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MLP Weekly: Q4 2017 Management Comments

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Units were on a roll since the New Year as crude gained nearly 8%, volumes reached record levels, and the equity market surged 6% while rates remained below the 2.70% trigger level.  In just a few days, in spite of strong Q4 earnings and reinforced guidance, units got crushed as a surge in rates panicked the markets.  

 

 

Large Cap MLP

 

 

 

The EIA increased their 2018 production forecast from 9.9M BPD to 10.3MM BPD with a modest increase for 2019  (10.8MM BPD and and 2020 (11MM BPD).  While production has been increasing, net imports declined to their lowest levels (2.5MM BPD) since 1973, a 7.5MM BPD reduction from a decade ago.   All in all, a good macro outlook for midstream infrastructure, which is still burdened by excess capacity in some basins.  

 

 

EIA Forecast

 

 

Q4 Management Comments

 

 

This upcoming week, 11 units will report their Q4 results, including Plains All American and Buckeye Partners.  This past week, 15 units reported results, and below are a few notable comments from their Management calls

 

On Chem-Pet, Enterprise Products CEO Comments "While the folks don’t realize that by 2021 just the state of Texas will be the largest producer of ethylene from steam cracking in the world and that’s not counting what is happening across the broader in Louisiana. That’s in our backyard and the resulting rapid growth in ethylene combined with increased international demand for markets like Asia, creates an ideal scenario in which markets are brought can diversify their supply towards cost advantage U.S. feedstocks."

 

On Gulf Coast Chem-Pet Expansion "Tony believes there's a second wave coming. We have companies in here whose name I can't hardly pronounce, pretty routinely talking about wanting to evaluate, putting the ethylene plants in the U.S…..And with the plentiful ethylene that we have and that number growing especially when you look at the Delaware Basin, people understand this. So, if they're coming I believe…It's hard for us to predict when these folks are going to have FID. So, it really is -- these plants take a while to come on and people to plan for them. But at the end of the day, the macro look is that people are coming in the U.S. to make ethylene because ethylene supplies are so plentiful."

 

On Growth Capex Funding Models "during the 2017, we funded through excess distributable cash flow or retain earnings approximately 55% of our equity funding requirements attributed to 2017 growth capital investments. We anticipate this level to continue to rise in 2018 and to reach a self-funding equity model in 2019 with $2.5 billion to $3 billion growth capital investment profile, while preserving our targeted leverage objective of 3.75 to 4 times."

 

C-Corp Conversion "I think where we are I think we still feel like the MLP structure works for us as far as access to capital is concerned. Access to equity capital at a reasonable price, we'll continue to monitor, frankly, how the capital values midstream C Corps versus midstream MLPs. Frankly, we haven't seen a lot of difference over the last couple of years, but frankly there was a lot of noise in the space whether you're a C Corp or MLP over the last three years. So, I think we will continue to monitor that and see what develops on the front. But that’s forever election, so it/s not to be taken lightly and we will continue to come and evaluate. But we think we got good access to capital now."

 

The Role of Marketing with Midstream "there is a lot of contango opportunity that marketing gets to realize, but as the market gives backward, barrels start to flow down pipes, they don’t stay in storage and that limits our opportunity.  So I think as Enterprise, when barrels to flow and gone through assets, that’s a good thing for us, But from a marketing side, we're probably more there to help them, when that’s not happening."

 

 

GasLog Partners CEO's View of LNG Market..."the long-term outlook for incremental LNG supply and demand continues to gather momentum as witnessed by Cheniere's recent sale and purchase agreement with Trafigura under which it agreed to supply 1 mtpa of LNG over 15 years beginning in 2019 and Tohoku Electric's 0.2 mtpa off-take contract with Area 1 in Mozambique. While only one final investment decision ("FID") was made last year (ENI's 3.4 mtpa Coral FLNG), various sources project a shortfall of LNG by between 2021 and 2023, implying the need for additional project sanctions over the next 1-3 years. 

 

Demand for LNG in 2017 was stronger than expected, growing an estimated 12% over 2016. More specifically, Chinese demand grew by almost 50% year-on-year, overtaking South Korea as the world's second largest consumer of LNG as the country seeks to introduce more natural gas into its energy mix. Elsewhere in Asia, demand from Japan remained steady while South Korea and Taiwan grew 10% and 14%, respectively. Strong seasonal demand from Asia drove spot LNG prices to over $11/mmBTU in recent weeks, widening the west-east arbitrage window for sending Atlantic Basin LNG into Asia, expanding ton miles and driving incremental demand for LNG shipping capacity. 

 

It may take time before the strength in the spot market observed this winter translates into the multi-year charter market as we are in the early stages of the recovery. However, we are observing increasing levels of tendering activity for charters ranging from multi-month to multi-year, an encouraging development.."

 

 

Magellan Midstream Partner's CEO Comments on Permian Midstream Rates  Longhorn currently average $2.25 vs new pipeline tariffs rumored to be  $1.50, for which new contracts will be lower  "we would prefer committed contracts vs being exposed to the market, and we would err to re-contract volumes that are secure for term commitments rather than be exposed to differential with spot tariffs...if production continues to grow, there could be tightness, but we prefer long term vs short term profits...we have space on Longhorn (10% spot capacity) and BridgeTex.....Safe to say we would not build a pipe out of the Permian without long term commitments...five plus years from now, there are bullish production estimates which would support more than two pipelines going forward...the rates being proposed are significantly lower than the pipelines built 5 years ago, which only means you need more volume, but the returns are in the same ballpark as previous projects (6-8x), but they are more difficult to secure commitments because you need more volume."

 

 

Fund Flows

 

Nearly $1B of new capital flowed into MLP fund projects since the New Year, helping units perform in the month of January.  Flows tapered this past week as units began to give back gains the last week

 

 

 

MLP Fund Flows January 2017

 

 

Q4 Distribution Increases

 

This quarter 35 units have announced Quarter over Quarter Distribution increases, but not all doing so while maintaining DCF Coverage.  Energy Transfer Partners, after 46 sequential increases, opted to maintain their distribution, as investors are discounting any distribution growth not supported by current or imminent increasing cash flows

 

 

 

TOP MLP Growth

 

 

 

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