Trolling For Distributions In The Crude Oil Pipelines

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Includes: BPL, DKL, EEP, ENB, ENBL, EPD, ETE-OLD, ETP, JPEP, MMP, MPLX, PAA, PSXP, SHLX, SXL
by: The Troll under the Pipeline

Summary

After some big price swings, the sector still offers some value.

EDP, MMP and EEP offer good distributions with some upside potential from future growth.

All of the pipeline partnerships are focused on lowering the debt ratio.

The oil pipeline partnerships have been through a wild ride like the rest of the midstream sector. Share prices dropped in several cases close to 50% and then have rallied back substantially. A big deal acquisition in the gas pipeline sector fell through and a new one has emerged in the oil pipelines. But, pipeline and Master Limited Partnership (MLP) investors are typically looking for a steady and growing distribution. How do the oil and refined product pipeline MLPs look for investors looking for a steady payment?

The primarily natural gas pipeline partnerships were looked at in my previous article.

The MLP Business Model:

The business is typically fee based. Crude oil and/or refined products are moved or stored for a fee or fixed margin. MLP revenue may increase or decrease as oil and natural prices move up or down, but the fee for operating the pipeline remains relatively constant.

MLPs need to steadily grow their asset base. More pipeline capacity means more revenue to grow the distribution and new assets to depreciate. The depreciation passes through to the partnership investor. 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 crude oil and refined products MLPs looks at distribution yield, coverage and debt.

Table 1: Summary of Crude Oil and Refined Product Pipelines (Market Close 9/16/16)
Ticker Current Price Distribution Current forward Distribution 2016 Total Debt Due Debt Covenant 2016
MLP Name: Symbol Close 9/16/16 Annualized Yield Coverage Ratio DCF guidance DCF/Debt Long-Term Debt In 2016 In 2017 EBITDA Debt x EBITDA
Buckeye Partners BPL 68.16 4.85 7.12% 1.0 $724,000,000 0.19 $3,738,610,000 - $125,000,000 - 4.28
Delek Logistics Partners DKL 27.86 2.52 9.05% 1.3 $88,000,000 0.23 $377,450,000 - - Not Reported 3.47
Enable Midstream Partners ENBL 14.42 1.27 8.81% 1.0 $550,000,000 0.18 $3,101,000,000 - $363,000,000 Not Reported 3.81
Enbridge Energy Partners EEP 23.86 2.33 9.77% 1.2 $1,014,000,000 0.12 $8,214,000,000 $300,000,000 - Not Reported 4.2
Energy Transfer Partners ETP 36.37 4.22 11.60% 0.9 $3,130,000,000 0.09 $33,309,000,000 $5,329,000,000 $1,182,000,000 Not Reported 4.47
Enterprise Products Partners EPD 26.01 1.60 6.15% 1.3 $4,180,000,000 0.31 $13,346,700,000 $1,700,000,000 $800,000,000 Not Reported 4.2
JP Energy Partners JPEP 7.32 1.30 17.76% 0.9 $49,200,000 0.31 $158,000,000 $1,113,000 - 4.5 $3.10
Magellan Midstream Partners MMP 67.84 3.28 4.83% 1.2 $852,800,000 0.27 $3,185,000,000 $250,000,000 - Not Reported 2.84
MPLX LP MPLX 32.31 2.04 6.31% 1.2 $1,050,000,000 0.24 $4,401,000,000 - - - 3.7
Phillips 66 Partners PSXP 47 1.87 3.98% 1.2 $1,025,000,000 0.76 $1,343,000,000 - - Not Reported 3
Plains All American PAA 27.49 2.80 10.19% 0.7 $302,000,000 0.03 $10,100,000,000 $651,000,000 $846,000,000 4.5 4.4
Shell Midstream Partners SHLX 29.68 1.00 3.37% 1.4 $270,000,000 0.78 $344,000,000 $100,000,000 - Not Reported 3.45
Sunoco Logistics Partners SXL 27.8 2.00 7.19% 1.0 $912,000,000 0.15 $6,112,000,000 $175,000,000 - 5.0 3.7

The market prices are current as of the September 16th market close. Yields are relatively close for these partnerships compared to the wide variations in natural gas midstream yields. The market does not appear to be paying as close attention to the debt leverage ratio. The ability to cover the distribution also varies quite a bit. The EBITDA to debt ratio, a key metric in the debt covenants as a guide to the partnerships' access to debt, is tabulated. 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 their investor presentations. 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 time frame, they are in compliance with the covenants.

