MLPData

Research analyst, oil & gas, newsletter provider, master limited partnerships
MLPData
Research analyst, oil & gas, newsletter provider, master limited partnerships
Contributor since: 2014
Company: MLP Data LLC
The steady state DCF for Kinder is troubling. In 2015, $3B was spent on Hiland in Jan, which should have added $250MM of EBITDA. The YoY performance by segment is worse than is portrayed. The other growth capex is also masking weakness. So when the growth capex slows, there is risk in the DCF numbers. The last caller on the conference call, who actually owned shares vs the friendly analysts, was pressing this issue, and RK's response was to do the math using the ROE multiples, but that does not address the stability of the existing cash flows
Phil
As always, an informed and instructive response
Thanks for the clarification. The 11% is much more significant than that of their PAA ownership from the latest filings. The argument is that management benefits from levering the GP vs reducing the distributions. Can you comment on what the impact of their differing tax position may be on future decisions?
A PAA distribution cut is very unlikely, the GP has very little debt and there are alternative financing available to fund the gap, which will be announced by Feb. 2017 Coverage may be closer to 1.0x with a 3% distribution increase, but management will bridge the gap until then. If crude is still $40, the GP acquiring the LP is more likely than a cut at that point. Mgt has a 66% interest in the GP and an LP cut would set back the IDRs
We see another leg down from crude oversupply headlines and bank redetermination results, which will play out in Q3 calls
The business model itself is not the reason for the liquidations, despite the provocative headlines from Barrons. Rather, it is risk OFF for energy and leverage. The C-corps have not been spared as of late, even though they have a more diversified, and some argue, sophisticated investor base.
There is not enough transparency towards 2016 Production/Capex, but we will see negative headlines for the next several weeks, which will lead to more selling, which will create some very good opportunities for selective units
Elliot
That is the conventional wisdom, we will see this week (Thursday is when we calculate) what the per fund flows look like to confirm or repudiate.
Dirk
Yes, we track the midstream short interest and recently provided some stats here. PAA will not be issuing 2016 guidance for quite some time (meaning there is no likely change in their guidance before Feb 2016), so it is a good beta short for the index, and a much cheaper alternative.
http://tinyurl.com/qa6...
That's right, and it does not take much to create a significant market imbalance..today was a turning point as professional investors dumped the C-corps, not just the retail investor as some would like to believe
Unfortunately, there are a few more chapters to the story, which will play out over the next 45 to 60 days, and drive these units lower. Check out PAA short interest this past week and it tells you all you need to know about sentiment. Just like in 2008, the macro fears did not transfer to MLP fundamentals, but the market assumed the worst case. Today, the worst case thesis is 15% of producers go bankrupt, contracts are marked down, and distributions are cut with no new issuance. If there is no capital for E&P, this is possible, but is it probable, and those who agree with this thesis have greater conviction than those who think otherwise, who are not adding to their positions
Pablomike
Good catch, the first column should be 9/4/15 and the change is the bond yield between 9/4/15 and 9/24/15
Long credit, short/hedge equity is the more likely culprit than fund liquidations. AMJ and AMLP have had less than $300MM of liquidations, the CEF's still have positive DTL's, and the open end funds might get hit by month end. Look at SUN to understand the market sentiment, absolutely no exposure to commodity, down 20% YTD and "risk premium" for the asset class
Silverbug2
To add, The US still imports oil because of the lack of infrastructure and cost to get the US oil to the east coast refineries and the refining limitations for US light sweet crude. Over 600,000 barrels are transported by rail out of Bakken, which yields low revenues for producers who ship, they look for higher prices elsewhere, which could be exported out of Houston/EPD
Agree on MMP, although at this point, we do not see much insight offered in these analyst upgrades or downgrades. They folllow the management guidance and adjust their Price Targets accordingly, usually a day or two after the conference calls....quick to move, slow to move down.
Thanks Walt, there are over 4MM retail investors who own MLP's, the majority of which are not very familiar with the assets they own. These articles attract some of the most insightful investors, and their comments add great perspective to market events
On NGLS call, management discussed 3-5% volume increase for 2015 and 70% of 2016 fee based...4% growth guided this year, next year has much risk with 1.1x coverage
There are quite a few additional conference calls which all point to the same risk, which is management does not know how current prices will impact 2016 volumes. If you overlay the change in contract terms, there is a very good possibility that EBITDA could be lower in Q1 of 2016 for many midstream units. With equity no longer an option to raise capital, those with strong coverage and leverage will be the safest, but they too will have further downside.
