Looks like EPD had a fairly good 4Q, especially in light of the commodity turmoil.
DCF coverage was actually higher than I expected, coming in around 1.50x. Not only does that provide a nice cushion for the distribution, it provides them with equity growth capital. They held back $1.5 billion and spent $4.1 billion on expansions. That means they only needed to externally source around $2.6 billion, which means fewer equity offerings and less debt.
I do not know how long the malaise of low commodity prices will last, my guess is 12-18 months before oil gets back to $65-$70 (prices at which most producers can do well, especially with lower D&C costs coming). I believe EPD is one of the best situated midstream companies to ride through the storm.
I expect continued modest distribution increases, perhaps some slight slow down on projects, the backlog may diminish a bit but I look for EPD to trudge through '15 and into '16 in decent shape and perhaps by mid to late '16 the supply demand imbalance will be nearing equilibrium or have even swung the other direction as the Saudi's are now warning that underinvestment will cause an upward swing. Either way, if you want energy exposure without having to own a E&P, EPD offers a nice play on it, not totally insulated, but certainly offering critical, necessary services. Oil and gas production in the US may flatten, it might even fall in a year or so, but it isn't going away as the Saudi's don't have enough oil to supply the whole world, OPEC only controls around 40%. 2015 won't likely be a banner year, but I do expect them to survive and prosper again when pricing returns to levels that are consistent for sustainable supply.
MMLP is starting to look quite interesting at these prices.
The recent Cardinal/Redbird deal wasn't pretty, but it did get the cash flow unencumbered. MMLP should be close to achieving 1.0x coverage. They desperately need to make sure that future deals are financed with equity rather than debt as their leverage is too high. Still, the potential to land assets from Alinda,including the very attractive Houston Fuel Oil Terminal is promising.
Their equity cost is too high right now, but a few quarters of above 1.0x coverage will help and make it more competitive.
EPD's business isn't immune to falling crude, NGL and natural gas prices. They have commodity exposure, however, they have managed their business quite well, terming out much of their debt, running with excellent coverage and generally focusing on fee based assets. I expect them to report well above 1.0x coverage.
EPD is the largest MLP in the sector. They are going to take their lumps during the downturn, but should do well. I expect continued modest distribution growth of 4-5% over the next year.
Yes, you are losing out on immediate income. As I said, I am sitting on a minor capital loss and will simply take the ETP units. I've been investing in MLPs since 2000. I've been the beneficiary of many GP buy-outs. I haven't been right on every transaction and not every deal works out in my favor, but overall, I pleased to see RGP being rolled into ETP. The downturn in commodity prices was going to hurt the G&P side of RGP. We could have seen even more price deterioration and likely little to no distribution growth. RGP never managed to obtain an investment grade credit rating, which they had been trying to do for some time.
As you said, you can do other transactions to lessen the pain. At least RGP unit holders get equity in what is now the second largest MLP behind EPD.
I expect at least 4-5% distribution growth and perhaps we will be surprised as see 5-7%. Not much we can do about the terms, I suspect that they will receive enough votes to make it happen.
Overall the deal is ok for Regency holders. The "cut" in distribution stinks, but clearly ETP is a much stronger company that is far more diversified than RGP. The collapse in oil will hurt RGP. RGP has been trying to get to investment grade for years. They have some good things going for them, but clearly taking on PVR, which was a turn around play, didn't really help them. The Hoover and Eagle Rock deals are probably too early to really know. Their Haynesville lines aren't full and volumes have been dropping. Everyone knew RGP and ETP would merge one day. That day arrived. Distribution growth was likely to slow down to 2-3% a year in a low crude price environment. On the other hand, ETP will likely grow at 5-6% annually. ETP is getting RGP at the bottom, but RGP holders are getting equity in a much stronger enterprise.
I'm holding RGP at slightly higher than today's close. I'll gladly take the ETP and let it ride. I expect distribution growth at ETP to make up for the cut within 2 years.
As an owner of ETE, I view this as simply part of the roll-up.
Probably the typical increase of $.0125 quarterly ($.05 annualized).
Buckeye might actually see an uptick in storage of both crude and refined products. The recent Trafigura deal will be the main topic of discussion on the upcoming conference call.
Finally got a chance to listen to the conference call. Kinder continues to amaze. The roll-up of KMP, KMR and EPB into KMI were perfectly timed to coincide with what appears to be an excellent time to acquire midstream assets. America has been blessed to have such abundant oil and natural gas reserves and despite near term volatility, there is little doubt that these reserves will continue to be harvested for decades. Kinder will continue to play a large role in moving natural gas, crude oil, refined products etc.
The projection of surplus DCF for '15 is meaningfully above their original projection. Kinder has taken a page from the EPD playbook, which has been to run with "excessive" coverage, which in turn is used simply as equity growth capital and to provide an excellent cushion against unforeseen events. It is a pity that the slick talking Rockov did not operate Linn with said excessive coverage ratio. But, to coin an old Kinder phrase that he frequently used to say, "make sure you aren't drinking your own whiskey and smoking your own dope". It appears that Rockov was doing just that, ...getting high on his own supply.