Table 2: Summary of Debt Leverage Ratio Changes
Ticker 2015 2016 %
MLP Name: Symbol Debt x EBITDA Debt x EBITDA Change
Buckeye Partners BPL 4.5 4.3 -4.9%
Delek Logistics Partners DKL 3.1 3.5 11.9%
Enable Midstream Partners ENBL 3.7 3.8 3.0%
Enbridge Energy Partners EEP 4.0 4.2 5.0%
Energy Transfer Partners ETP 4.7 4.5 -4.9%
Enterprise Products Partners EPD 4.2 4.2 0.0%
JP Energy Partners JPEP 3.2 3.1 -3.1%
Magellan Midstream Partners MMP 3.1 2.8 -6.9%
MPLX LP MPLX 4.3 3.7 -14.0%
Phillips 66 Partners PSXP 3.5 3.0 -14.3%
Plains All American PAA 4.5 4.4 -2.2%
Shell Midstream Partners SHLX 3.6 3.5 -4.2%
Sunoco Logistics Partners SXL 3.4 3.7 8.8%

In short, everyone has improved. Several small partnerships with relatively low 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.

Buckeye Partners (NYSE:BPL)

Buckeye is a pipeline and terminal operator primarily in the Northeast and Midwest. It also has some assets in the Caribbean and Gulf Coast. Buckeye's storage capacity is essentially full. Pipeline business will likely continue to grow. However, storage incomes may well drop in the next few years as it cannot go higher. Buckeye has a thin distribution coverage ratio and an acceptable debt ratio. Buckeye has an excellent reputation for raising the distribution and this has driven up the share price. At current yield, shares appear fully priced and are not recommended.

Delek Logistics Partners (NYSE:DKL)

Delek is a small midstream partnership primarily in the Texas Gulf Coast with crude and refined product pipelines around Delek Energy's refineries. DKL's future is tied closely to its parent, and this will likely slow growth near term. The yield and excellent distribution coverage more than compensate investors for the likely limited growth and risks of a small customer base. Delek is worth buying in small amounts.

Enable Energy Partners (NYSE:ENBL)

Enable Energy Partners operates gathering networks and pipelines primarily in Arkansas, Louisiana and Oklahoma. It is adding capacity in the Dakotas. This partnership has a tight distribution coverage ratio and moderate yield. Enable has been touting operational efficiencies from connecting its midstream efficiencies that are likely real but should not be overvalued. It will likely get by without a distribution cut, but at the current price, investors may not be adequately rewarded with yield for the risk. Pass on ENBL until something changes.

Enbridge Midstream Partners (NYSE:EEP)

Enbridge Midstream Partners is the US arm of the Canadian Pipeline giant Enbridge Inc. (NYSE:ENB). EEP has pipeline capacity from the Canadian border through the US to the Gulf Coast. EEP still pays IDRs to Enbridge. Pipeline leaks and fines are behind them. Debt coverage and distribution coverage make EEP attractive at current prices.

EEP's general partner Enbridge has made an offer to acquire Spectra Energy (NYSE:SE). If this deal goes through, the Enbridge empire will be the largest pipeline company in North America. Near term, this won't affect EEP. Rumors of structural changes are premature. If there are ownership structure changes, it may be an opportunity to change or eliminate the IDRs. EEP is a buy.

Energy Transfer Partners (NYSE:ETP)

Energy Transfer Partners is one of several partnerships in the Energy Transfer Equity (NYSE:ETE-OLD) empire. The partnership operates crude oil pipelines from the Rockies through the Midwest to the Gulf Coast and substantial gas and natural gas liquid pipeline capacity from the Marcellus and Utica shale areas.

