You can learn a lot about an industry by listening to earnings calls and digging into financial results, but there’s no substitute for boots-on-the-ground research,” assert Elliott Gue and Roger Conrad, who recently attended the MLP & Energy Infrastructure Conference, a professional gathering of CEOs, analysts and sector experts. Here, the co-editors of Energy & Income Advisor and frequent contributors to MoneyShow.com discuss their top picks among energy infrastructure MLPs.
For a high yield in the MLP infrastructure sector, I like USD Partners. Trains are going to continue to be a big part of transporting Alberta oil to market for a long time to come. There’s going to be a lot of demand for rail logistics, which USD Partners operates.
Its major customers are blue chips and there’s a solid coverage ratio of 1.2 times and a pretty good balance sheet with debt at 3.6 times EBITDA. And while a low unit price may inhibit future distribution growth, there’s good reason to expect the firm’s 13 percent yield to hold up. I do like this name on the basis of assets and the current yield; it’s for aggressive investors up to $12.
I also like
My top pick for high quality is Antero Midstream Partners. The frac water business, I believe, ensures they’re going to be able to continue growing much faster than the average MLP. And they’re among the very few in this sector that can still issue new equity at a high enough price to ensure accretion with enterprise value at 15 times EBITDA.
Developing big wells takes a lot of water and sand. Up to now the default in this business is to frac with onsite water and supplement any other needs with water that’s trucked or piped in. The wastewater is then hauled away in trucks and taken to disposal sites.
Companies can save a lot of money and limit environmental liability by recycling their frac water. This business requires building infrastructure, chiefly processing facilities and pipelines. But once it’s available, users save on water supply costs, avoid paying for disposal and can theoretically actually improve water reactivity and therefore well productivity.
Antero is already one of the fastest growing MLPs, increasing its distribution by 30 percent over the last 12 months. Water at 34% of EBITDA is already a key piece of that. But it’s about to become even more important when the company opens its Clearwater facility this summer.
Up to now, Antero has been providing its water services exclusively for its ultimate parent
In Appalachia where Antero Resources operates, frac water disposal is a very big challenge, mainly because reaching a disposal site requires many miles of running very heavy trucks on narrow winding roads. The bigger challenge in West Texas, in contrast, is ultimately going to be fresh water supplies as activity outstrips local wells and groundwater.
Either way, recycling facilities cut costs and ensure reliable supplies. And the cash flows are reliable and scalable, perfect for an MLP. I’m sticking with the Buy up to $43 recommendation. This is one I believe you can buy and lock away.
For a recommendation that’s kind of out there, I like Enviva Partners. The company basically harvests wood waste in the U.S., processes it into fuel that can be used to bring down carbon emissions in power plants and ships it to utilities in Europe and Japan that face tough emissions standards.
This has a high yield, right now north of 8.5 percent. And that has to be at least something of an impediment to growing as fast as management wants, though their CEO did make a pretty good case for organic growth. This MLP also generates free cash flow.
That’s not to say acquisitions haven’t been an important part of Enviva’s growth so far. And management is obviously interested in consolidation as in its own words the industry is “fragmented.” But I think there are enough ways for Enviva to keep proving its critics wrong. And even a reduced distribution growth rate to a more sustainable mid-single digit pace is attractive at the current price. I rate Enviva a Buy up to $30.
My favorites come from the Plains “family” of MLPs – that’s Plains All-American and Plains GP Holdings. Since Plains GP Holdings’ only asset is a stake in Plains All-American, these companies are essentially the same thing. The only major difference for investors is that Plains GP pays dividends reported on a 1099 form to the IRS while Plains All-American is a classic MLP which pays distributions and reports on a standard K-1 form.
Plains All-American is also a name we’ve been full circle on over the years. Back in 2013 and 2014, Plains was considered one of the most stable and highest-quality MLPs in the business and had an investment-grade credit rating. However, we soured on the name when oil prices started coming down in late 2014 and early 2015 due to the partnership’s hefty leverage and commodity price exposure through its Supply & Logistics segment.
Fortunately, we had it rated a Sell as they’ve cut distributions twice over the past two years and the MLP has been hit hard. The good news: We now think Plains is on the mend and has an enviable slate of new organic growth projects, generally aimed at the Permian supply bottlenecks we discussed earlier.
Most of Plains’ commodity price exposure is through that supply and logistics business. Basically, this is a sort of “trading” operation where Plains buys oil in one market (say from producers around Midland), moves the crude along its pipes to another hub (like Cushing) and immediately sells the oil there. Since both the “buy” and the “sell” of this time are done simultaneously, there’s no direct price risk.
However, when basis differentials are large – when the price of oil in different hubs are wide – then Plains has a lot of opportunities to book these margins through this business. However, when the price of oil in Houston is similar to Cushing and Midland, there are fewer opportunities to book these margin plays so the business doesn’t generate as much money.
