With investor confidence in master limited partnerships (MLP) at low ebb, inflows to the group have slowed significantly, reducing the market’s capacity to absorb equity issuance. Many debt-constrained MLPs with higher yields have responded to this challenge by pursuing private placements of preferred units to finance growth projects or asset drop-downs.
A strong balance sheet and excess distribution coverage enabled Enterprise Products Partners LP (NYSE: EPD) to take a slightly different tack: reducing its rate of quarterly distribution increases to retain more cash flow.
With Enterprise Products Partners not getting credit for its consistent growth, management indicated that reducing the rate of distribution increases would put the MLP closer to being able to self-fund the equity portion of its growth capital in 2019—a major point of differentiation. Management asserted that any excess cash flow eventually could be used to buy back stock, depending on the valuation and how this option stacks up relative to other uses of capital.
This announcement from an industry bellwether raised questions about whether the traditional model of pushing the envelope on distribution growth while relying primarily on equity issuance to finance expansion opportunities still makes sense.
Given the pain of the past several years, a focus on building distribution coverage and improving leverage metrics should help to shore up confidence in the group. And any MLP that can grow its per-unit cash flow without leaning heavily on the equity market will have a distinct advantage as competition for volumes intensifies.
Enterprise Products Partners wasn’t necessarily the first MLP to go down this path—Magellan Midstream Partners LP (NYSE: MMP) hasn’t issued equity since 2010—but this announcement has changed the conversation this earnings season, with many partnerships tapping the breaks on distribution growth to build coverage and reduce the need to issue equity.
Thus far, third-quarter results suggest that most of our MLP Portfolio holdings will be able to make this transition with relative ease, though two names with tighter distribution coverage could face more of a slog.
Massive distribution cuts from the likes of Plains All-American Pipeline LP have severely damaged midstream master limited partnerships' (MLP) reputation among income investors. But our favorite MLPs trade at favorable valuations and offer exposure to compelling volumetric growth stories.
The divergent performance between Noble Midstream Partners LP and Hess Midstream Partners LP since their initial public offerings demonstrates what investors value in an environment where energy prices remain lower for longer.
Break-even rates continue to fall across the board in US shale plays, but the efficiency gains that come from exploiting multiple oil-bearing formations with the same infrastructure give the Permian Basin an edge in the battle for market share.
Over the past 12 months, the difference between the top and bottom performers in the Alerian MLP Infrastructure Index amounted to about 60 percentage points. Capturing this upside requires on-the-ground intelligence, which is why we attend the MLPA Association's annual investor conference every year.
Expansions to the Gulf Coast refinery complex will translate into higher ethane demand in the US, creating opportunities for short-term trades and longer-term wealth building.
We have increased our exposure to exploration and production companies in recent months, focusing on names with solid balance sheets and franchise assets that legitimately could live within cash flow. Third-quarter results from these companies were a mixed bag, though their stocks have rallied.
Big changes are afoot in the midstream segment. Many master limited partnerships appear to have taken Enterprise Products Partners LP's lead and shifted their focus to building distribution coverage and reducing equity. We explore which names will be able to make this transition with relative ease and which names face more of a slog to put themselves on a path to sustainability.
News flow related to our Focus List picks has been limited in recent weeks, though third-quarter earnings season is just around the corner.
We break down some of the major themes and opportunities in Canada and Australia's energy patches, including consolidation in the oil sands, ongoing takeaway constraints in Alberta and restrictions on LNG exports.
The recent rally in upstream oil and gas stocks has bolstered our Focus List.
Elliott and Roger on Oct. 30, 2017
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