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On The Record: Key Quotes From Midstream MLPs’ Fourth-Quarter Earnings Calls

By Peter Staas on Feb. 13, 2017

Fourth-quarter earnings season is in full swing for the energy patch, providing plenty of data and commentary to mull over the macro outlook and the prospects for individual companies.

Each quarter, we scrutinize financial results and earnings calls from every energy-related master limited partnership (MLP) and share our insights with subscribers in our MLP Ratings table, which includes comments and vital statistics to help you assess your portfolio holdings and identify new opportunities.

Subscriber should consult our MLP Ratings for our updated assessments of all the publicly traded partnerships that have reported quarter results thus far—from industry heavyweights Enterprise Products Partners LP (NYSE: EPD) and Plains All-American Pipeline LP (NYSE: PAA) to small fry like VTTI Energy Partners LP (NYSE: VTTI).

While reading through these 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 Stanley Horton: “I’m pretty bullish on natural gas storage longer term. I think as more of the LNG plants come online, more power plants come online, more industrial plants come online, that the need for operational storage to balance the loads on these facilities is going to be there.”

  • Consulting firm Black & Veatch last fall issued a white paper making a similar argument. Horton’s comments help to explain Brookfield Infrastructure Partners LP’s (NYSE: BIP) acquisition of Niska Gas Storage Partners LLC a few years ago.

MLPX LP (NYSE: MPLX)

President Donald Templin: “We are very optimistic about what’s happening in the Southwest. And our Hidalgo plant, the first plant that we put into service in that region is nearly at 90% utilization or maybe on a daily basis, slightly higher than that. So typically, we would have a ramp up that would be 12 to 18 months, that was put into service in the May time period. We’re already at 90% utilization. And so I would expect that we will continue to invest in that region. We are actively in dialogue with producer customers around being able to grow our assets,particularly processing assets around there.”

  • MPLX generates the bulk of its gathering and processing cash from in the Northeast, but the rapid ramp up of volumes at the Hidalgo plant underscores the strong activity levels in the Delaware Basin.

Chief Commercial Officer Randy Nickerson: “The other thing we can do because of the way we’ve designed the system that’s really unique is that we can include smaller de-ethanization integrated with the plants at the complexes, or we can install larger standalone de-ethanizer. So we have almost unlimited flexibility sort of meet the market, particularly as – we talked about the crackers coming on at the end of 2018 and into the 2019. It’s still to be seen what the price of ethane is going to happen. Is it really going to accrue like this, like people are projecting that we’re going to be perhaps even short of ethane, and those crackers are going to have to reach up in the Northeast to pull up a lot more ethane than what we have. Today, we’re primarily just recovering the minimum amount what we all talked about as must to recover, but realize that number can double and even in some cases triple if ethane becomes highly profitable to recover, and that’s what drives it for us.”

  • We discussed growing domestic ethane demand and its implications for midstream operators in Let’s Get Cracking: Playing the US Petrochemical Boom. The question is whether these trends also lead to a robust production response in the Eagle Ford Shale and the emerging SCOOP/STACK plays in Oklahoma’s Anadarko Basin.

Enterprise Products Partners LP (NYSE: EPD)

CEO A James Teague: “Everyone was watching the U.S. because they understand that we’re the growth barrel. As painful as it has been, this downturn has proved the special qualities to US oil and gas industry and proved the staying power. Now the news is either cautioning that US shale might grow too quickly or questioning whether the US can grow enough to meet growing global demand.”

  • We continue to expect US short-cycle plays to take market share in an environment where capital expenditures on longer-cycle projects have dwindled.

Senior Vice President Anthony Chovanec: “The Permian [Basin] in West Texas is the hotbed of activity not just in the United States, but really across the globe. Stack plays, great returns for producers, a fair amount of cachet just attracting capital is going to the Permian. We have two new plants in service, another one under construction and I’m going to punt down to Brad, you don’t think we’re done there, do you?”

  • Everyone loves the Permian Basin.

Senior Vice President Anthony Chovanec: “We think the Eagle Ford is a sleeper that people aren’t paying attention to, and I’d tell you what we like about what we see in the Eagle Ford. One is, rig counts are up substantially and people don’t realize that they’ve moved significantly off of their low and continue to add two to five a week. The other thing that’s going on in the Eagle Ford that is missed on many people is, it’s beginning to participate in its own stacks. And what I mean by that is, people aren’t just drilling the Eagle Ford there anymore, they’re also mostly drilling the Austin Chalk. So, we like what we see in the Eagle Ford. Our break-evens in the prime areas of the Eagle Ford are competitive with the Permian, as we run our half-cycle economics. The last thing we’re seeing in the Eagle Ford is, we’re seeing smaller players come in. So, we think the Eagle Ford is going to be an area where you’re going to go from a couple of handfuls of very large players to smaller players, which is really opposite of what’s happening in the Permian.”

