The suspension in the distribution is certainly bad news for income investors however it is actually good news for those that are concerned with the long term survival of the company.
Survival now likely hinges on several factors; how much they can deleverage, how quickly commodity prices bounce back and to what level and how prudent they are with their capital.
Retiring debt at 75 cents on the dollar provides a very nice return. It remains to be seen how much they can retire and how long they can keep it up. If they reduce their capital budget to near zero and dedicate that cash to deleveraging, it seems likely they could make material improvement over the next 2-3 years while they still have fairly strong hedges. That debt reduction comes with a reduction in interest expense as well, which will help offset some of the natural decline of production (and cash flow) provided that is the path they go down. It really is almost like an LBO now that they are not paying a distribution. Linn is simply going to dedicate the bulk of their cash flow to deleveraging. The assets still have long term option value. Let them continue to delever and wait till gas and oil return to more reasonable sustainable levels $3.50/$65.
On the bright side, it appears that natural gas production in the US is finally flattening out. It has taken 8 months but between a reduction in associated gas, a drop in rig counts and capital investment and of course, natural decline, production is finally starting to taper all the while consumption is climbing with continued US coal plant conversions, exports to Mexico, LNG on the horizon and continued chemical company expansions primarily ion the Texas/Louisiana Gulf Coast region. I would not be surprised to see gas pop back towards $3.50 or even $4.00 in the next 24 months.
What SE and PSX have done is that they have stopped taking distributions from DCP LLC, not DPM. DCP LLC isn't in a position to dividend cash up to the 2 GP owners.
SE has already publicly stated that cash only flows one way with DCP LLC. That is understandable, but unfortunate. They may end up divesting their GP stake, perhaps to PSX. The problem is, they are divesting at the bottom. Having 2 owners really hamstrings DCP when they do not agree on the long term direction. It is possible that PSX could contribute MLP qualified assets to DCP LLC in exchange for a larger stake in the entity, thereby reducing SE's stake, but not exchanging cash. That would strengthen DCP LLC, give PSX a larger stake and position them for a rebound long term.
The reality is that DCP needs a cash infusion from SE and PSX. Probably $1 billion or more, clearly sums that SE is not prepared to invest in an entity in which they are likely not to receive any cash from for several years.
DPM, and DCP LLC's assets are actually fairly good and well integrated. The low NGL pricing is hurting, however, natural gas exports and LPG exports along with increased industrial demand for ethane (crackers) may eventually turn the tide but that will likely be 2017.
It's a real mess, but PSX and SE have the resources to resolve it.
I think it is more oil price related than interest rates, REITs are not falling as sharply and those are yield plays.
This looks like a combination of fear/panic like in 2008 with perhaps a healthy bit of leveraged funds getting margin calls. Note that XOM and CVX aren't collapsing. They too are going to suffer on the E&P side.
The sector is in full melt down, nearly every MLP. Even those with excellent financials and little to no commodity exposure.
I am not good at calling bottoms, so I will leave that to others. I will say that many of these MLPs are now looking impressive even potentially in a rising rate environment.
Does anyone think gas and oil production is going away? It may drop off with reduced drilling and smaller capital budgets, but it isn't going away. EPD is one of the better ones to hold. There strong coverage ratio will likely wane but I expect them to survive.
These sell offs happen every so often in the MLP sector, though this one is deeper than most, and similar to '08.
I am not buying anything right now, just waiting to see when the panic burns itself out, then I may try to pick up some value on the cheap.
Falling crude prices will eventually result in reduced rig counts (from the already low levels) and ultimately lower volumes, both in the US and abroad.
The market appears to be puking on anything midstream. Looks a lot like 2008. Selling begets selling as leveraged players get margin calls. Anything and everything gets sold off.
Clearly some of the midstream firms are hurting, Buckeye isn't immune, but they do have a large exposure to refined products, which have generally tended to be relatively stable. Overall refined product use in the US has dropped over the past few years. BPL's recent acquisitions appear to be performing ok. It seems like it typically takes BPL 2 years to fully integrate and start getting accretion.
I look for BPL to keep plodding along, irrespective of the malaise. Low oil prices are going to be a pain for 6 more months and perhaps into 2016. $50 is below the long term sustainable price. It's ugly, but the market will muddle through it.
The Trafigura deal will be interesting. I expect it will start contributing within a Q or 2. Eagle Ford appears to be one of the lower cost basins with steady supply, though it may be flattening off some.
This upcoming call will be interesting. EPD's coverage ratio will likely drop significantly, but I expect it will continue to be above 1.0x
I am still at shock that EPD did not make a move for Markwest. It seems like such an odd pairing with MPLX. It makes sense for MPLX holders, or rather MPC but not so much for MWE.
Yes, Plains (PAA), Magellan, (MMP), Enterprise (EPD), Holly (HEP) all have some nice streaks to go with Genesis.
