Trolling For Distributions In The Natural Gas Pipelines - A Year-To-Date Review

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Includes: AM, AMID, BWP, CEQP, CNXM, CPPL, DCP, MEP, OKE, SEP, TCP, WES, WPZ
by: The Troll under the Pipeline

Summary

The Midstream Energy sector has rallied off of early in the year lows.

AMID, CEQP, MEP are all interesting for near term distribution growth.

Much safer and steady paying DPM SEP, WPZ and SEP all are still worth buying.

It has been a wild ride in the last year in the pipeline sector. Share prices dropped in many cases over 50% and then have rallied back substantially. Pipeline investors are typically looking for a steady and growing distribution. After these big price swings, how does the sector look after this rally?

This article will explore a group of primarily natural gas pipeline MLPs to see if these still offer good opportunities as steady distribution payers. The mixed crude/gas and primarily oil or refined products partnerships will be examined in a separate article.

The MLP Business Model

The business is typically fee based. They either move the product from point a to b for a fixed dollar fee or process a volume of gas for dollars or a cut of the NGLs. Fractionating or processing for NGLs can give a Midstream company more commodity exposure than one might expect if they process in exchange for a cut of the hydrocarbons, especially if these NGLs are not fully hedged. The entire sector has been moving towards fixed fees whenever possible and few MLPs have significant exposure to commodity prices anymore. MLP revenue may increase or decrease as gas and liquids prices move up or down, but the fee for operating the pipeline remains relatively constant.

MLPs need to grow their asset base. More pipeline capacity means more revenue to grow the distribution. It also means new assets to depreciate. The depreciation passes through to the partnership's owners. Historically this growth has been mostly debt financed. Equity prices are depressed and now new debt is not so easy to get. Every partnership in the sector has felt the pressure to reduce debt levels and improve the quality of capital expansion projects. Those MLPs that can clean up their balance sheets first will be the best positioned for 2017 and beyond.

The following Table of Midstream Natural Gas MLPs looks at distribution yield, coverage and debt.

Table 1: Pipeline Yields and Measures of Financial Strength
Ticker Current Price Distribution Current forward Distribution 2016 Total Debt Due Covenants 2016 Forecast
MLP Name: Symbol Annualized Yield Coverage Ratio DCF guidance DCF/Debt Long Term Debt In 2016 In 2017 Debt Ratio Debt/ EBITDA
American Midstream Partners AMID $14.81 $1.65 11.1% 1.50 $90,000,000 0.13 $672,400,000 $731,000 - 4.5 4.00
Antero Midstream Partners AM $27.70 $1.00 3.6% 1.70 $296,000,000 0.48 $620,000,000 - - 4.75 2.40
Boardwalk Pipeline Partners BWP $16.65 $0.40 2.4% 4.30 Not Reported 0.12 $3,625,500,000 $250,000,000 $575,000,000 5 4.40
Columbia Pipeline Partners CPPL $14.67 $0.79 5.4% 1.50 $91,000,000 0.04 $2,180,000,000 - - not reported 3.40
CONE Midstream Partners CNNX $19.45 $1.02 5.2% 1.55 $96,000,000 2.04 $47,000,000 - - 5 0.46
Crestwood Equity Partners CEQP $21.43 $2.40 11.2% 1.40 $285,000,000 0.18 $1,620,000,000 - - 5.5 4.00
DCP Midstream Partners DPM $34.82 $3.12 9.0% 1.21 $1,170,000,000 0.49 $2,367,000,000 - $500,000,000 5 3.80
Mid Coast Energy Partners MEP $8.21 $1.43 17.4% 1.00 $66,000,000 0.08 $873,400,000 $140,000,000 $25,000,000 not reported 4.80
Oneok Partners OKS $39.80 $2.46 6.2% 1.15 $1,124,800,000 0.17 $6,695,000,000 $650,000,000 5.5 4.20
Spectra Energy Partners SEP $44.83 $2.66 5.9% 1.20 $1,304,000,000 0.22 $5,861,000,000 $250,000,000 $400,000,000 not reported 3.40
TCP Pipelines TCP $53.69 $2.71 5.0% 1.25 $298,000,000 0.15 $1,938,000,000 $100,000,000 $212,000,000 5 4.80
Western Gas Partners WES $51.02 $3.32 6.5% 1.22 $800,000,000 0.27 $2,932,000,000 - - not reported 3.10
Williams Partners WPZ $39.50 $3.40 8.6% 1.02 $2,800,000,000 0.15 $19,116,000,000 $377,000,000 - 6 4.40

