Plains All-American Pipeline generates about 50 percent of its cash flow from assets serving the Permian Basin and locked up volumes from two of the leading operators in the area with the acquisition of the Alpha Connector gathering system from Concho Resources (NYSE: CXO) and its purchase of the Advantage pipeline as part of a joint venture with Noble Midstream Partners.
Issuing equity to foot the bill for these transactions didn’t help Plains All-American Pipeline’s distribution coverage, setting the stage for the 45 percent payout cut that the MLP announced in August as part of a plan to retain more cash flow and reduce leverage. Management expects this latest reduction to lower its annual outlay by $725 million.
Plains All-American Pipeline aims to use this retained cash flow and the proceeds from at least $700 million in asset sales to handle near-term bond maturities and reduce its outstanding debt from $11.1 billion to $9.7 billion by March 31, 2019. The MLP also issued $600 million worth of perpetual preferred securities to fund its growth plans and eliminate the need for equity issuance.
Assuming Plains All-American Pipeline’s operating cash flow remains flat, these debt repayments would improve its leverage ratio to about 5.27 from the current rate of 6 times earnings before interest, taxes, depreciation and amortization (EBITDA). If the MLP also delivers on its guidance for $2.3 billion in annual operating cash flow, its leverage ratio would decline to a much more comfortable 4.2 times EBITDA.
This turnaround story will take time and depends on Plains All-American Pipeline meeting its guidance—not a given when you consider the partnership’s recent performance—and the murderer’s row of debt maturities that the MLP faces over the next decade. Plains All-American Pipeline appears to have finally taken its medicine, but we prefer to wait on the sidelines until we have a better sense of the run rate on its underlying businesses, especially with the MLP monetizing cash flow-generating assets.
Energy Transfer Partners increased its third-quarter distribution by 10 percent, but investors shouldn’t mistake this announcement for a show of strength; in reality, the payout boost merely ensures that Energy Transfer Equity LP (NYSE: ETE), which owns the general-partner interest in the MLP, will cover its own distribution.
The MLP has continued to issue equity despite the stock’s double-digit yield. For example, Energy Transfer Partners in August sold 50 million common units on the public market at a yield of 11.9 percent to help meet its $2.2 billion in planned capital expenditures for the year. These actions serve as a reminder that management is keenly aware that whereas bond coupons are fixed, distributions to common unitholders are not.
On a more unitholder-friendly note, Energy Transfer Partners also continues to monetize its interests in under-construction projects to raise much-needed capital without diminishing its existing cash flow streams. For example, the MLP sold what amounts to a 32.44 percent interest in the Rover pipeline to private-equity outfit Blackstone Group LP (NYSE: BX) for $1.49 billion.
Management has indicated that Energy Transfer Partners LP could also monetize part of its stakes in the Revolution gathering system and the second phase of the Mariner East ethane and propane export system in the Marcellus Shale. Other sources of cash flow include the potential sale of some of its 43 percent equity interest in Sunoco LP (NYSE: SUN) if the wholesale fuel distributor makes good on its plan to buy back stock.
Energy Transfer Partners owns quality assets in the Permian Basin and the Marcellus Shale, as well as the Lone Star NGL system. But elevated leverage and significant near-term debt maturities represent formidable challenges. All signs point to another distribution cut, an eventuality reflected in the stock’s more than 12 percent yield and recent underperformance.
Management has indicated that a simplification transaction could be in the works, though uncertainty remains about the ultimate form and the implications for common unitholders, who likely will receive the short end of the stick. Investors should continue to stand aside on Energy Transfer Partners LP.
With investor confidence in MLPs 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.
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Elliott and Roger on Mar. 20, 2018
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