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MLP Weekly: Beware of Zombies

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Another week of events which indicate  MLP specific risks have not abated and M&A can often be troubling news for unitholders.  MLP's are useful financing vehicles to Sponsors with drop down assets, until they are not, at which point they enter Zombie status, where the Sponsor no longer has a vested interest, or ability,  to maintain unit prices with a managed distribution strategy.  This past week, TC Pipelines and Andeavor Logistics Partners entered the Zombie waiting room for very different reasons.  Marathon Petroleum and Andeavor announced a definitive merger agreement where Andeavor shareholders will receive a 25% premium in the form of stock or cash.  The combined company will have two MLP vehicles, MPLX (+3.69% WTD) and ANDX (-11.64% WTD), leading to speculation that the higher yielding ANDX will be merged with MPLX at some point.  During their earnings call, Management was vague "We know that a very logical question is, what will the general partner do with the two MLPs post-closing? We’re not commenting on any potential structural considerations for MPLX and Andeavor Logistics today, both will operate as separate MLPs and MPC will evaluate structural considerations at the appropriate time following the close of the Andeavor transaction."



Andeavor Logistics Chart



TC Pipelines, the other Zombie addition, announced a distribution cut to align their cash flows with an expected decline in DCF as a result of the FERC ruling.  The company reiterated their views from April 27th, where they stated that TCP is no longer a viable financing vehicle and no further drop downs or equity issuance will be considered.  These statements follow their March 19th assessment at which time Management concluded "the Partnership does not anticipate any material financial impacts to its natural gas pipeline cost of service rates to take effect in the near-term as a result of the revised FERC tax policy. "




TC Pipeline Chart




Q1 Management Comments


Enterprise Products on Considering Converting from MLP to C-Corp "I don’t think any more so than what we had been in the past. I mean we look at it periodically. You know it's a big step and right now we don't see anything that's compelling, that leads us to come in and check the box. When we come in and look at valuations and things of that nature, there is not anything different between an MLP and a C-Corp from that perspective. So right now I mean we continue to monitor all data and evaluate from time to time, but no development on that front."


On Exports and Trade War Risks "First of all, I get out of the table position in the corner of my office. I'm not worried about it. Yes, first of all there have been no tariffs imposed. We don't have a single contract, no we got one contract with a Chinese company I think and if it happens product close adjust, there is a demand for LPG and it's not just China, it's Korea, it’s India just and all this stuff going, so I don't worry that okay China won’t import our propane. Well, they're going to import somebody’s propane which is going to leave somebody else needing propane."


Williams Partners on Northeast Gas Pipeline Capacity   "I will just tell you from what we saw over the winter and all of the Northeast that two week cold spell that was in New England between just after Christmas through the New Year, they burned more fuel oil in those two weeks than they did in all of 2016 and had to import Russian LNG into Boston. And I will tell you that somewhat ridiculous whenever you have the cheapest gas in the world, just a few hundred miles away, they can get to those markets."


Buckeye Partners on a Potential Distribution Cut " 2018 is a transitional year for Buckeye, as market conditions for segregated storage remain challenged and meaningful contributions from capital projects will not be realized until 2019 and 2020. Considering the impact of these factors, we expect to report a distribution coverage ratio and for the full year 2018 of 0.9 to 0.95 times.  We continue to have liquidity available to find our growth capital plans. Based on this outlook  our management team and our Board of Directors remain committed to our current distribution policy, we have no intention of cutting Buckeye's distribution and we continue to view a distribution cut as an option of the last resort."


Tallgrass Energy Partners on FERC Impact "As we mentioned in our press release that day, we do not expect any material financial impact as of revenues at our two largest assets, Rockies Express and Pony Express, are almost entirely generated by contracts with negotiated rates. However, we expect there could be some impact at both Trailblazer and Tallgrass interstate transmission.  While many of the details will need to become much clearer in the future, we continue to believe that potential impact to be immaterial. If I had to quantify it today, we currently believe that potential impact to be less than $4 million and collective loss revenue annually given our expected corporate structure following the close of the proposed merger."



Midstream Yield To Coverage


The below chart plots the annualized distribution rate and Q1 Distributable Cash Flow Coverage ratio for all Midstream units. Premium Subscribers can access the charts here


Midstream MLP Coverage Ratios




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