Earlier this year, MLPs and other energy infrastructure companies were making sweeping financial decisions in order to protect themselves immediately from an oil cycle that showed no signs of turning. Distributions were cut to affirm debt ratings. Investors scrutinized balance sheets. JVs were launched to reduce risk, even at the cost of reducing rewards.
Now, as the second quarter earnings season has closed with a less pessimistic tone, both investors and management teams are looking beyond the end of the year and even beyond 2017.
The Best News
The most encouraging news to come out of earnings season was Magellan Midstream Partners (MMP) increasing expansion capex. Increased expansion capex generally translates into increased distributions. MMP increased 2016 expansion capex by 6.3% and further out by 300%, and it reiterated 10% distribution growth for 2017 and at least 8% for 2017. This does not include the $500 million it is considering for other potential projects.
Voluntary Reductions in Cash Obligations
The emphasis has moved away from balance sheet stability, but that doesn’t mean balance sheet health is now disregarded. Energy Transfer Equity (ETE), the parent of Energy Transfer Partners (ETP), provided them with an IDR waiver of $720 million. ETE is also the GP of Sunoco (SUN), and SUN’s management team believe a similar offer would be available to them, if necessary. The management team of Archrock Partners (APLP) agreed to a 10% pay cut, and the CEO will forgo any short term incentive this year. This probably doesn’t have a huge impact on the balance sheet, but it is a meaningful gesture, especially given other staffing reductions at the company. It is also a gesture that places the long term future of the company above management bonuses.
Genesis Energy (GEL) has watched the markets transition from valuing distribution growth to valuing financial flexibility. Now, despite management confidence in the existing business and future growth, it may moderate its 10% annual distribution growth. It’s an admittedly unusual way to increase shareholder value, as management cleverly and politely explains in the earnings report.
The Future Needs More than Cash
Even if a company has the balance sheet flexibility and the desire to commit cash to a project, that doesn’t automatically mean the project can begin. Enbridge Energy Partners (EEP) recently withdrew from the regulatory process for its Sandpiper Pipeline. It has experienced a number of delays and procedural complications since the initial application in 2013. Now, the market has changed, and Bakken production does not currently support the pipeline’s capacity.
In the same press release, EEP announced funding for Dakota Access, a joint venture that it recently bought an interest in. (Formally, Dakota Access is part of the JV owned by Energy Transfer Partners (ETP) – 23.0%, Sunoco Logistics Partners (SXL) – 15.3%, EEP – 27.6%, MPLX (MPLX) – 9.2%, Phillips 66 (PSX) – 25%. ETP is in charge of construction, and once built, SXL is in charge of operation.) However much the JV makes the cost of building of the pipeline easier from a balance sheet and cash flow perspective, it does little to appease public opinion. A lawsuit filed by the Standing Rock Sioux Tribe contends that pipeline construction will destroy cultural and historical sites. A ruling is expected in early September. Ongoing protests at the construction site are concerned with protecting local water sources, specifically the Missouri River. Events have recently turned violent when protesters trespassed and private security responded with both pepper spray and dogs that drew blood from protesters. Police were not on the scene although dozens of people have been arrested since the protests began.
On the opposite coast, the Massachusetts Supreme Judicial Court disallowed a tax enabling utilities to increase prices in order to pay for natural gas pipelines that would feed their power generation facilities. Most immediately, this affects the Access Northeast pipeline owned by Spectra Energy Partners (SEP).
Fight Over the Future
The drama continues with the Williams Companies (WMB) as it seems no one can agree on what is best for its future. Corvex wants to replace the entire board. WMB issued a mild response which included an FAQ that seemed mostly designed to tell WMB employees they need not worry. Then, it promptly added three more board members, at an annual cost of $250,000 each. There was even a rumor of an Enterprise Products Partners (EPD) bid for the company. Please forgive the editorializing, but it appears that even a non-ideal solution would be better than the continued bickering.
On a brighter note, Williams Partners (WPZ)’s exposure to Chesapeake Energy (CHK) contracts has been settled. Gathering contracts in the Barnett have been signed with Saddle Barnett Resources, the private company successor to Chesapeake, extending through 2029. WMB and WPZ also finalized the sale of their Canadian assets to Inter Pipeline (IPL).
Despite the drama of the month, recent MLP announcements makes the crystal ball seem just a little less cloudy.