Executives at energy MLPs are mostly optimistic about their growth prospects but investors do not share their enthusiasm, as the Alerian MLP ETF (AMLP +0.1%) trades at YTD lows, Mizuho analyst Brian Zarahn learned at an MLP investment conference in Orlando last week.
MLP management teams offered a relatively constructive view supported by rising U.S. volumes which are positive for cash flow growth, as well as producer drilling efficiencies and growing demand for petrochemicals, but investor optimism on 2018 will wane if oil prices remain below $50/bbl, Zarahn says.
Finally, heavy competition in the Permian Basin could lower returns for winning projects and pose pricing pressure for incumbent crude pipelines, according to Zarahn, who prefers exposure to diversified, integrated midstream MLPs such as Enterprise Products Partners (NYSE:EPD) and Energy Transfer Partners (NYSE:ETP).
The plan's proposed cut to the top tax rate on pass-through businesses to 15% from the current rate of up to 36.9% largely would benefit owners of private businesses, but MLP investors would receive the same treatment.
MLPs have broadly underperformed the broader stock market over the past several years, largely due to the weakness in oil prices.
Mike Bresson, a tax partner with the Baker Botts law firm in Houston says the proposed change would enhance an already superior tax structure enjoyed by MLPs, but adds "the devil is in the details, and we haven’t seen them."
Energy Transfer Partners (ETP +0.3%) says it received the easement from the Army Crops of Engineers needed to complete construction of the Dakota Access pipeline, and the company says construction work already has started.
The Cheyenne River Sioux, one of two American Indian tribes fighting the pipeline, filed a legal challenge this morning to try to block its completion, saying a pipeline leak could contaminate its drinking water; the Standing Rock Sioux tribe also has vowed to fight the construction in court.
ETP says it will take about two months to complete drilling under Lake Oahe, but any timetable looks iffy when considering the legal and physical obstacles opponents will use to block it.
For investors in energy MLPs, controversy around new pipeline construction - and volatility in MLPs - is not going away, but existing pipelines are growing more valuable, says Cohen & Steers portfolio manager Tyler Rosenlicht, "because it has gotten so difficult to build a new one, [so] the existing asset base is naturally worth more."
The IPO sold 12.5M units, as planned, at $22.50 each, after the company had looked to price units in the $19-$21 range.
NBLX provides crude oil, natural gas and water-related midstream services on 300K acres in the Denver-Julesburg basin in Colorado and on 40K acres in the Delaware Basin within Texas’ Permian Basin.
While the deal is not likely to open the floodgates for new MLP offerings, a successful stock market debut should signal to MLP management teams that they can raise equity if they need it, which is “in striking contrast to the beginning of the year,” says Chris Eades, portfolio manager for several MLP strategies at ClearBridge Investments.
Energy MLPs enjoyed a lift this week (at least until yesterday) following news of the Enbridge-Spectra merger, particularly those lacking sponsorship by producers that may be targets for consolidation.
FBR Capital says MLP valuations have improved ~45% from lows reached early this year, and expects macro trends to lift the sector; the firm thinks CAPL could enjoy double-digit growth for nearly seven years, and says MMLP is another notable outperformer whose valuation reflects more than enough discount for a distribution cut (which the firm is forecasting) - it also likes ENLK, EEP, TLP, SRLP, USAC, WLKP and USDP,
RBC notes favorable sentiment in the MLP realm, highlighting attractive valuations particularly at ETP, BWP and AMID, and sees dropdown stories - out of favor YTD - such as VLP and SHLX offering visible growth that can support the stocks over the next 12 months.