Roger S. Conrad
May. 30, 2015
The 2015 edition National Association of Publicly Traded Partnerships’ MLP investor conference featured roughly the same number of attendees as the prior year, though the number of management teams available only for one-on-one meetings increased relative to previous years.
Seventy of the 87 master limited partnerships (MLP) slated to attend this year’s event were scheduled to deliver presentations.
This year’s conference included its fair share of excitement, with the National Association of Publicly Traded Partnerships changing its name to the Master Limited Partnership Association.
Foresight Energy Partners LP (NYSE: FELP) also canceled its presentation, probably because of the coal producer’s May 22 press release stating that its Deer Run Mine remains closed because of elevated levels of carbon monoxide.
The partnership continues to work with state and federal authorities to monitor the mine and, at this point, does not have an estimate for when the facility will resume operations. Thus far, the MLP has met all of its coal supply obligations by dipping into its inventories.
Plains All-American Pipeline LP (NYSE: PAA) also bowed out of its presentation because of a leaking pipeline in Santa Barbara, California. We shared our take on this situation in an Alert sent to subscribers on May 21.
Although we didn’t win the drawing for the rifle honoring the American oilman, we did leave the conference with a lot of information to digest and some new investment ideas that we shared in an exclusive report for Energy & Income Advisor subscribers.
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Here are some of our key takeaways from the conference, transcribed from our copious notes.
- Most management teams had little to say about commodity prices, instead focusing on their asset portfolios, growth projects and fee-based contracts. As usual, Enterprise Products Partners LP (NYSE: EPD) provided one of the few macro outlooks at the conference. In some ways, this oversight makes sense: Not only do many MLPs have limited direct exposure to commodity prices, but management teams should also focus on what they can control.
- Demand for new projects has shifted from the supply side to the demand side, with more utilities, refineries and petrochemical companies seeking to improve their access to cost-advantaged feedstock. Oftentimes, these off-takers will push for an ownership interest in the pipeline projects supplying their facilities. Many of the exciting, larger-scale projects highlighted at the conference fell into this category.
- In a market riven with uncertainty, investors continue to prefer the surety of MLPs whose growth stories hinge on drop-down transactions from a supportive general partners. These structured growth stories can help to offset any weakness in the underlying business by adjusting the pace of drop-downs. Shell Midstream Partners LP (NYSE: SHLX) and Valero Energy Partners LP’s (NYSE: VLP) general partners, for example, recently accelerated their drop-down schedules, enabling these MLPs to raise their full-year guidance.
- Gathering and processing outfits continue to feel the squeeze from an oversupply of natural gas liquids, with propane and butane prices continuing to slide. Meanwhile, reduced drilling activity, rising competition for volumes and the prospect of lower throughput on some systems have diminished the group’s growth prospects.
- Gathering volumes will remain under pressure in marginal basins such as the Mississippi Lime, Barnett Shale and Fayetteville Shale. Many management teams highlighted projects that would tie in multiple systems in the Midcontinent region to bolster overall volumes and improve efficiency.
- Some of the gathering spin-offs that producers in the Marcellus Shale launched last year trade at reasonable valuations and should grow at a decent clip once takeaway capacity in the basin catches up with production.
- MLPs that own pipelines running to and from refineries usually fetch a premium valuation for their highly reliable cash flow and supportive sponsors that drive distribution growth by dropping down assets. Tesoro Logistics LP (NYSE: TLLP), Delek Logistics Partners LP (NYSE: DKL) and Western Refining Logistics LP (NYSE: WNRL) all highlighted their appetite for leveraging their low cost of capital to acquire assets from third parties. Many of these deals focus on adding gathering systems closer to the wellhead.
- Management teams indicated that the asking prices for many midstream assets remain elevated. Many hoped that exploration and production companies’ access to capital would be curtailed, prompting more divestments of midstream assets. Based on the recent spate of equity and bond issues, the capital markets remain open for many oil and gas producers.
- Most of the growth drivers come from the natural-gas side of the market, including the need for more takeaway capacity in the Marcellus Shale, rising demand for US output in Mexico, and the start-up of seaborne exports. Some NGLs could benefit from a similar volumetric growth story over the next few years, as new petrochemical capacity comes onstream. Nevertheless, ample supplies of natural gas and NGLs will ensure that energy prices remain lower for longer.
- Kinder Morgan (NYSE: KMI) and Williams Companies (NYSE: WMB) consolidated the MLPs under their auspices, a commentary on the importance of a lower cost of capital and not a sign of weakness in the MLP structure itself. Copycat transactions could make sense for ONEOK (NYSE: OKE) and ONEOK Partners LP (NYSE: OKS) and Targa Resources Corp (NYSE: TRGP) and Targa Resources Partners LP (NYSE: NGLS).
- Expiring hedges and energy prices that are lower for longer mean that investors should continue to steer clear of upstream MLPs. That includes Memorial Production Partners LP (NSDQ: MEMP), the lone oil- and gas-producing partnership that hasn’t cut its distribution over the past six months. Although the MLP boasts an industry-leading hedge book, production per unit has declined over the past two years and the firm has failed to cover its payout in recent quarters.