I have a Bank of America account and I can verify that the MLP analysts there have been months and months behind the market. Their downgrade and new target of, I believe 8 down from 26, is likely the near bottom call.
Not sure that the Marine Division drop down will be positive for non-MPC unit holders. The deal will be 100% financed with MPLX units which, given the sell-off, represents a relatively stiff cost of capital. MPC will benefit from the normal distribution from the new units plus the resultant increase in IDR payments. I don't recall that being told that the Marine unit would be accretive to current unit holders during the conference call.
This morning management reduced 2016 distribution growth for 2016 to 12% - 16% citing ongoing weakness in product pricing and slower than previously anticipated volume growth.
I think Kinder Morgan slashing its dividend by 75% this morning has become the example of why the MWE deal was done. As you must know, the MLP model is to fund each project, whether organic or acquisition, with some combination of new debt and new equity. As equity prices fall, however, more units must be sold at these lower prices in order to satisfy project requirements. The cost of capital thus rises to the point that ongoing projects are no longer economically viable. Given the massive ongoing building program at MWE, management evidently believed becoming part of a financially stronger entity, MPC, preferable to the alternatives (the golden handcuffs were also attractive). It appears that KMI produces sufficient cast to satisfy its growth and debt service needs by cutting its dividend. Given the number of ongoing projects at MWE and the likely slower than previously projected utilization growth for its many new projects that might not have been possible for MWE.
However, to believe that MWE could remain independent while maintaining its distribution and continuing to grow distributions at 5% or higher each year in the current energy environment is, I believe, a fantasy.
Assuming you really have concerns I'm assuming a $1.88 dividend for 2015.
1.25x$1.88 = $2.35 in 2016 x 1.09 = $2.56 per MWE unit equivalent
1.25x$2.35 = $2.94 in 2017
1.20x$2.94 = $3.53 in 2018
1.20x$3.53 = $4.24 in 2019 x 1.09 = $4.62 per MWE unit equivalent
Plus one starts with the $3.37 per unit
Might the guidance be overly optimistic? Could happen, certainly MWE, in recent years, tended to lower guidance.
However, MPC hopefully feels some obligation to MPLX unit holders and keeps at least close to the guidance.
I think you'll find that between the projected $3.37 per unit in cash and the announced distribution growth rate holders will not lose income. Compared to the current MWE distribution per unit payment with the announced distribution growth rate of the combined MPLX/MWE annual distributions paid should equalize by the end of 2018 on the units (1 MWE = 1.09 MPLX) and one has, by my calculations $1.67 per unit of the $3.37 remaining on a cumulative cash to unit holders.
If one assumes a 5% growth rate for MWE distributions (note I don't believe previous MWE guidance achievable and thus the sale), income from the units equalize on an annual basis by the end of 2019. Cumulative cash received remains slightly positive when the $3.37 is considered.
After each of the above annual distribution break-even years of 2018 in the first paragraph and 2019 in the second, the unit holder receives a greater distribution amount from the merged company.
So rather than looking at the headlines, put the numbers in a spreadsheet and calculate how your cash position should look.
Just don't believe the MWE management team believes any longer in the most recently given guidance of 10% or higher starting, I believe, in 2017. Recall that when given this was based upon a recovery in NG and NGL prices. Evidently management believes the merger with MPLX is the lower risk strategy to attain longer-term goals.
You are absolutely correct that approximately 50% of MWE's DCF will be taken out of the company. However, this cash goes to the IDRs controled by MPC, the GP, and not MPLX, the LP. So a huge boon for MPC and its shareholders as MPC issues no new shares yet receives 50% of new cash paid out by the combined MPLX/MWE. Moreover, MPC has announced a slower drop-down schedule to MPLX as a result of the merger allowing MPC to not only massively increase IDR revenues but to enjoy the full revenue stream from projects on its books for a longer time. Also, the value of its GP holding of MPLX suddenly doubles or even triples (haven't looked closely at this yet - it could be even much more given the relative size of MWE to MPLX).
MPLX unit holders are left with a much larger partnership with better diversification but a slower (at least intermediate term) distribution growth profile. Generally, distribution growth drives the relative yield at which MLPs trade. And this can make a huge difference in unit price. A distribution of $3 trading at a yield of 2.5% implies a unit price of $120. Meanwhile a distribution of $3 trading at a yield of 3.5% implies a price of $85.71.
So the decline in distribution CAGR at MPLX really hurts MPLX unit holders.
Agree, the clarified guidance for 2018 and 2019 of distribution growth "around 20%" makes the deal more attractive than I had previously believed.
Whenever distribution growth guidance is reduced an MLP will trade to a higher yield, which is what has happened to MPLX. It traded at something around a 2.5% yield when guidance was 25% per year through, I believe, 2020. Now the CAGR guidance is 25% through 2017 and then top tier. My guess this means significantly less than 25%. Therefore, MPLX units are trading down to the new reality of slower distribution growth, perhaps to 3.5%, perhaps higher. In any case neither management team can be surprised by the sell off which is why the deal amounts were announced from prices prior to the MPLX CAGR reduction.
MWE has been my largest holding for a number of years so I tend to follow it quite closely. As this deal goes against most everything Mr Semple and the MWE team has stood for over the years I can only suspect that management believes low NGL prices will remain depressed for the foreseeable future and, as a result, the huge MWE building program and the continuing need for raising equity capital at falling unit prices made promises to investors impossible to deliver. As a result management accepted a deal they believe will continue to deliver growth over time, while also aligning with a financially strong general partner. A look at MPC financials shows that company is projected to produce $1.3 - $2.0 billion in free cash flow per year over the next five years.
The dividend cut is tough to take as I am retired and rely largely on my portfolio for income. However, my projections show that the $3.37 per unit and the additional .09 shares will offset the distribution cut when compared to what MWE currently pays (note as my basis is zero, I already pay taxes on distributions). However, if one assumes 5% annual growth in the MWE distribution it will take approximately 10 years to be even on cash paid to shareholders including the $3.37 per unit. I really do not believe MWE management would have sold in such a manner if they believed the previous guidance realistic.
Nine months ago the index, according to BAC/ML estimates for each company, had an expected distribution growth rate of just under 7%. Since then one of its largest components, KMP, has been removed and replaced with slightly faster growing companies. However, due to the conditions in the energy industry, distribution growth rates have been lowered. I haven't run the numbers yet, but I would suspect the index growth rate has been lowered to approximately 6% with the near term bias for additional declines. A 2X the index growth rate that still leaves dividend growth (really interest) of near 12%. Another caveat is that if short rates rise the cost of leverage will also rise, eating into the return. I do believe that the cost is born by the NAV and not the dividend, however. So, barring a true disaster in the MLP space (which could, of course, occur) dividend increases should remain somewhere near the 10% range (assumes 5% CAGR on the index).
Payments are interest payments - this is structured as a bond. You pay taxes at your marginal rate and you do not get a K-1.