Q1 2019 MLP Distribution Recap: Outlook Improving In Spite Of Cuts

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Includes: CEQP, CQP, DCP, ENBL, ENLC, ET, MMLP, NGL, NS, PAA, SMLP, TCP, TGE, WES
by: Alerian
Summary

Most MLPs in the AMZ and AMZI grew their 1Q19 distributions sequentially and on a year-over-year basis.

Consolidation-related backdoor cuts among AMZI constituents and outright cuts from smaller constituents of the AMZ made for a noisy quarter, though the 20% increase from PAA was a bright spot.

Healthy distribution coverage and progress with MLP consolidations contribute to a constructive outlook for distributions going forward, particularly for the AMZI.

By Stacey Morris

PAA's 20% hike overshadows multiple cuts.

The pie charts below show the quarter-over-quarter (Q/Q) or sequential changes to distributions for constituents of the Alerian MLP Index (AMZ) and Alerian MLP Infrastructure Index (AMZI), comparing 1Q19 with 4Q18. To be clear, 1Q19 distributions refer to the distributions that will be paid in 2Q19 as a result of operational performance in 1Q19.

Most notably for 1Q19, after holding its distribution flat for six quarters since its 3Q17 cut, Plains All American (NYSE:PAA) announced a 20% distribution increase from $0.30 to $0.36 per unit per quarter. The jump in the distribution coincided with PAA achieving its deleveraging goal. Over the next few years, PAA anticipates distribution growth of ~5% annually contingent on achieving its targeted financial metrics. The resumption of growth is positive to see following the painful cuts in the past.

For the AMZ and AMZI, consolidations completed during the first quarter led to two backdoor distribution cuts, which is when the distribution is effectively cut for legacy holders of an acquired MLP due to the lower distribution paid by the surviving entity. Western Gas Equity Partners acquired Western Gas Partners, and the combined company was renamed Western Midstream Partners (NYSE:WES). Western Gas Partners was the predecessor in the index. For the index and legacy holders of Western Gas Partners, the 1Q19 distribution from WES represented a 5.1% cut1. Similarly, following a merger transaction, EnLink Midstream Partners was replaced in the index by EnLink Midstream LLC (NYSE:ENLC), and ENLC's 1Q19 distribution represented a 17.7% cut2 relative to EnLink Midstream Partners' 4Q18 distribution.

The remaining two cuts among AMZ constituents came from Summit Midstream Partners (NYSE:SMLP) and Martin Midstream Partners (NASDAQ:MMLP), which had a combined weight in the AMZ of less than 1% as of the March quarterly rebalancing. In February, SMLP announced that it would cut its quarterly distribution by 50% to $0.2875 per unit as one element in a series of strategic actions that also included eliminating its IDRs. MMLP also announced that it would cut its distribution in half to $0.25 per unit per quarter as it focuses on strengthening its financial positioning.

Most AMZ and AMZI constituents grew their distributions year over year

The charts below compare the 1Q19 distribution with the 1Q18 distribution for those names that were in the index in both periods. Note that this approach introduces survivorship bias. As a result of the AMZ methodology change that became effective in December 2018, eleven tickers have been excluded from the year-over-year comparison for the AMZ since they were not in the index in 1Q18. Four tickers have been excluded from the AMZI. We included ENLC, WES, Tallgrass Energy (NYSE:TGE), and Energy Transfer (NYSE:ET) because they had a related predecessor in the indices in 1Q18.

