In light of recent volatility that master limited partnerships (MLPs) have experienced, Credit Suisse released a report explaining why. A big mover in this market has been the volatility in the price of crude, which ultimately has had an impact on the space.
In the third quarter of 2014, distribution growth has averaged around 11% year-over-year with a median of 7.3%. Direct cash flow per unit grew 20% year- over-year in both the median and the average.
Credit Suisse’s John Edwards further detailed in his report:
Ratio of DCF and EBITDA Beats/In-Lines to Misses ~2:1, Distributions In-Line; Capex Outlook Keeps Rising: Of our coverage, DCF/unit averaged a 0.8% beat and a median 0.4% miss, distributions have been in-line while EBITDA missed an average of 3%/median of 2%. For distributions, there has been just one beat with the rest in-line for MLPs and GPs combined. Expected capital spending for MLPs has moved ahead of $47B for 2014. For 2015 capex expectations stand near $43B vs. ~$36B two months ago, and for 2016 expectations are for ~$40B vs. $35B two months ago.
Little Capex Slow-down in the Wake of Weak Crude Prices: We did not hear much in the way of a capex slow-down from weak crude prices. Bellwether companies reported just minor impacts. Kinder Morgan (KMI, KMP) reported that they had not seen any impacts to their business. EPD continues to expect to invest about $3.7-$4.2B for 2015 and 2016, the same as they indicated before the price pullback. The Bakken to Cushing pipeline may not get done but EPD has not been included in their backlog.
Spectra Energy Partners L.P. (NYSE: SEP) remained on track in its drive to a $35 billion program. Plains All American Pipeline L.P. (NYSE: PAA) indicated that it expected a reduction in activity based on a $32 billion annual reduction in cash flow to exploration and production companies. This scenario expects a $10 per barrel drop in crude price versus roughly $100 billion spent per year.
With median distribution and dividend growth of 28% during the quarter and similar growth prospects ahead, the general partners continue to be a solid investment. Energy Transfer Equity L.P. (NYSE: ETE) grew its distribution outlook 24% and Plains GP Holdings L.P. (NYSE: PAGP) also has a 20% growth outlook for its distributions.
Credit Suisse made the following ratings changes:
- Midcoast Energy Partners L.P. (NYSE: MEP) was upgraded to Outperform from Neutral.
- ONEOK Partners L.P. (NYSE: OKS) was upgraded to Outperform from Neutral.
- Targa Resources Partners L.P. (NYSE: NGLS) was upgraded to Outperform from Neutral.
- Western Gas Partners L.P. (NYSE: WES) was upgraded to Outperform from Neutral.
- Magellan Midstream Partners L.P. (NYSE: MMP) was downgraded to Neutral from Outperform.