Fundamentals for midstream MLPs generally appear bullish in 2018. Third-quarter earnings season underscored the extent to which the group has followed Enterprise Products Partners’ lead and sought to limit equity issuance to focus on self-funding growth opportunities.
At the same time, many MLPs have taken their medicine, slashing distributions and shoring up their balance sheets by monetizing noncore assets. This process hasn’t entirely run its course, with Energy Transfer Partners LP (NYSE: ETP) and others still leaning against the winds of change. Contract expirations and dilutive conversions of preferred units will also present challenges for some names in coming years. However, many partnerships have taken the necessary measures to put themselves on a sustainable path.
Besides the prospect of outsized production growth in the Permian Basin and STACK plays, our favorites should also benefit from supportive crude-oil prices and the highest gas-processing margins in years.
This issue of Energy & Income Advisor reviews the headwinds buffeting MLPs, the promise of the new year, trends in mergers and acquisitions, our top picks, pockets of underapprecated risk, and some under-the-radar opportunities. We’ve also updated most of the comments in our MLP Ratings table.
We survey the outlook for mergers and acquisitions involving master limited partnerships.
We explore the lessons from the market's reaction to Oasis Petroleum's recently announced asset purchase in the Permian Basin and Noble Midstream Partners LP's new joint venture in the Denver-Julesburg Basin.
We explore what the Nebraska Public Service Commission's approval of the Keystone XL pipeline's cross-border segment really means for TransCanada Corp.
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.
We explain why we remain selectively bullish on master limited partnerships in 2018, discuss key opportunities and areas of risk, analyze trends in mergers and acquisitions, and highlight our favorite picks for the coming year.
Many investors’ tax rates will come down in 2018, making the next few trading days your best opportunity for taking tax losses on any underwater positions that may take time to recover. With investors facing higher tax liabilities in 2017 than next year, the benefit of writing off a loser is that much greater. Of course, we prefer to avoid taking any losses and run the Energy & Income Advisor Portfolios with an eye toward long-run returns. However, given the sector’s recent down-cycle and the topsy-turvy performance of many energy sub-industries over the past few years, we have a few positions that haven’t worked out because of timing issues or a faulty investment thesis. These sales will help to offset the handful of gains that we took over the course of the year.
We swap one value-oriented play on the Permian Basin for one that offers exposure to more near-term upside catalysts.
The tale of two cycles looks set to continue for another year. Drilling activity may have bottomed in the international markets, but pricing pressure will persist until price deflation improves break-evens and upstream operators have more confidence in the outlook for oil prices. Meanwhile, some US exploration and production companies may moderate their spending increases relative to last year, but this short-cycle market remains the best bet for incremental growth and pricing gains in 2018--especially if our call for oil prices to average between $55 and $60 per barrel pans out. Given our preference for US exposure at this point in the cycle, we review the challenges, opportunities and market dynamics in three prominent onshore service lines through the lens of companies’ third-quarter results: contract drilling, pressure pumping and proppant.
The recent pullback in midstream master limited partnerships creates buying opportunities. We've also added a power company to our Focus List and the International Portfolio.
Elliott and Roger on Dec. 21, 2017
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