I think, Willie went through, about half of the pipeline upside was associated with the Permian.”

  • The Permian Basin will likely continue to take market share as production falters in other regions.

Willie Chiang, COO US Operating & Commercial Activities: “No, we’re being aggressive, at the least. So, when we look at the business, because of the integrated system, where the objective function is the integrated margin, not just one section’s margin.”

CEO Greg Armstrong: “So, to answer your question, you’re not having to discount your pipeline tariffs, but you’re already sacrificing gathering margin. And again, you can look at it, kind of, on a consolidated basis to say, net-net, the company is doing better than they were to lose the barrel perhaps to somebody who’s going to take it into another pipeline system.

And part of this, Brian, is, again, it’s all influenced by the MVCs to some extent because, if somebody has got a commitment on the pipeline that has a higher tariff but they have a ship-or-pay view on that or contract obligation, they’re going to view that as a sunk cost and the tug war on that is at the gathering margin. So, yeah, the producers are benefiting right now from that intense competition.”

  • Plains All-American Pipeline’s management team highlights growing competition for gathering volumes.

CEO Greg Armstrong: If you ask me what area have we been consistently wrong in, it’s in projecting the more consolidation because we see the rationale – the reason for it, but it’s one of the hardest things to make happen and there is all kinds of issues that get involved in that. I think, anytime you end up with a, let’s call it, head fake or resurgence in the market that makes everybody feel like we’re only three months or four months away from everybody pulling out of a down cycle, it tends to freeze all discussions. So, either we need to pull out of the cycle and then people say, okay, we’ve now got our relative valuations reset, you probably have an opportunity to have some discussions or alternatively, we stay in a lower cycle for longer and people run out of options to be able to either take care of their balance sheet or be able to have a discussion about what growth is going to look like when they come out of the cycle and that kind of forces the discussions.”

  • Plains All-American Pipeline’s CEO suggests that further consolidation remains inevitable once conditions stabilize..

Western Gas Partners LP (NYSE: WES)

CEO Don Sinclair: “It’s very competitive out there [the Permian Basin].”

  • The Permian Basin has accounted for much of the recovery in the US oil-directed rig count; midstream MLPs are eager to establish a presence in this area.

CEO Don Sinclair: “We haven’t seen the margin erosion [in the Permian Basin]. It’s just people trying to decide if they want to go out and put infrastructure in place without contracts. And so you have that as a backdrop, but you continue to see – producers understand that when you look at WES, we have over a $3 billion invested just ourselves in West Texas. We are investment-grade, and they can see that we have a sustainable business model out there, and that really has helped us significantly in differentiating ourselves from some of the other competitors.”

  • High-quality producers favor high-quality midstream operators whose systems offer connections to various takeaway options.

Subscribe to Energy & Income Advisor today for instant access to our most recent analysis of every midstream MLP and updated buy targets.

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