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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Company is making efforts to reduce seasonality. Gas storage and WTLPG are helping.
Coverage now at 1.0x on a TTM basis.
Given how terrible the commodity price environment has been, MMLP has done fairly well.
Kelcy is going to get Williams. He recognizes the opportunity in front of him.
He lost out on Targa last year. Now he will get Williams.
Bankruptcy is indeed a possibility, but I doubt it happens before 2018.
Even sub $40 oil, which while possible, seems unlikely, won't hurt them until next year, when they have far less oil hedged than this year.
Linn really is just a leveraged proxy for oil now.
It will take both prudent use of cash, balancing cap ex and debt buy backs for Linn to survive. It's evident that retiring debt, especially near term (2019, 2020, 2021) dated debt at a huge discount helps keep bankruptcy away. Gaining flexibility from their banks on the revolver is also important. Linn can survive perhaps even past 2018 by going into zombie mode, simply letting natural decline take over and putting all cash towards debt reduction.
I do think that the days of Linn ever being an income play are over with.
It's probably also time for Linn to jettison Ellis and Rockov. Ellis never understood the MLP format and always saw Linn as a high growth c-corp. Rockov mismanaged his own finances with the same recklessness as he did with Linn's.
Buckeye's results were quite good given the commodity price environment and also given that the 2nd and 3rd Q's are usually weak for BPL. They are still projecting 1.0x coverage for the year.
As for oil pricing, I think we are in a panic mode right now. It is clear the market is oversupplied. That oversupply will take another 6-12 months to work off. Rig count is now down over 50%, and we all know that it is a leading indicator. Bakken production is starting to flatten off, other basins will follow. I don't know where it will bottom, but I do know that the world cannot be supplied long term at $45/bbl. I think I have seen at current rig count, US production is scheduled to drop by 500K bpd this year. It remains to be seen.
PAA, another holding of mine, has some excellent presentations where they talk about long term supply demand fundamentals. They note that over the 4+ years of $100+ oil, the rest of the world produced essentially zero growth while the US/Canada grew volumes by 3+ million. It seems obvious that US production needs to drop, but US basins may not be the high cost producers, meaning other supply sources may drop, such as the North Sea etc.
Long term sustainable price seems like $60-$65. I think the rest of this year will be rough or producers but a glimmer of hope may be coming in 2016.
Given the poor commodity price environment, coverage of 1.10x looks fairly good. If they can achieve 1.0x or better throughout the year, then I think it will be a testament to how well they have managed the business a terrible environment and also given how poorly timed the APL merger was.
I think Targa will trudge through the malaise, clearly growth is slowing down but maintaining 1.0x coverage is huge to surviving.
Regarding debt repurchases, I think it is very likely that after the next revolver redetermination, in which it is expected that Linn's borrowing base will be reduced to around $1 billion, that Linn will pull down a significant portion of that and use it to retire debt at 50 cents on the dollar, and likely the 2019's. At 50 cents on the dollar, they can put a significant dent in their interest expense. With a lot of help from commodity prices, Linn may actually survive thru 2019 but may need to resort to all manner of 2nd lien borrowings, asset divestitures etc.
Roughly speaking, it seems possible that Linn could manage $1 billion over the next 3 years from savings from cutting the distribution. That, coupled with borrowings on the revolver could allow them enough breathing room to survive thru 2019, but again, they will need $70 oil most likely.