“Rig counts bottomed in the Eagle Ford at 21. I think we ended over 50 this last week; so, already significant improvement. But you’re going to see, and I don’t know exactly how much, you’re going to see a lag from the time you start drilling and completing to the time the new production comes on. But that lag is months, so call it, people project it to be anywhere from 90 days to let’s say 150 days, from the time you deploy rigs to the time you put that production on. So, we’re going to see in the Eagle Ford something that’s no sooner than back half of 2017 loaded.

  • Anadarko Petroleum Corp’s (NYSE: APC) sale of Eagle Ford acreage to Sanchez Energy Corp (NYSE: SN) illustrates this trend. At the very least, these transactions should help to stabilize production volumes in the basin.

Magellan Midstream Partners LP (NYSE: MMP)

CEO Michael Mears: “If you look, clearly, as we here today, there’s still significant excess capacity, pipeline capacity coming out of the Permian. And the differentials were down below $1 between Midland and Houston just in the recent weeks. And so that’s an indicator there’s still significant excess capacity. We are probably less bullish as a lot of other folks are that we’re going to be reaching 100% utilization on existing capacity late this year, early next year. We certainly would expect to start to see some incremental movements on the pipes.”

“Based on those comments, one might say, well, you’re expanding BridgeTex a little too early. We’re expanding BridgeTex because it was literally $2 million to expand BridgeTex to be prepared. And so it wasn’t a significant capital investment. If you have any upsets in the market, if production happens to ramp quicker than we’re projecting, we want to be prepared. And with such a low capital investment to expand, we felt we’d just go ahead and do that.”

  • Drilling and completion activity continues to ramp up in the Permian Basin, but takeaway capacity doesn’t appear to be a near-term problem.

Phillips 66 Partners LP (NYSE: PSXP)

Executive Vice President Robert Herman: “Yeah. I think if you step back and look at the Bakken in general, Kevin just commented about the overall macro picture is looking better and I think that includes the Bakken also. We currently see production’s been kind of flat in North Dakota over the last couple months. Differentials have started to widen out a little bit here. That’s nothing but good for our rail infrastructure and the ability to move crude east and west. There’ll probably be some temporary disruptions in the market as we go into the line fill period for DAPL here at some point in the first half of the year. But overall, I think we still see the drill bit turning again in the Bakken, production recovering over the period of 2017-2018, and continuing to utilize our rail assets to go east and west.”

  • The Permian Basin may be growing like gangbusters, but the Bakken Shale continues to plod along.

EQT Midstream Partners LP (NYSE: EQM)

CEO Steven Schlotterbeck: “There is great value on the midstream side by having a supportive sponsor that provides consistent gathering opportunities, and also has the amount of supply required to anchor large transmission projects.”

Plains All-American Pipeline LP (NYSE: PAA)

CEO Greg Armstrong: “As we discussed recently, drilling activity has picked up and there are very – other very encouraging signs on the horizon. But I would note, there will be a time delay before our transportation volumes and gathering margins will reflect the benefits of this increased activity, and we anticipate the first six months to nine months of 2017 will be challenging.”

  • The lag between the recovery in drilling activity and the corresponding drilling response means that much of the volumetric growth will occur in the second half of 2017 and early 2018.

CEO Greg Armstrong: “But your question, I think on takeaway capacity, if – because the project that Enterprise has coming on in 2018 – and I think they’ve announced they are going to go ahead and go straight to the 450,000 barrels a day, we don’t see a shortage of takeaway capacity, but the margin – the amount of headroom if you will between production and takeaway gets tighter, and that should obviously improve the realizations on the gathering margins and potentially even some of the realizations on the pipeline tariffs.”

“And so, we do think there’s – the bottom line is, Jeremy, we think they can produce as much oil out of the Permian as they want to. It’s a matter of rigs, just a manufacturing operation. Think of it like a short-cycle oil sands deal. I mean, it’s just replete with resources and they are getting better and smarter at how to get it out. So we’ve got it forecasted to go to roughly 3.5 million barrels. I think by around 2020, if you increase the rigs by 50 plus, you could move that number forward quite a bit, and obviously if you decreased it, you can move it out. So, we think – we were looking at options already for how we make sure the producers can move their oil. Probably not by the end of 2017, but by the end of 2018, there may be either new builds or loops.”

  • All hail the Permian Basin. A shortage of takeaway capacity appears unlikely.

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