The market prices are current as of the September 7th market close. There is a wide range of Yields, so the market is valuing these companies differently. The ability to cover the distribution also varies quite a bit. The EBITDA to Debt ratio is a key metric in the debt covenants as a guide to the Partnerships ability to service debt. The table also looks at the Distributable cash flow to debt. If the partnership had to hunker down and live within its mean, how quickly can it pay down near term debts? In all cases the risk of bankruptcy is incredibly small. All of the pipelines examined could meet their debt obligations with a near term distribution cut even if they were completely cut out of capital markets. However, this author has observed DCF/debt ratios below 0.15 seem to correlate well to distribution cuts.

Forecast Debt Coverage

This can be a bit tricky to calculate so I have used the various partnerships guidance in most cases. The Partnerships can take out a large loan and exceed their long term covenant values for several quarters while they build a project. As long as the project brings in the required additional EBITDA in the required timeframe they are in compliance with the covenants.

Next, lets look at how the various MLPs have changed since last year.

Table 2: 2015 and 2016 Debt Ratios
Ticker 2015 2016 Forecast
MLP Name: Symbol Debt x EBITDA Debt x EBITDA % improvement
American Midstream Partners AMID 4.4 4.00 10.0%
Antero Midstream Partners AM 4.5 2.40 87.5%
Boardwalk Pipeline Partners BWP 5.0 4.40 13.6%
Columbia Pipeline Partners CPPL 4.1 3.40 20.6%
CONE Midstream Partners CNNX 0.2 0.46 -56.5%
Crestwood Equity Partners CEQP 4.8 4.00 20.0%
DCP Midstream Partners DPM 3.2 3.80 -15.8%
Mid Coast Energy Partners MEP not reported 4.80 n/a
Oneok Partners OKS 4.3 4.20 2.4%
Spectra Energy Partners SEP 4.3 3.40 26.5%
TCP Pipelines TCP 5.4 4.80 12.5%
Western Gas Partners WES 3.5 3.10 12.9%
Williams Partners WPZ 4.8 4.40 9.1%

In short, everyone has improved. Several small partnerships with little to no debt have increased their debt as they grow. As stated in their presentations, most MLPs understand they need to get their debt ratio under 4.0.

American Midstream Partners (NYSE:AMID)

American Midstream operates gathering systems and transmissions pipelines primarily in Louisiana both onshore and offshore. They also operate several systems in Texas, Mississippi and Alabama. They have continued to acquire assets in the Gulf of Mexico region.

While no long term debt is due in 2016 or 2017, they have announced they will not raise the distribution. Both AMID's distribution coverage and debt ratio have improved. The partnership is very credit worthy, the risk here is the small geographic footprint. AMID is a Buy for a small position.

Antero Midstream Partners (NYSE:AM)

Antero midstream partners operates a hodgepodge of midstream gas related assets for Antero Energy primarily in Appalachia. As a relatively new spin off, they have excellent coverage of their distribution and an exquisite balance sheet that they should be able to borrow against heavily to fund their capital expansion.

Antero Midstream also has a fresh water supply and water treatment business for Antero Energy. This is unique to this MLP. Time will tell how good a deal this is for the partnership. Immediately the deal has greatly reduced the debt ratio, but past investor presentations make reference to payments due in 2019 and beyond from the profits of this business. Near term, Antero Midstream has the balance sheet it needs to keep growing, however investors should understand the risks around the water business. Antero's yield is not compelling.

BoardWalk Pipeline Partners (NYSE:BWP)

Boardwalk's main asset is the Texas Gas Transmission Pipeline which runs from Texas, extending to Lebanon Ohio. Expansion projects have included laterals to Kentucky and Indiana for feeding power plants.

BWP is an interesting case. They "Kindered" first when they cut their distribution to lower debt and fund expansions. Investors have not yet been rewarded.

Boardwalk has successfully rolled over their near term debts. The partnership is on track to reduce its debt leverage ratio and expansion projects should greatly boost cash flow starting this year. The yield is not compelling; this partnership is for those interested in the growth potential.

Columbia Pipeline Group (NYSE:CPPL)

Columbia pipeline Group is the MLP spin off from NiSource last year to take the Columbia Pipeline assets connecting the Marcellus and Utica Shale areas to Texas. These pipeline assets are almost completely booked on fee for capacity agreements, so Columbia gets paid the same regardless of actual volumes moved.

