Enterprise Products Partners LP’s (NYSE: EPD) second-quarter results underscore why the blue-chip MLP remains a core holding. The midstream operator hiked its quarterly payout by 1.2 percent sequentially and 5 percent year over year, and generated enough distributable cash flow to cover this disbursement by 1.2 times.
All the partnership’s operating segments grew their gross operating margins from year-ago levels, with NGL (natural gas liquids) pipelines and services benefiting from the start-up of petrochemical capacity on the Gulf Coast and crude oil pipelines and services receiving a bump from ramp-ups in exports and production in the Permian Basin.
Enterprise Products Partners continues to advance its slate of growth projects, including an ethylene storage and logistics hub in Mont Belvieu, Texas. The MLP also made a final investment decision on two projects serving producers in the Permian Basin:
During Enterprise Products Partners’ second-quarter earnings call, management indicated that the MLP continues to pursue two additional processing plants in the Delaware Basin as well as a solution (potentially a joint venture) to transport natural gas from this prolific play.
The MLP expects strong volumetric growth in the Permian Basin in the second half of 2017 and early 2018, while the Haynesville Shale and Eagle Ford Shale also show promise after acreage exchanges helped to reinvigorate drilling and completion activity. Management also highlighted the marketing segment’s strength, indicating that robust oil exports could make August a record month.
Enterprise Products Partners’ integrated asset base, high-quality management team and highly visible backlog of growth projects set the MLP apart from the competition; the stock remains on our Focus List as a buy up to $33.
MPLX LP (NYSE: MPLX) increased its second-quarter distribution by 4.1 percent sequentially and 10.3 percent year over year. Record distributable cash flow covered this payout by 1.26 times, and the MLP remains on track to grow the payout by 12 to 15 percent on the year. Management reminded investors that coverage could slip to about 1.1 in the back half of the year because of the timing of maintenance capital expenditures.
MPLX also increased the midpoint of its guidance for 2017 adjusted operating income by $50 million, to between $1.75 and $1.9 billion. This target excludes Marathon Petroleum Corp’s (NYSE: MPC) plan to drop down interests in pipeline and storage assets that generate about $135 million in operating cash flow annually. On the MLP’s second-quarter earnings call, management emphasized that this increase reflects an expectation that full-year results will come in toward the top end of the range.
The Northeast gathering and processing segment benefited from a 14 percent year-over-year increase in processing volumes, fueled in part by the start-up of the Sherwood VII facility in March. MPLX completed an eighth processing plant in July and expects to complete three additional facilities in 2018 as part of its joint venture with Antero Midstream Partners LP (NYSE: AM). Management reiterated its guidance for processing volumes to increase 10 to 15 percent this year and for a 15 to 20 percent upsurge in fractionation volumes.
MPLX’s Southwest gathering and processing assets benefited from an 8 percent increase in volumes, fueled by the Permian Basin. The partnership expects to complete the Omega plant, which serves producers in the STACK play, in mid-2018 and the Argo plant in the Delaware Basin in the first quarter of 2018.
Newly installed CEO Mike Hennigan indicated that his first line of business would be to improve the utilization rate on existing assets and that the partnership would be very active seeking joint ventures and acquisitions after completing transactions to eliminate its incentive distribution rights.
Given MPLX’s leading gas-processing franchise in the Northeast and Hennigan’s experience as former CEO of Sunoco Logistics Partners LP, the MLP would be an ideal strategic partner for Energy Transfer Partners LP’s (NYSE: ETP) Mariner East expansion. Located in Marcus Hook, Pennsylvania, this system exports ethane and propane produced in the Marcellus Shale to international markets.
We also wouldn’t be surprised if MPLX made a play for CenterPoint Energy’s (NYSE: CNP) equity and general-partner interest in Enable Midstream Partners LP (NYSE: ENBL) to expand its position in Central Oklahoma’s SCOOP and STACK plays.
Meanwhile, MPLX’s existing asset portfolio offers leverage to growing production in the Marcellus Shale and Midcontinent refiners push to ship more of their output to the East Coast.
With a strong balance sheet, high-quality management team and sound growth strategy, MPLX LP looks set to take market share and remains on our Focus List as a buy up to $37 per unit.
Western Gas Partners LP’s (NYSE: WES) unit price took a hard hit a few weeks ago after First Reserve monetized its equity stake in the company, a position that originated from convertible preferred units that the private-equity outfit purchased during the nadir of the energy sector’s down-cycle.
Although the MLP’s stock hasn’t fully recovered from this selloff, the midstream operator’s second-quarter results suggest that its growth story remains intact. Western Gas Partners increased its second-quarter distribution by 1.7 percent sequentially and 7.2 percent year over year, with cash flow covering this higher payout by 1.19 times.
As expected, Western Gas Partners’ natural-gas volumes shrank in the second quarter, reflecting the exchange of its interest in gathering assets in the Marcellus Shale for Williams Partners LP’s (NYSE: WBZ) stake in their Delaware Basin joint venture. Excluding these volumes, the Focus List member grew its natural-gas gathering and processing volumes by 2 percent year over year. Anadarko Petroleum Corp’s (NYSE: APC) decision to temporarily shut in its vertical wells in the Denver-Julesburg (DJ) Basin after a tragic explosion also contributed to this weakness.