An MLP Portfolio needs to be protected against $50 oil through 2016 and new money will only be attracted once the risk of lower prices is either realized or subsides
Elliot
Thanks for taking the time to provide feedback. We will submit the correction for 2016. On the latter point, regarding "On Following Marathons Growth Strategy for MPLX0', the views from PSX/PSXP were in regards to questions posed to them about whether they would make such a transaction as this has been a market concern for all of the large sponsor drop down units since MPLX changed their strategy. We will submit a sentence which clarifies the connection between the headline and comments
If the company is producing positive free cash flow, the bonds are safe as the MLP can always lower or suspend the distribution to service the debt. In the case of Linn and others, once the hedges roll off and the company will realize much lower prices, the interest payments and the capital structure allows no room to finance the gap
Regarding lower prices and volumes, take a look at EQT Corp and their midstream MLP EQM. EQT, the driller, reported a 34.5% quarter over quarter increase in production volume, but realized a 53% reduction in price, leading to an operating loss of $69MM for the quarter. Midstream gathering revenues were 35% higher along with a 19% increase in midstream transmissions. So the question is how long can EQT continue to produce gas at a loss? At some point, they will be capital constrained and will need to reduce production to reduce the loss. When this happens, there is less volume over the pipes and distributions will have peaked at best. This quarter will be very ugly for producers and if strip prices continue, 2016 will be a year of less drilling and the market will project lower midstream growth, which will further lower prices
Our view is that the commodity price outlook shifted in June, when market expectations were of higher crude in late 2015/mid 2016. Although midstream is not correlated to price, lower price means less drilling and lower volumes over time, which translates to lower growth. The market is now assuming that midstream MLP's will be challenged to expand distributions in 2017 IF prices do not recover. Some consider M&A a catalyst, but if you look at the deals, most LP's have not had any material benefit from such activity. Add the prospect of higher rates, and you have a very negative outlook for which the risk premiums are adjusting with a lack of new fund flows to step into the market. From the SA community, it appears few are adding to their positions given the weakness, which in turn gives the market an excess of sellers. Those who have large MLP portfolio's should be hedging against persistent or lower commodity prices in 2016, which must be done with direct futures contracts. If you had used this hedge over the past three years, you would have greatly reduced your risk at a very low expense.
The higher coverage ratio allows management to maintain or grow distributions at shorter term lower levels of cash flows, which implies more stable growth. That's the theory, but EPD is now down nearly -22% YTD and -25% TTM and forward yield is now nearing 2011 levels, with a 10% reduction in distribution growth. When looking at the coverage to yield relationship and yield to growth, the real fundamentals and risks are not represented in current prices
Prices reflect fear and there is a scarcity of buyers, with negative fund flows...too bad SCO is a bad hedge to protect against oil correlation
Agreed, safe for distributions, but increasing risk for yield spread expansion as the market will continue to assign greater risks to future cash flows if energy prices persist in current range. The high coverage ratios have offered little downside protection to principal
The drop down units had not been exposed to these risks given the EBITDA inventory and low leverage, but now that MPLX has changed their approach for growth, the others are now suspect and the total return strategy is now broken..even before high rates adjust the market further
Agree that MPLX is on a different growth trajectory past 2017. VLP, SHLX, PSXP, DM, the previous MPLX peer group, projects 20% growth well past 2017. MPC will need to drop down a very large set of assets to move the needle past 10% growth with a unit base of almost 300MM, vs the 80mm units presently, which is why it will remain at these levels. MPC is the winner here, and once again the LP unit holders are not.
We will be publishing a select group of Fund Xrays on Seeking Alpha, which will provide forecasted distribution growth rates associated with each portfolio, which should help investors understand the future performance of each MLP ETF, Closed End Fund and Mutual Fund. MLP portfolio managers are challenged to increase yield without taking on significant principal risk, so understanding the balance of the portfolio is more relevant today than it has been for the past three years
The risk with HCLP and EMES is that they continue to "negotiate" their take or pay contracts, which were previously positioned as guaranteed payments. They are lowering price by 30% and extending terms. If current gas and oil prices persist, they will continue to get further squeezed like all other service providers. Q2 performance will be telling as to whether these discounts are expanding. Above these specific issues is the expanding risk premiums associated with MLPs, which are lowering prices. Both management teams have suggested that the market needs to reward their distribution growth otherwise they will modify their growth plans given the high expense associated with issuing new units. Much greater risk with EMES
GLOG will be the higher growth vehicle as you correctly clarified
Biological
We agree the drop is accretive, but LP owners paid a higher price for the asset with greater re-contracting risk than their GP did just a year ago. GLOP is down -33.4% on a total return basis due to the expectations of slower distribution growth. Given 1.91 pa and IDR tiers, GLOP will be taking a greater share of GLOP distributions and should be the higher growth vehicle.
The market certainly responds to short term commodity price changes despite their impact on the 12 month short term. However, over time, the market is adjusting to, if these current levels prevail through Q3 2015 or later, the lower growth rate for midstream MLP's which are reliant on organic projects for growth. With low commodity prices and the prospect of higher rates, it is wise to develop a portfolio which is comprised of MLPs with drop down growth along with high yielding lower growth units
Not all MLP midstream MLP's have reacted poorly to the adverse price conditions. Although most have no price exposure, they do have volume exposure. Each MLP has a set of assumptions about future distribution growth. If those assumptions change (or more likely mgt adjusts or comments on guidance), the current price will adjust down to reflect the higher yield associated with lower growth, which is behind the PAA and EPD reductions.
So the key item is not current distribution coverage, but rather the future growth rates. MLPs which rely on organic growth have greater risk from lower commodity prices than those which will rely on sponsor drop down assets to drive distribution growth.
Yes, there will be no taxable income reported through at least 2017. If and when there is income, it will be reported via a 1099
1099's will be issued, but the company does not expect any taxable federal income prior to at least the end of 2017