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MLP Update: Will Investors Benefit from the new MLP Model?

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Volatile energy prices, and FERC regulatory changes, coupled with inconsistent EBITDA  stability and growth crushed unit prices in 2018 as investors expressed more concern about continued dilution, IDR payments and increasing leverage.  As a result, many MLP's became ineffective funding vehicles, and were folded back into their sponsor. Others eliminated IDR's and lowered their distribution growth in order to retain cash flow to internally fund new capital requirements.  From a dwindling MLP universe, Investors received relatively good news this past week from units which reported Q4 results..  Self funding, low/no reward for high distribution growth, and managing leverage while still pursuing accretive growth projects were common themes from management teams. 



MLP Universe

Western Gas Partners (WES)  has set a February 27th vote to confirm their stock merger with Western Gas Equity Partners (WGP), which will eliminate WES

Andeavor Logistics is at risk of being merged with MPLX in a stock transaction, lowering the distributions ANDX unitholders would receive after the merger



Q4 Management Comments  Below are a few interesting comments made by management teams which reported Q4 results this past week


Enterprise Products Earnings Release:  When the equity price fell in December, Enterprise bought back just over 1.2 million units at an average price of $24.92, which exhausted an existing buyback program that dated back to December 1998. The indicative DCF per-unit yield was approximately 11% on this buyback


On Using Free Cash Flow Metrics, Enterprise Comments  “Well, we -- I think the transition that we're making is from the MLP-centric model that, if you would, we had our own specialized financial metrics. And as we come in, the incremental value of investment is from more traditional funds, institutional investors that are not accustomed to our MLP language. And I guess, 2 things. One, with us going more to a self-funding model, we can come in and utilize traditional financial metrics. So a little bit, we're just making that transition from an MLP-centric model, consuming a lot of capital and really trying to appeal to generalist investor. And we need to talk their language, which is GAAP measures, whether it's earnings per unit and price on earnings per unit, whether it's multiple of cash flow from operations or in terms of free cash flow.”


On C-Corp Conversion, Enterprise Comments We continue to evaluate it. It's a long-term decision. There's no going back. So we're looking at a number of things as far as relative valuation, relative access to capital. And frankly, one of the things, how many more MLPs are there going to be to convert. One of the things that we also look at, we look at -- when we look at Congressional Budget Office, what CBO forecasts are of the federal deficit, one of the questions we ask is, "How permanent is this 21% corporate rate?" The CBO has federal deficit doubling to almost $1.3 trillion by 2022. There's another election coming up in 2020. So again, how permanent is the 21% rate? And just remember, Brett Kavanaugh got more democratic votes than that 21% corporate rate did. So again, we'll continue to monitor.”


On The Impact of China on US Energy Exports, Enterprise Comments  “ Yes. I mean, in terms of -- if you look at the ethane demand from China, there's a healthy, healthy appetite for ethane. In terms of all these hydrocarbons and how tariffs affect it, it affects routes, it doesn't affect what we actually export. So if you look at crude oil, the fourth quarter crude exports for us were the highest we've ever had. If you look at January, that exceeds December. If you look at February, that exceeds January. If you look at March -- you can see where this trend is going. At the end of the day, as Tony has alluded to in the past, these barrels will all price to export, just sometimes the routes get inefficient. That's probably a benefit to shipowners. But at the end of the day, these barrels will move.”


Using Excess Cash Flow to Increase Distributions or Buyback Units, Enterprise Comments  “But the feedback that we've gotten from investors clearly has been a preference right now for buyback over distribution growth. And so again, we'll continue to come in, take a look at it, but that's -- I would say, over the last 3 or 4 months, that has been the clear preference from investors. And look, I mean, we're going to keep our financial flexibility, so again, keeping the leverage in check is important to us. And then after that, I mean, we're going to get capital back to investors, whether it's by a buyback or by incremental distributions.”


Magellan Midstream on C-Corp Conversion  “We keep the idea of converting to a C-Corp on under evaluation all the time. From our perspective, just making sure we’re doing our jobs appropriately that something we need to keep our eye on, so we do. The reality of it is given we don’t need to raise any equity. We can fund our growth with excess cash flow and raising debt. We feel like we have what I would consider a really powerful option here. And when you combined that option with the data that we see which is arguably not very conclusive that if you were to convert to a C-Corp that you necessarily see a valuation benefit from that.”


“And if you take that uncertainty, that’s the real motivator of converting and trying to get additional demand from your units and increase the price for that with a broader investor base. We understand that, but we have to believe that against the fact that when we convert for us it would -- not for us for everybody it's permanent. You don’t get to rewind the clock. So when you looking at having to make a very permanent and impactful decision, over the long-term and just propose that with the uncertainty of whether you’ll benefit from it, to us that means you need to be cautious and patience, which is steps that we’re taking.”


Hess Midstream on Future Drop Downs – “ So, as you said and as you heard me say on the call, therefore, we have no need for dropdowns to meet our financial targets. As we have higher coverage, we'll do as we have done before, which is to continue to self fund our distribution and capital program….. So, we think that that using that higher coverage in that way really goes towards helping to continue the sustainability of our model.”


Tallgrass Energy on $3B GP and Unit Sale to Blackstone - "The transaction with Blackstone as its co-investors will transfer control of the general partner to Blackstone and effectively replace Kelso and EMG’s Class B ownership. A portion of the management team’s ownership in Tallgrass will also be purchased in the transaction, and all active members of the team will continue to have significant interests going forward. The team will stay on in their current roles, and I plan to remain CEO, at least through the end of 2019."


Q4 Distribution Increases - Many management teams believe that investors are not rewarding units which project high distribution growth, but some Units continue to pay and project double digit annual increases.  



Q4 Distributions



Wednesday Score Reports, which use the latest Distributable Cash Flows (DCF) to calculate coverage trends and other key unit metrics, are available to Premium Subscribers.


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