Western Gas Partners also announced plans to build 400 million cubic feet per day of additional gas-processing capacity in the DJ Basin, with the first plant coming onstream in the first quarter of 2019 and the second one two quarters later. This expansion project testifies to Anadarko Petroleum’s superior economics in the play where the company also holds the mineral rights for much of its acreage.
Anadarko Petroleum’s commitment to become an anchor shipper on a gas pipeline running from the Delaware Basin to the Waha Hub also netted Western Gas Partners the option to purchase a 30 percent interest in the project.
In light of multiples that NuStar Energy LP (NYSE: NS) and other midstream operators have paid for entrée to the Permian Basin, Western Gas Partners’ purchase several years ago looks particularly prescient. Management expects throughput on these systems to ramp up significantly, once Anadarko Petroleum transitions from appraisal mode to development. Its sponsor also continues to build out its midstream capabilities, adding to the pipeline of potential drop-down transactions.
Yielding 6.8 percent, Western Gas Partners LP offers leveraged exposure to Anadarko Petroleum’s growth in the Niobrara Shale and Delaware Basin, areas where the exploration and production company hasn’t cut its capital expenditures. The stock remains on our Focus List and rates a buy up to $64 for aggressive investors.
In the second quarter, EnLink Midstream Partners LP (NYSE: ENLK) generated enough cash flow to cover its distribution by 1.02 times. The partnership also increased the midpoint of its full-year guidance for operating cash flow to $860 million from $850 million and called for this financial metric to hit an annualized rate of $925 million to $950 million in the fourth quarter. During the MLP’s second-quarter earnings call, management again highlighted the potential for a return to distribution growth in 2018.
Delivering on this guidance depends on robust throughput growth on EnLink Midstream Partners’ systems in central Oklahoma’s SCOOP and STACK plays as well as the Delaware Basin and Midland Basin in West Texas.
Throughput on the MLP’s gas-gathering and transportation systems ticked up 9 percent sequentially in the second quarter, while processing volumes increased by 13 percent. These results fell somewhat short of expectations,
In the back half of the year, EnLink Midstream Partners’ Oklahoma operations should receive a boost from Devon Energy Corp (NYSE: DVN) transitioning to full-field development of the STACK play in the third quarter. EnLink Midstream Partners’ Chisholm III gas-processing plant will also come onstream in the third quarter.
EnLink Midstream Partners also announced the construction of an oil-gathering system to support Devon Energy’s Showboat development, the first in a series of large-scale projects that the exploration and production company plans for the Black Coyote area.
In the Permian Basin, EnLink Midstream Partners’ gathering volumes increased 9 percent sequentially, while its processing volumes ticked up 6 percent. The MLP will bring on 90 million cubic feet per day of additional gathering and processing capacity this year and continues to evaluate plans for the next phase of expansions, as producer activity continues apace. Management also highlighted expectations for the utilization rate on its Midland gas-processing assets to improve to 70 percent from 55 percent in the back half of the year.
The outlook for EnLink Midstream Partners’ Louisiana operations continues to improve, with the Cajun-Sibon NGL system’s utilization rate improving after a recently inked transportation agreement with ONEOK (NYSE: OKE) provided direct access to volumes from the MLP’s Chisholm processing plants in the STACK. Throughput on EnLink Midstream Partners’ gas assets in the state also continues to grow, though the expiration of a transportation contract weighed on this segment’s profit margins. During the MLP’s earnings call, management once again reminded investors of the value of its gas pipelines in Louisiana, some of which could be converted to support the coming boom in petrochemical production.
EnLink Midstream Partners LP’s near-term prospects hinge on the MLP delivering on its guidance for the back half of the year and growing its distribution in 2018; the stock remains on the Focus List as a buy up to $19 per unit for aggressive investors.
Among the midstream names on our Focus List, Altagas (TSX: ALA, OTC: ATGFF) has lagged despite posting another quarter of solid results that set the stage for another dividend increase later this year.
Management increased its full-year guidance for growth in operating cash flow, citing potential improvement in fractionation volumes, stronger earnings at its hydropower capacity in British Columbia, higher utilization rates at its wind-power facilities and the start-up of new gathering and processing capacity.
Altagas has worked hard to reduce its exposure to commodity prices by divesting assets and pursuing the acquisition of US-based gas utility WGL Holdings (NYSE: WGL).
The latter deal secured the approval of the Federal Energy Regulatory Commission, but regulators in Maryland, Virginia and the District Columbia still need to sign off on the transaction—a process that could take time.
Management reiterated its target for annual dividend growth of 8 to 10 percent through 2021 while maintaining a payout ratio of 50 to 60 percent. Although this outlook factors in opportunities related to the WGL acquisition, the company’s base business will also support solid dividend growth until the deal closes.
Why hasn’t the stock’s performance matched developments at the business level?
Much of the hesitance toward the stock appears to stem from concerns that Altagas’ earnings remain tied to commodity prices—a holdover from when the company generated a larger proportion of its cash flow from gas gathering and processing.
Uncertainty about when Altagas’ proposed purchase of WGL will close—Maryland and the District of Columbia were big reasons why Exelon Corp’s (NYSE: EXC) acquisition of Pepco Holdings took almost two years to complete—probably hasn’t helped matters.
Two things haven’t changed since Altagas joined the Focus List: The stock trades at an undemanding valuation and pays a rising dividend. Altagas remains a buy up to US$30 for patient investors.
Elliott and Roger on Aug. 27, 2019
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