The newest of the pipeline companies reviewed in this article, there is not a lot of track record to follow. Columbia has a great distribution coverage and a very low debt ratio that will enable them to engage in expansion projects. Columbia appears to be fully priced as well.

CONE pipeline Partners (CNNX)

Formed in 2014, CONE is also one of the newer Marcellus/Utica Shale area pipeline companies. They have lots of room to grow their debt and very good DCF coverage. The partnership is small and only operates in the Marcellus/Utica area. Because of this the partnership is likely more tied to the price of gas continuing up to drive drilling and subsequent pipeline volumes in the area. The current yield is not compelling and much of the growth potential appears priced in.

Crestwood Equity Partners (NYSE:CEQP)

Crestwood Equity Partners is a smaller but well-diversified midstream company. Crestwood has cut their distribution and greatly reduced their debt ratio. Financially this company understands what is required of them and investors should be reassured by that. The yield is very interesting here and this is a buy for a small position.

DCP Midstream Partners (DPM)

DCP owns a variety of gas transmission, gathering pipelines and gas processing facilities primarily in the mid-continent and Texas. The partnership continues to increase the percentage of its business that is fee based.

DCP has decent distribution coverage and some room to increase debt. They will not have any problems meeting their near term maturing debt and continuing to make the distribution while funding some small growth projects. Given the high yield they are one of the better deals in the field. DPM is a buy.

MidCoast Energy Partners (NYSE:MEP)

MidCoast Energy Partners is a small gathering pipeline operator primarily based in Texas. Their general partner is the Canadian pipeline giant Enbridge. MEP has no margin for error with its DCF coverage and a relatively high debt ratio that will likely hinder financing. However all of this has been priced in and even with a 50% distribution cut, MEP is worthwhile at current prices. MEP is a buy for a speculative position.

TCP pipeline Partners (NYSE:TCP)

TCP has several U.S. gas transmission lines and one of the U.S.-Canadian pipelines. They have eased back on their debt ratio but still have a relatively high debt ratio. The distribution coverage is good. TCP is already fully priced but a safe choice.

ONEOK Partners (OKS)

Oneok is a massive gas and liquids pipelines and processing through middle of the country down to Texas. This is a well-established MLP and a big name in the sector. With a tight coverage ratio of 1.0 but with some room to grown debt, they are probably on the safe side of a distribution cut. Given their longstanding reputation, look for Oneok to maintain their distribution at all costs, even if it means much slower growth going forward. Oneok's low yield makes it's current price too expensive.

Spectra Energy Partners (NYSE:SEP)

Spectra operates an extensive pipeline network from Pennsylvania to Texas and one of the pipelines from Canada to the Colorado and Wyoming area. Spectra appears to be one of the more conservative names in the field. They have slightly above average coverage of their distribution and room to borrow. Look for Spectra to continue with responsible growth. However, given the low yield, the market clearly already agrees with me that this is a very safe pipeline payer to own and will have some steady upside potential.

There is a buy-out offer for SEP's general partner that should not affect the value or potential of SEP.

Western Gas Partners (NYSE:WES)

Western Gas Partners owns midstream assets in New Mexico and Western Texas that were dropped down from Anadarko Petroleum. They have both gathering and transmission capacity. Q1 results where held back by a fire at one of their processing facilities. WES has fixed the problems and brought another processing plant online. Western Gas has increased its DCF coverage and has one of the lower Debt ratios in the sector. WES appears to be very stable and worth its higher valuation relative to its peers. WES remains recommended as a buy.

Williams Pipeline Partners (NYSE:WPZ)

Another big name in the pipeline arena with a gigantic network of gas pipelines, WPZ is likely to remain committed to its distribution. With an improved but still thin distribution coverage ratio don't expect distribution growth anytime soon. While debt is relatively high, the general partner is starting to take steps such as asset sales and a shares purchase to infuse cash into WPZ's balance sheet.

WPZ is performing in line with the forecast for the year and the distribution is looking safer with each passing quarter. The balance sheet improvements make WPZ a recommended buy.

Conclusion

Overall, the natural gas MLPs are addressing their balance sheet problems and still are worth buying. AMID, CEQP and MEP are more speculative but with small position sizes very appropriate for investors seeking the more substantial distribution growth potential or share price upside. DPM, SEP, WPZ and WES are all excellent choices for safe and (eventually) increasing distributions.

Disclosure: I am/we are long BWP, AMID, MEP, WPZ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.