Nice to see Genesis up the last couple of days in a brutal energy sector sell off!
I think perhaps someone realizes how good of a deal this was with Enterprise.
DNR is a target because they are relatively small, they have low exploration risk due to them being a tertiary recovery focused company and while they are hurting, they are not insolvent. Denbury still produces good cash flow, they can maintain production flat for several years without borrowing (staying within cash flow, even under cash flow). A company could acquire them now, near the bottom and end up with an option on rising oil prices.
Based on what little data was released in the 8-K, it looks like this deal was made at 7.5x Ebitda, which is quite good, especially for quality assets. Their is clearly some volume risk, but these are world class assets that Enterprise built out and acquired over many years. I think EPD simply wants out of the offshore risk, especially considering it is 3% of gross margin for the entire company. They are a good fit with Genesis and it should drive another 2+ years of 10% distribution growth.
This makes Genesis a major player in the GoM. I had wondered why GEL didn't acquire the assets that CORR just acquired from EXXI, but it appears they were likely working on this deal.
Genesis doesn't get a lot of attention, they do very few roadshow presentations, but they are one of the more consistent MLPs, quietly cranking out ever rising distributions.
It's a major haircut on the distribution. By my math, and you have to assume distribution growth rates, it takes around 4 years to catch up. If you roll the token cash payment back into units, you are taking a little under a 50% clip on distribution rate (someone double check my early morning math, please!). Assuming 25% distribution growth rate at MPLX vs say 6-7% at MWE, you are looking at 4-5 years. Of course, in theory, with a high growth equity, you should get a lot of capital appreciation at MPLX.
On the whole, it looks like a great deal for MPLX, which uses an inflated equity to buy a great enterprise without taking on much debt and gives them plenty of growth for years to come. MWE holders do not appear to be getting compensated for future growth.
I don't think calling Magellan a POS is in order. They are one of the better run MLPs. While the unit price has suffered, management has been excellent, almost always under-promising and over delivering.
The Greek contagion, the threat of rising interest rates are taking their toll.
BPL is a relatively low risk MLP. They overpaid when they bought back the GP and that hindered growth for a number of years. From an asset mix standpoint, they have a nice mix of quality pipelines and storage terminals. Revenue and cash flow does not appear to be severely impacted by the drop in crude prices.
I think they have projected a relatively weak 2nd and 3rd Q but a strong 4th Q and full coverage for 2015. The recent Trafigura deal will likely result in modest growth in '16 and '17 and perhaps tempered by recent rate settlements.
Management seems to have done a decent job of integrating recent acquisitions into the mix.
Ultimately, I see BPL being acquired and rolled into another MLP.
This is a general market panic. EPD isn't immune to the sell-off, but they are somewhat insulated due to a strong coverage ratio that will help them weather the storm as well as any other midstream firm. I expect coverage to drop, but to stay solidly above 1.0x, allowing them to continue to fund expansions with surplus DCF.
They may even use this malaise as an opportunity to make a run at someone like Markwest, which would fold in nicely and give them a solid footprint in the Marcellus/Utica, where they presently are not the dominant player.
EPD is one of the more solid MLPs in the sector. They are not one of the fastest growers, but keep in mind, it is difficult to grow an asset base as large as theirs.
The lack of a IDRs, the strong capitalization and decent back-log of projects means EPD will likely continue kicking out those half cent increases for some time. No, it isn't earth shattering, but they do add up, on a compounded basis, you are looking at over 5% annually.
EPD has some of the premier US NGL assets. Even a combination of some of their competitors, say MWE, OKS and NGLS would be hard pressed to replicate their integrated system.
This downturn is more about Greek fear and interest rates than anything else.
The departure of Ed Cohen from day-to-day affairs is a blessing. Putting a seasoned guy like Schumacher in charge of day-to-day operations is important, and frankly, about 2 years too late! Losing Matt Jones is, well, addition by subtraction! He was nothing more than a sycophant collecting a paycheck and telling Cohen what he wanted hear.
Cohen is, put simply, a blind optimist. He also has the uncanny ability of disappearing as soon as he screws something up, which he is quite good at. Perhaps now that he has his new shiny play-toy
Is it marklibera that once said, Cohen has the ability to take something good and turn it into something not quite as good? I think it was. A golden quote.
Now, I will say that ARP has some attractive properties. The Barnett acreage is actually quite good. The CBM production, which they overpaid for, is essentially immune to NGL exposure (for obvious reasons) and provides a "ballast" of low-decline properties to help dampen their overly active drilling program.
If, and it is a big if, ARP can get back to a 10% yield, and if they can manage to make quality acquisitions (stick with natural gas while it is low and out of favor) they can survive and perhaps even grow again.
Hopefully they will learn to hedge rather than try to "time" the market, as Ed did with Rangely. He really needs to retire completely, but then I guess he wouldn't be able to find jobs for his progeny...