AMZ constituents that maintained their distribution in 1Q19 relative to 1Q18 include (names with an asterisk are also in the AMZI):

  1. Crestwood Equity Partners (NYSE:CEQP)*
  2. DCP Midstream (NYSE:DCP)*
  3. Enable Midstream Partners (NYSE:ENBL)*
  4. NGL Energy Partners (NYSE:NGL)*
  5. NuStar Energy (NYSE:NS)*
  6. TC PipeLines (NYSE:TCP)*

Backdoor cuts from ET, ENLC, and WES account for three of the four cuts for the AMZI shown above, with the other cut coming from Buckeye Partners (NYSE:BPL). On Friday, BPL announced that it agreed to be acquired by IFM Investors. BPL expects to pay a distribution in August, but an additional distribution will depend on the timing of the transaction's close, which is expected in 4Q19. For the AMZ, the other cut is from SMLP, which was in the index for both periods (MMLP was not). Prior cuts from TC PipeLines (TCP) and NuStar Energy (NS) have rolled off from the year-over-year comparison.

Why may MLP distributions be in a better position going forward?

As we saw this quarter, distribution cuts can be a byproduct of consolidation transactions. Since the start of 2018, four of the six distribution cuts among AMZI constituents coincided with consolidation transactions (ET, ENLC, WES, NS). For ANDX holders, the acquisition by MPLX (NYSE:MPLX) will result in a distribution cut3, though this was expected given that ANDX had the highest yield among AMZI constituents as of April 30 at 12.3%. Based on company guidance, MPLX holders will see distribution growth of $0.01 per unit per quarter for 2019. For investors, the conclusion of MLP consolidations, which we believe have largely been announced at this point, may help stabilize distributions and set the stage for growth.

Distribution coverage, which compares distributable cash flow (DCF) to distributions paid, also continues to improve (read more). The average distribution coverage ratio for AMZI constituents for 1Q19 was 1.5x, excluding Cheniere Energy Partners (NYSEMKT:CQP), which does not report DCF, and NGL Energy Partners (NGL), which has not yet reported results. In other words, AMZI constituents on average are generating 50% more cash than they are paying out as distributions. Improving coverage indicates that MLPs are better able to afford their distributions, while also using retained cash flow to fund growth projects.

Among the large and mid-cap MLPs in the AMZI, the companies that needed to right-size their distributions have largely done so in our view. It is positive to see PAA, which had cut its distribution twice, return to growth having achieved its deleveraging target. While some MLPs will continue to prioritize debt reduction or growth capital over distribution increases, the combination of consolidations concluding and healthy distribution coverage has limited the risk of potential cuts, particularly among AMZI constituents.

1 Western Gas Partners paid a 4Q18 distribution of $0.98/unit. Legacy holders received 1.525 units of Western Midstream for each unit of Western Gas Partners. Factoring in the units received and Western Midstream’s $0.61/unit distribution for 1Q19 equates to a 5% cut: ($0.61 * 1.525)/$0.98 = -5.1%.

2 ENLK holders received 1.15 units of ENLC per ENLK unit owned. ENLK’s 4Q18 distribution was $0.39/unit. Factoring in the units received and ENLC’s 1Q19 distribution of $0.279/unit, ENLC’s distribution represented a 17.7% cut: ($0.279 * 1.15)/$0.39 = -17.7%.

3 ANDX is paying $1.03/unit quarterly. ANDX holders will receive 1.135 MPLX units per ANDX unit, and MPLX’s 1Q19 distribution was $0.6575/unit. MPLX plans to grow its distribution by $0.01/unit quarterly. The cut for ANDX holders will likely be ~25%.

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Stacey Morris is the Director of Research at Alerian, which equips investors to make informed decisions about Master Limited Partnerships (MLPs) and energy infrastructure. Ms. Morris engages with the investment community to increase awareness of the Alerian Index Series and support broader understanding of the role that midstream assets play in North American energy markets. Ms. Morris was previously the Investor Relations Manager for Alon USA Energy, overseeing investor communications for the corporation and its variable distribution MLP, Alon USA Partners. Prior to Alon, she covered the integrated majors and refiners at Raymond James as a Senior Associate in the firm’s Equity Research Division. Ms. Morris graduated summa cum laude with a Bachelor of Science in Business Administration from Stetson University, and is a CFA charterholder.