ETP is one of the remaining partnerships that still has Incentive Distribution Rights (IDRs) that must be paid to the general partner. ETP and ETE have an IDR reduction agreement for 7 quarters that will reduce these payments. Without the IDR reduction, ETP could not maintain its distribution. Investors are relying on this grace period to save them from a cut. ETP has reduced leverage a bit so they can probably grow their way out of the cash flow problem, but ETP remains risky.

Enterprise Products Partners (NYSE:EPD)

Enterprise is one of the larger pipeline partnerships out there. It has an extensive crude oil network connecting all of the major shale basins to approximately 90% of the refining capacity east of the Rockies. It also operates an extensive gas and natural gas liquids pipeline network. EPD has a good distribution coverage and respectable improvement in its debt ratio. Given the diversity of its assets and financial strength, EPD is worth the premium the market has place on its valuation. Look for slow but steady distribution and take advantage of dips like the current one to buy EPD.

JP Energy Partners (NYSE:JPEP)

JP Energy Partners is a small midstream company primarily operating in Texas. While it operates some NGLs distribution and cylinder exchange businesses, JPEP's future is primarily tied to the Silver Dollar Pipeline. There is no diversification and a real risk it is relying on the General Partner to support the distribution. JP Energy should be avoided.

Magellan Midstream Partners (NYSE:MMP)

Magellan Midstream Partners operates a massive mid-county refined products and crude pipeline network. It also has a marine storage business. Magellan is one of the more financially conservative partnerships. With excellent DCF coverage, low debt ratio and steadily growing distribution, the market has priced it with one of the lowest yields in the field. Magellan is a safe investment with limited upside and worth buying on the dips.

MPLX LP (NYSE:MPLX)

MPLX LP is a Marathon Petroleum's (NYSE:MPC) MLP. MPLX owns and operates a variety of crude and refined product midstream assets in the Midwest and East Coast. MPLX has good DCF coverage and has reduced its leverage ratio. Based on yield, it is priced similar to EPD, and on this basis, it is overvalued as its future is tied with Marathon's.

Phillips 66 Partners (NYSE:PSXP)

Phillips 66 Partners is the Phillips 66 (NYSE:PSX) MLP. It owns a national network of midstream assets primarily around Phillips 66 Refineries. This partnership is tied to Phillips for future pass downs. The balance sheet is strong enough to support future purchases. PSXP has already priced in a lot of growth and does not look compelling at this time.

Plains All American (NYSE:PAA)

Plains All American owns and operates a large mid-country pipeline network and has storage terminals nationwide.

Recently, PAA has eliminated IDRs in exchange for issuing a large number of new units to the General Partner. Long term, this is good for the PAA investor, but short term, it is barely enough to protect the distribution. Investors should be looking for a higher yield to protect themselves while Plains works out its balance sheet problems.

Shell Midstream Partners (NYSE:SHLX)

Shell Midstream Partners was recently created by Shell Oil to hold midstream assets primarily in the Gulf Coast area. The partnership has excellent DCF coverage and room to grow. Unfortunately, this is all priced into the shares already and it's the lowest yield in the group. Even if the partnership achieves the 25% distribution the investor presentation says it is planning on, SHLX is just too expensive currently.

Sunoco Logistics Partners (NYSE:SXL)

Sunoco Logistics Partners is another piece of the ETE empire. It has an extensive pipeline network on the East Coast and a presence in Texas. Through joint ventures it is increasing its pipeline capacity North Dakota. Its distribution coverage is very thin at 1.0, but its low leverage ratio means it should be able to fund its growth objectives. Unless share prices drop, pass on SXL for other pipelines with the same yield and better DCF coverage.

Conclusions

The crude oil and refined products pipeline partnerships remain attractive for investors seeking a steady distribution. Balance sheets are improving and in general the crude oil pipeline companies have good distributable cash flow coverage for their distributions.

EEP, EPD and MMP are all appropriate for conservative investors seeking the distributions. DLK is interesting for those feeling a bit sportier.

Disclosure: I am/we are long EPD, EEP.

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.