The acquisition of Hiland is likely the first of many deals that Kinder will make now that he has a ultra-low cost of capital. Hiland will no doubt grow in value, especially with CLR acreage dedication. If you were going to bet on any Bakken player, it would be Continental. The fact that Kinder was able to catch Hamm in an inopportune time is fortuitous. I eagerly await to see one of Rockov's acquisitions. He finds himself leveraged to the hilt and with an equity cost of capital still well over 10%. Silly, simply silly for them to have so haphazardly abandoned their full hedge position to try and "time" the markets.
How divergent KMI and LINE have been since the clown at Hedgeye attacked the two enterprises.
It is indeed in the Form 4 (available on SEC.GOV).
I copied it below..
"Units sold involuntarily. These units were held as collateral for a loan and were sold as a result of a decline in the Issuer's unit price."
Regarding Rockov's sale, as Warren Buffett likes to state: It is only after the tide has gone out that you find out who has been skinny-dipping. It certainly seems like a margin sale type of transaction.
And in other news, looks like Rich Kinder managed to swoop in and catch Harold Hamm in a cash bind (thanks to his rather costly divorce), picking up Hiland Partners.
As is usually the case, Kinder is simply tucking in another quality asset that will no doubt become more valuable in a few years as crude supply/demand balance is restored and the current pricing malaise subsides and pricing returns to a point where the incremental marginal barrel of production can be produced profitably. Don't kid yourself, look at "real" crude production growth across the world, the US shale basins constitute the bulk of the production gainsand that was with 4+ years of $100 oil as a tailwind (not counting restoration of dormant production). The Saudi's are playing with fire, forcing Americans to speed up technological investments which will, reduce completion costs (drilling and frac'ing) increase expected ultimate recoveries. In the end, the world will benefit from plentiful supply.
Of interest will be any comments from storage operators such as BKEP, BPL etc on upcoming CC regarding terminal utilization for both crude and refined products. Cushing volumes are marching steadily upward and I expect BORCO is seeing comparable refined product inventory climb. Not everyone is hurting from surplus supply.
Has anyone seen the degenerate sandforbrains? I haven't seen him since the poor hapless sap predicted a distribution increase to $3.08
Ha Ha. I bet he is still bragging about how the Bakken is going to surpass the Permian and Eagle Ford. Poor dolt. He always was so high strung.
Kinder appears to have timed his EPB,KMP,KMR roll-up almost perfectly. While, it would have been far better to do it years ago (ala EPD), the roll-up right before the plunge in oil appears to be very well timed.
Kinder Morgan is likely to fall short of producing $500 million in surplus cash (I think DCF drops by $7 million for each $1/bbl drop, and we assume that is based off their assumed $70). The drop to $45 would mean $175 million drop, or perhaps $325 million in surplus. The reality is that the $325 probably will be tough, but I do expect meaningful coverage.
As others have alluded to, acquisitions seem highly likely. KMI isn't a homerun, but it should weather the storm.
Agree artist that terminals ought to do well over the coming year. In fact, I saw an article that stated Cushing was only 1/3rd full but that many oil traders were scrambling to secure storage as they could lock in modest gains with the strip being well above current pricing.
I think Plains, Magellan, Buckeye, Blue Knight and NuStar ought to see an uptick in utilization. Also, as you point out, it won't matter whether it is oil or refined products.
I always worried about Borco. It is a world class facility, large, modern but it was a large deal for Buckeye. I have to believe that it will be full within a year if pricing stays low. I've noticed that most of the crude tanker stocks have popped nicely as traders are securing them as "floating storage".
I don't know how long pricing will stay weak, but it seems likely that pipeline and storage MLPs ought to do well. A glut in crude means that pipes and tanks ought to be full.
Actually, I'd consider it bullish that they are buying crude and putting it into storage. It means longer dated crude is higher.
I think EPD has done what is best for the long term. They have managed the company fairly conservatively, though the OilTanking deal might have been a bit early.
The distribution increase as a percentage indeed is falling as long as they keep increasing by the same amount.
I really don't think a bump will garner much from the market. It's probably better to let them keep doing the predictable and hold back the surplus to fund development.
Add Genesis (GEL) to the list. And, I guess you can also include Enbridge (EEP), which announced that it will bump with the Alberta Clipper drop-down.
The midstream MLPs, those without excessive commodity exposure should survive, perhaps even prosper during the down-turn. I actually expected most of the MLPs to be a bit more cautious. I am quite curious to see what MMP will do. They are excellent operators and are also very conservative.
Announcement should be made within the next 3-4 days based on historical announcement dates.
Will be interesting to see if they raise or keep it flat.
This is one of the better management teams within the business. They called a drop in oil early in '14. They even tried to prepare for it.
I understand. I own a much wider array of MLPs. I feel comfortable with most. I still ask the question, if we have a glut of oil, It has to get to market. The pipelines ought to be full. Obviously producers are suffering, but rig counts are dropping and given time, the supply-demand issue will sort itself out.
Nice seeing you here. I have sold very little of my MLPs.
I won't dare call a bottom, but I feel that we are nearing it. Some of this is panic and some of it is simple supply/demand. Long term, I don't think the world can be satisfied with $48/bbl.
Genesis just raised the distribution, a good sign.
I think analysts are predicting $30 billion out of around $160 billion in energy high yield bonds to default. There will of course be at least partial recovery in many, perhaps most of those. This will not be a Lehman contagion, not evenly remotely close, sorry to disappoint you.