Not much love again this week for MLP's as the benchmark index gained just 1.07% as crude held last weeks gain on the hopes that Non OPEC producers meeting this weekend will voluntarily cut production. On Saturday, the non OPEC producers did agree to cut 558,000 bpd of production, starting on January 1st, for at least six months. Russia had previously signaled their intent to reduce production by 300,000 bpd, so the new information is that Mexico, Azerbaijan, Kazakhstan and Oman also agreed to cuts. After the announcement, Saudi Arabia's oil minister commented that "we are going to cut, and cut substantially, to be below the level (486,000 bpd cut) that we have committed to on November 30th" which likely removes uncertainty over the production cuts becoming reality. Over the past few months, midstream unit prices have been challenged to hold firm in the face of weak energy prices and have not had much upside support as price trends have reversed. These latest headlines may provided the needed confidence for US producers to commit to new midstream projects, providing MLP's with some real growth visibility rather than the financially engineered transactions which have had not inspired investors. Given that only one half of 1% ($3B ATV vs $630B market cap) of the aggregate MLP market cap trades on an average day, it does not take much to move the market.
The EIA released their December Short Term Energy Outlook this past week, indicating that crude production will remain flat through Q4 2017. After the 2016 decline, the first since 2005, the agency is forecasting natural gas volumes to increase 5.8% by the end of 2017.
Earlier in the week, the US Army Corp of Engineers deferred their easement approval of Energy Transfer's Dakota Access Pipeline, extending the completion delay likely until the first week of White House transition. Thousands of protestors left this past week as harsh winter conditions, along with high winds, collapsed many of the tents.
Kinder Morgan, amidst rumors of Permian and Trans Mountain asset sales, announced their 2017 guidance of $7.2B Adjusted EBITDA, which is essentially flat YoY after spending $9.3B of capex over the past two years. The forecast assumes $53 average crude and $3.00 natural gas for 2017. Flat EBITDA is partially attributable to the 50% SNG sale to Southern for $1.47B, which will reduce EBITDA by $200MM and improve leverage from 5.5x to 5.3x by year end. The company expects to spend $3.2B on growth capital expenditures next year, funded by internally generated cash and JV contributions.
OCI Partners has become the latest MLP reversal as Sponsor OCI N.V has offered to purchase OCI Partners in all stock deal where OCIP holders will receive 0.52 shares of OCI N.V. The MLP was first listed in late 2013 and paid out a variable distribution, which for several quarters was $0.
Tallgrass Energy's Rockies Express Pipeline (REX) has announced the expansion project will be operational on December 13th with 200,000 Dth/d of capacity, while the remaining capacity will be used to test the commissioning of the facilities.
USA Compression Partners sold 4.5MM new units at a 9.5% discount with a 13.72% effective yield when considering IDR payments.
Yield To Growth
Below is the Forward Annualized yield for midstream units plotted against the expected mean Three Year Distribution growth forecasts as collected from several sell side analysts. Premium Subscribers can interactively compare specific MLPs and their peer groups.
Actively Managed Funds
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1 . High Risk of Distribution Cut
2 . Distribution At Risk
3 . No Risk of Distribution Cut
4 . No Risk of Distribution Cut; Growth at Risk
5 . No Risk of Distribution Cut; Strong Growth