The problem is that back in 2013 and 2014, much like today, regional crude oil pricing differentials are wide. Plains really cleaned up and their margin-based businesses accounted for $900 million or so in annual EBITDA in those years out of total EBITDA in the $2.2 to $2.3 billion range.
However, in late 2014 and early 2015 when crude oil prices plummeted so did these basis differentials. That’s because when the price of oil falls rapidly due to a global oversupply of oil, those regional supply/demand imbalances that drive basis differentials become less important. By 2016, the margin business was down by more than 50% to $400 million or so.
That’s a big hit.
Keep in mind that the company’s other business lines – mainly crude oil pipelines, terminals and related assets supported by take-or-pay type contracts – were fine all through this period. In fact, EBITDA from these fee-based businesses continued to grow even as the margin-based business collapsed.
However, what Plains has done is to refocus on its fee-based pipeline business and away from the more volatile S&L business. As a result, last year the margin-based business accounted for less than $100 million in EBITDA while the fee-based business has grown to $2 billion in 2017 and around $2.2 billion this year.
Management is guiding for an additional 14% to 15% year over year growth next year. And it’s important to note that this growth is high quality – it’s based on solid projects primarily related to the Permian Basin that feature long-term guaranteed revenues and take-or-pay type clauses. Around 80% of their capital spending plans are tied to the Permian.
Their slate of Permian expansion projects includes some of the most anticipated pipes in the industry such as the Cactus II line from the Permian down to the Corpus Christi market and the Sunrise Pipeline I and II from the Permian to the Cushing. They’re now talking about additional capacity through a third stage to both projects all needed to support production growth out of the region and all underpinned by long-term supply commitments.
Plains eliminated all of its incentive distribution rights (IDRs) as part of a simplification transaction a couple of years ago and has paid down a hefty debt load racked up to fund all these new pipelines via a combination of non-core asset sales, money retained through the reduced distribution and equity issuance.
By early next year, Plains should be down to its targeted leverage range of 3.5 to 4.0 times EBITDA. We think it will be in a position to start raising distributions again sometime in 2019 or 2020 especially when you consider the current coverage ratio is expected to be a whopping 1.7 times in 2018. And the company has a new CEO, which is a position at this stage in its transition and growth plan.
We’re adding Plains GP Holdings to our focus list of top buy recommendations because it pays on a 1099 and a lot of our readers tell us they’re looking for MLPs that won’t add to their stack of K-1s at tax time. If you prefer a K-1, Plains All-American is a valid option as a Buy as well. Both issues yield around 4.75%.
Beyond Plains, I think Enterprise Product Partners is a solid long-term holding. Enterprise was also among the first MLPs to focus on the importance of US exports as a release valve for shale production and they have an impressive asset base aimed at that market.
Magellan Midstream Partners is another high-quality name to buy right now. Management noted that the acquisitions market has really heated up in the MLP space and Magellan believes it’s overheated. As a result, while they bid on many deals they rarely win because they’re not willing to pay up.
Magellan is an organic growth story as it has always been and the market appears to be rewarding organic growth over acquisitions-led growth right now so I think they’re in the sweet spot. Magellan also highlighted a $700 million investment opportunity in export and dock facilities on the U.S. Gulf Coast.
I’d also say that neither Enterprise nor Magellan has any significant exposure to FERC. They both long ago eliminated their incentive distribution structures and they’re both about as close as possible to be a corporation without being a corporation because they both have limited need to access capital markets.
Thus, if generalist investors – in particular, value fund managers who are not specifically focused on the energy/MLP space – want to take a stake in the midstream energy group I think Magellan and Enterprise would be the first to benefit from those fund flows.
Coming out of last year’s MLP & Energy Infrastructure Conference, Crestwood Equity Partners was a top pick for us and it has been a big winner, rising about 65% over the past year compared to a gain of just 2% to 3% for the benchmark Alerian MLP Index.
Heading into the show, I was wondering if Crestwood had run too far too fast and it might be time to re-evaluate the name. However, I gained an additional comfort with the story and I’m more inclined to reiterate the Buy recommendation.
I see the potential for the Bakken Shale field to see additional development due to some impressive wells drilled over the past few months and fewer infrastructure bottlenecks in comparison to the Permian. Since the Bakken is Crestwood’s largest basin in terms of volumes, that should benefit the MLP.
The company ticks all the boxes right now. Crestwood has no incentive distribution rights, leverage is under 4 times EBITDA, there is no exposure to FERC cost of service rates, no need to raise additional capital to fund growth in 2018 and a distribution coverage of greater than 1.2 times. Thanks to its attractive slate of growth projects in the Bakken, Delaware Basin (Permian) and other basins, EBITDA growth should remain around 15% annualized through 2020.
Even more important, at the conference management indicated that 3-year annualized growth in distributable cash flow per unit –- basically the amount of cash available for distribution per unit — is also going to grow 15% annualized over the period from 2018 through 2020. I think this opens up the possibility of distribution growth later this year or in early 2019. Crestwood Equity Partners rates a Buy under $35.