Thoughts from the MLP Association’s Annual Investor Conference

The Master Limited Partnership (MLP) Association hosted its annual investor conference in Orlando last week and, as always, the Energy & Income Advisor team was on the ground to talk to management teams and fellow investors.

• Attendance declined dramatically relatively to the past three years, with most conference-goers representing “the core of the core”—mainly, analysts and asset managers heavily focused on the space. The drop in attendance underscores how much momentum-driven capital has exited the MLP universe and made it easier to interact with management teams and fellow analysts.
• The potential for increased ethane recoveries—US processing plants reject about 650,000 barrels per day into the gas stream—emerged as a highlight for gas-processing and fractionation names. Although the start-up of Enterprise Products Partners LP’s (NYSE: EPD) export capacity on the Gulf Coast will help, much of the upside will come from the host of new ethane crackers slated to come onstream in 2017 and beyond. Gas processers on the Gulf Coast, where the preponderance of this petrochemical capacity will reside, stand to benefit the most. Removal of these volumes from the gas stream should be an incremental positive for natural-gas prices, though volumes from prolific shale plays will quickly fill the void.
• Several management teams and panelists asserted that the boom in initial public offerings over the past several years created too many MLPs, setting the stage for consolidation and “simplification” transactions for those that need to shore up their balance sheets.
• With a lot of private-equity money looking to buy assets, competition for mergers and acquisitions remains high. Some MLP management teams expressed a preference for doing deals where the buyer can unlock value from the asset in question by integrating it with its existing systems.
• Although management teams of oil-focused midstream MLPs emphasized that shorter-cycle shale plays would win market share over the long term, the near-term outlook for throughput volumes looks challenging, especially with the decline curve expected to kick in hard in the back half of the year. This downside could create opportunities to establish positions in some of the better-positioned oil-focused names.
• Demand-pull projects received the most attention during the conference, underscoring the likelihood that utilities and refiners will continue to leverage their superior balance sheets and costs of capital to participate in joint ventures, acquire interests in existing midstream infrastructure and pursue acquisitions in this space.
• Plans All-American Pipeline LP’s (NYSE: PAA) management team highlighted a future for MLPs that includes reduced capital expenditures than during the boom years because of fewer growth opportunities—all the more reason to focus on names with exposure to areas of volumetric growth.
• Blue-chip MLPs Enterprise Products Partners and Plains All-American highlighted the advantages of their integrated systems and their commitment to taking volumes from smaller operators to offset declining production in some areas. Energy Transfer Partners LP’s (NYSE: ETP) management team made similar comments during the MLP’s first-quarter earnings call.
• Many investors that we talked to were on the lookout for potential deep-value opportunities where the market has overly discounted risks or failed to appreciate management’s efforts to stop the bleeding.
• The Eagle Ford Shale appears to be suffering the biggest production declines of the major liquids plays.
• Investor preference has shifted from aggressive distribution growth without regard to the sustainability of underlying cash flow or embedded risk to a safety-first approach that focuses on strengthening the balance sheet and coverage ratio.

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