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What Happened In September: Are The Good Old Days Returning?

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Includes: CVX, DTE, ET, MMP, MPC, MPLX, OMP, PSX, PSXP, RDS.A, SEP, SHLX, VLO, WPZ
by: Alerian

By Maria Halmo

With MLPs returning 0.7% on a total return basis in September, it's hardly something we would have hailed as good news back in the actual good old days, but with oil prices up 9.3% during the month, the double reversal is refreshing. September's news on an individual company level harkens back to the days of organic growth projects being announced (with subsequent regulatory approvals proceeding without delay), dropdowns from parent companies at reasonable multiples, and new MLPs being formed. It was almost a textbook MLP month circa 2011. Almost.

Organic Growth

Magellan Midstream Partners (NYSE:MMP) led the crowd here announcing almost $1 billion of new build projects, both a refined products pipeline joint venture with Valero Energy Corporation (NYSE:VLO) and its own [1] Permian crude takeaway pipeline (a feeder pipeline to MMP's larger Longhorn pipeline). They will also be expanding a marine storage facility (also with VLO). MMP also just priced $500 million of 30-year debt at 4.2%, indicating its healthy relationship with capital markets. As might have been expected, MMP finished the month up 4.6%.

Now that the FERC has returned to a quorum, many projects have now received final approval. These include portions of both Atlantic Sunrise and Rover, which were placed into service this month [2], and NEXUS can now begin construction. Atlantic Sunrise is being built by Williams Partners (NYSE:WPZ), Rover is being built by Energy Transfer Partners (ETP), and NEXUS is a 50/50 project between Spectra Energy Partners (NYSE:SEP) and DTE Energy Corporation (NYSE:DTE).

As the FERC finishes its backlog, approval schedules should return to normal.

Dropdowns Don't Disappoint

MPLX (NYSE:MPLX) received a $1.05 billion dropdown in joint-interests across four assets from parent Marathon Petroleum Corporation (NYSE:MPC) at an attractive 7.6x multiple on estimated 2018 EBITDA. There is still about $1 billion of remaining dropdown EBITDA at MPC, which would translate to additional dropdowns of $7.6 billion if the same multiple is paid in the future.

The companies expect the remaining dropdowns to be completed within the next two quarters. After the dropdowns are complete, IDRs are expected to be exchanged for LP units. If all goes as planned, by this time next year, MPLX will be a much larger company and able to grow from that point without the IDR drag on growth.

Phillips 66 Partners (NYSE:PSXP) received a $2.4 billion dropdown from its parent Phillips 66 (NYSE:PSX), at an 8.9x multiple of 2018 EBITDA. This deal was both larger and earlier than analysts expected. It included a 25% interest in the Bakken Pipeline and 100% of two heavy sour crude processing units at the Sweeny refinery in Texas. Both assets are fascinating for different reasons. The "Bakken Pipeline" is actually a combination of the Dakota Access Pipeline and the Energy Transfer Crude Oil Pipelines, a very clever renaming.

(PSX owned only a 25% interest, so the entirety of its interest has been sold to PSXP.) The refinery is typically a very commodity price sensitive asset (turning crude oil into other products and profiting from the spread in the prices), but the dropdown was done with a long-term (15-year) contract with PSX where PSXP will process their crude for a set base fee and minimum volume commitments - essentially turning a commodity-sensitive asset into a midstream cash flow stream.

New Kids On The Block

There isn't much precedent for integrated majors to form MLPs, but large energy companies are familiar with energy infrastructure because otherwise, all of their product would be stranded at the wellhead or refinery. In some cases, integrated majors may own the infrastructure, and in other cases, they may outsource the midstream necessities to companies like MLPs. Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) was the first major to create an MLP, Shell Midstream Partners (NYSE:SHLX), and some of its fellow majors may be following suit.

Back in July, there were rumors that Chevron (NYSE:CVX) should create its own MLP, but the substantive news is that in September, BP went ahead and filed with the SEC for its own MLP: BP Midstream Partners (anticipated ticker: BPMP). Since BP makes up 95% of BPMP's revenues and BP will continue to own both the general partner and a majority of the LP units, it is obvious that BP sees more value in BPMP as an MLP, rather than as an incorporated part of the broader entity. There is no guarantee that BP will follow through and complete the IPO of BPMP. An S-1 only signifies the initial stages of the process.

Howard Midstream Partners (anticipated ticker: HMP) also filed an S-1 in September. A G&P company operating primarily in Texas, the parent company of HMP is owned by Alinda (a private equity firm focused on infrastructure), AIMCo (a Canadian institutional investor), and management.

Further, one IPO was completed during the month! Oasis Midstream Partners (NYSE:OMP) is a midstream services MLP operating in the Williston Basin. Unfortunately, not all news was good news in September. OMP ended up pricing at $17 per unit, below the anticipated range of $19-$21. In the days since the IPO, it has traded up slightly (finishing at $17.24 on October 6th).

Lower pricing could be due to the highly concentrated nature of their assets or simply due to increased competition for capital. Given the increase in the number of announcements from MLPs in September and related capital funding, the OMP IPO was one of many opportunities investors had during the month.

One Quarter Left In 2017

MLPs may have still finished September down for the quarter (-3.0%) and down for the year (-5.6%), but the return to a more normal news cycle is a breath of fresh air. That, and the fact oil was up 9.3% during September didn't hurt. As 2017 draws to a close, analysts and investors alike will be watching to see whether MLP sentiment moves further from neutral, and hopefully into hesitantly positive.

Footnotes:

[1] Interesting line from the press release, “Magellan plans to conduct an open season for commitments on the new pipeline system at a later time; however, construction of the new pipeline does not depend on the results of the open season.” This is rather unusual for MLPs, which typically build a pipeline only after contracts have been signed. That said, since the pipeline is a feeder pipeline, MMP likely knows the market around the area and must have significant confidence in the demand for this pipeline.

[2] For Atlantic Sunrise, additional greenfield construction began on 9/15/2017 and the pipeline is expected to be in service in mid-2018. Rover is expected to be in service by the end of the first quarter of 2018. NEXUS is expected to be on line in mid-2018.

Disclosure: © Alerian 2017. All rights reserved. This material is reproduced with the prior consent of Alerian. It is provided as general information only and should not be taken as investment advice. Employees of Alerian are prohibited from owning individual MLPs. For more information on Alerian and to see our full disclaimer, visit http://www.alerian.com/disclaimers.

Maria Halmo is the Director of Research at Alerian, which equips investors to make informed decisions about Master Limited Partnerships (MLPs) and energy infrastructure. Ms. Halmo leads the firm's research efforts, which include examining MLP regulatory filings, monitoring legislative activity, and investigating industry developments. She also oversees Alerian's public communications strategy through investor and media outreach. Ms. Halmo is a former Associate at SteelPath Capital Management LLC, a Dallas-based MLP investment manager, where she conducted valuation analyses of petroleum transportation partnerships and researched macro-level energy issues. Ms. Halmo graduated with a Bachelor of Arts in Astrophysics from Barnard College at Columbia University. She is also a contributing author to Midstream Business, a monthly publication addressing the need for business market intelligence on North American energy infrastructure.