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This Week in Master Limited Partnerships: Deals and Distribution Cuts

By Peter Staas on May. 4, 2018

First-quarter earnings season is in full swing for master limited partnerships (MLP), giving the Energy & Income Advisor team plenty to mull over as we prepare for the MLP Association’s annual investor conference, which takes place later this month. As always, we’ll share our top takeaways and best ideas from the event.

Mergers & Acquisitions

The past week brought plenty of news on the consolidation front, with Boardwalk Pipeline Partners LP (NYSE: BWP) disclosing on its first-quarter earnings call that the midstream operator had started to explore whether the MLP structure still makes sense for the company.

Management acknowledged that this reconsideration stemmed from the Federal Energy Regulatory Commission’s (FERC) proposed elimination of the income tax allowance on cost-of-service contracts on interstate pipelines that fall under the regulator’s jurisdiction. We explored the fallout from this announcement and consequent buying opportunities in the March 16 installment of Energy Investing Weekly.

Boardwalk Pipeline Partners sponsor also indicated that its sponsor, Loews Corp (NYSE: L), is “seriously considering its purchase right under the partnership agreement.” According to these terms, Loews can purchase the MLP’s outstanding units at their average daily closing price over the preceding 180 trading days.

Although this formula would result in a premium today, Loews need only wait until this fall for more favorable pricing terms. Boardwalk Pipeline Partners recently withdrew from the MLP Association’s annual investor conference, suggesting that a deal could be in the works. At these levels, Boardwalk Pipeline Partners rates a Hold.

Focus List member MPLX LP (NYSE: MPLX) reported strong first-quarter results, increasing its distribution by 1.6 percent sequentially and generating enough cash flow to cover this higher payout by a robust 1.29 times. Management reiterated its guidance for the payout to increase by 10 percent this year and emphasize that the MLP won’t need to issue equity to support its growth projects.

The start-up of expansions to the Ozark and Wood River-to-Patoka pipelines, as well as gas-processing plants in the Marcellus Shale, Delaware Basin and the STACK play should drive cash flow growth over the course of the year and into 2019.

But these strong results were dwarfed by an announcement from MPLX’s sponsor, Marathon Petroleum Corp’s (NYSE: MPC). The independent refiner announced the blockbuster acquisition of Andeavor (NYSE: ANDV), a transaction that would give the sponsor control of Andeavor Logistics LP (NYSE: ANDX) and set the stage for an eventual combination of the two MLPs.

Given MPLX’s superior cost of capital and balance sheet, assets that Andeavor had planned to drop down to Andeavor Logistics could make their way over to MPLX instead—akin to what happened when EQT Corp (NYSE: EQT) acquired Rice Energy and its interests in Rice Midstream Partners LP (NYSE: RMP). In that situation, EQT Midstream Partners LP (NYSE: EQM) acquired Rice Midstream Partners at a roughly 10 percent premium; an all-equity combination between MPLX and Andeavor Logistics likely would take place at similar terms.

The transaction would boost MPLX’s scale in the Permian Basin, a point of focus for CEO Mike Hennigan. Andeavor Logistics’ gathering operations in the Bakken Shale could also have synergies with MPLX’s interests in the Dakota Access Pipeline.

We continue to like MPLX for its industry-leading gas-processing position in the Marcellus Shale, strong balance sheet and capable leadership team.

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