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MLP Weekly: Focus on Fundamentals Q1 2018

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Higher oil and improving sentiment have helped units rebound from the year lows induced earlier this month by fund liquidations.   However, distribution cuts and FERC related caution continues to muddle the MLP story for new investors.  A recent Bloomberg article suggested $18.5B of Natural Gas Pipeline revenues are at risk from the new FERC rules, concentrated across 8 companies with MLP structures.  Dominion Midstream Partners became the first to react to the impact the ruling has had on their cost of capital by announcing their intent to eliminate Incentive Distribution Rights if and when new equity is required, lowering their distribution growth rates and deferring their planned dropdown of the Cove Point LNG export facility.  Management suggested it will take years for the potential impact of the FERC change to have any material impact on their Distributable Cash Flow.  For units without FERC exposure, investors are now focused on whether midstream assets are able to maintain and grow margins from higher volumes.

 

MLP Performance

 

 

 

Q1 Management Comments

 

EQT announced their Streamlining plan, which will merge Rice Midstream Partners into EQT Midstream Partners in a unit swap, eliminate the Rice Midstream Incentive Distribution Rights at a 16x multiple in a unit transaction between EQGP and EQT, and drop down retained midstream assets from EQT to EQM for $1.15B in cash and 5.9MM EQM units.  As a result, EQM does not expect to issue any units at least through 2020.  

 

EQM's Management Comments on further Simplification to a C-Corp "I would say that this is a new core board decision that will have to be made we think that that's more likely that you'd see a simplification of the IDRs, that seems like a the right first step at some point. And in terms of a simplification all the way to just the C Corp. There could be tax considerations in that, so that's something that going to require some additional analysis and part by the new core board and management team once established."

 

Dominion Midstream, which has dropped -50% YTD, announced their plan to maintain MLP status at least until 2019, which will include a lower distribution growth rate, near 1.0x DCF Coverage, and the suspension of any further drop downs.  Management continues to project that the proposed FERC changes will not have a material impact on their DCF, but their yield has made the MLP an ineffective financing vehicle for Sponsor Dominion Energy. 

 

Dominion Midstream's Plans if the MLP Market does not Recover "We will see how this plays out, we are in no rush, we think what FERC did was an unreasonable outcome, we have plenty of cash available to meet our distribution goals, we will give it time to play out and consider options" ....It will take FERC a bit of time to address requests and rehearing and the earliest we may see a recovery in the MLP and DM share price will probably be next year."

 

Phillips 66 Partners Management Comments on peer MLP Valuations "what on the face of it might look like attractive valuations when you factor in all things, including what the balance sheets of some of these other entities look like, the debt loads that they have. They actually don’t -- things don’t look so cheap as you might initially think, just looking at where the equities are trading.

 

On Phillips 66 Plans to Consider a C-Corp Conversion No, no, not at all.

 

FERC Impact on DCF  "Phillip 66 Partners expects little to no impact from this decision due to our limited exposure to cost of service rates. Most of our pipelines fall into three categories, pipelines that are not FERC regulated; FERC regulated pipelines where Phillips 66 is the sole shipper; and pipelines that have negotiated rates.

 

GasLog Partners on the State of Global LNG "Global LNG production continued to grow in Q1 2018, registering a 10% year-on-year increase and a 2% increase over Q4 2017 as measured by Wood Mackenzie….LNG market participants continue to forecast significant growth in LNG demand. Consensus compound annual growth rate in LNG demand of 6% is forecast over the 2017-2025 period. Based upon Wood Mackenzie’s forecasts of supply either onstream or under construction, this suggests the market may be short of LNG as soon as 2020, reiterating the need for further LNG supply projects to be sanctioned in the near-term. LNG continues to be seen as an attractive way to diversify energy imports, with Germany being the most recent country to articulate plans to develop LNG import infrastructure…. As measured by Poten, tonne miles in Q1 2018 were 18% higher year on year, continuing the significant growth trend seen in 2017. Structural changes in the LNG market, such as fragmentation of market participants, the increasing market share of portfolio players such as Shell, Total S.A. and BP plcand commodity traders, and a move away from destination clauses in supply contracts are all increasing the amount of LNG traded and bode well for further increases in tonne mile."

 

 

 

Fund Flows

 

The latest rally in unit prices did not entice fund investors to add cash to MLP Mutual Funds as indicated in the one month fund flow chart below.  Total Fund flows for the same period can be found here

 

 

MLP Mutual Fund Flows

 

 

 

 

Q1 Distribution Scorecard

 

Units continue to increase, and reduce, distributions reflecting their Q1 Performance.  The full list of announcements can be found here

 

MLP Distribution Increases

 

 

 

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