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The quotes of Q4: Midstream executives puzzle over stock price 'discrepancy'

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The quotes of Q4: Midstream executives puzzle over stock price 'discrepancy'

The changing shape of the master limited partnership structure was on oil and gas pipeline executives' minds during the recent earnings season, shining the spotlight on a market where more shareholders value consolidated structures and long-term cash flow retention over increasing quarterly payouts.

While some executives reassured investors that they are keeping close tabs on the sectorwide trend toward simplified organizations, others lamented Wall Street's hesitancy to reward past and current efforts to streamline balance sheets. They also addressed concerns about expiring pipeline contracts and contracting capacity on new pipelines.

S&P Global Market Intelligence listened to a wide range of midstream operators' earnings calls looking back at the fourth quarter of 2017 and compiled insightful and colorful comments. Those standout quotes are in italics below.

MLPs versus the market

Even though several general partners have relinquished their incentive distribution rights, or IDRs, Shell Midstream Partners LP continues to funnel these required cash contributions to its holding company. CEO John Hollowell acknowledged that while the partnership understands that IDRs can increase MLPs' cost of capital by handicapping their capacity to retain cash for reinvesting in the business, Shell Midstream does not need to address that issue right now.

"Just know that we don't have our heads in the sand here, we do recognize the impact of this on cost of capital, and we're going to be working hard to be able to approach it in the right way and deal with it at the right time," he said Feb. 27.

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Enbridge Inc., on the other hand, recently eliminated Spectra Energy Partners LP's IDRs following the North American energy infrastructure giant's acquisition of the pipeline MLP in 2017. While the transaction prompted positive reactions from equity analysts, that did not stop them from asking about potential plans for further consolidation of Enbridge entities.

"We certainly are not blind to the fact that people prefer simplicity in this market," CEO Al Monaco said Feb. 16.

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Tallgrass Energy Partners LP and Tallgrass Energy GP LP could be moving in a similar direction as they evaluate different options for streamlining their organization and reducing capital costs, but the muted stock market response to that Feb. 7 announcement weighed heavily on CEO David Dehaemers.

"It is beyond my realm of comprehension why our securities have gotten beat down like they have," Dehaemers said Feb. 13. "The reason that ... we're undertaking [this] now is to actually improve the company, improve our cost of capital. Get us to investment-grade rating. Have a lower cost of debt. Be more transparent. Get rid of the IDRs directly or indirectly. And why people have such a hard time accepting what we're doing, I don't quite get."

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Dehaemers' apprehension echoed Kinder Morgan Inc. Executive Chairman and co-founder Rich Kinder, who emphasized that his company's stock remains undervalued after Kinder Morgan's 2014 consolidation, followed by a 2015 dividend cut to balance the books and a 2017 dividend hike to return value to shareholders.

"I certainly hope and expect that discrepancy to be overcome," Kinder said Jan. 17.

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Contract concerns

With midstream companies expected to face significant recontracting risks in 2018 as many initial long-term firm transportation contracts for interstate pipelines come to an end, Tallgrass executives also assured investors that the partnership's Pony Express crude oil pipeline is well-positioned to maintain flows alongside a planned extension of the system.

"What I will guarantee you is that we are going to have volume in this pipe post any contract roll-off," COO William Moler said. "And what I will guarantee you is, and I've said it since the beginning, this is not a one-trick pony. In fact, it's become several bags of tricks tied to that pony."

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Plains All American Pipeline LP, meanwhile, is open to a wide array of third-party shippers as it solicits capacity reservations on the proposed 585,000-barrel-per-day Cactus II pipeline from the prolific Permian Basin in West Texas to Corpus Christi, Texas.

"As far as diversity goes, we don't discriminate against gender or religion," CEO Greg Armstrong said Feb. 7. "We're not relying on an affiliate shipping on that [pipeline] to underpin the economics."

The project is expected to take 18 months, and Plains executives added that they anticipate turning it into a joint venture project.

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The technology revolution

DCP Midstream LP CEO Wouter van Kempen presented a much different perspective than his midstream peers, focusing instead on the partnership's "DCP 2.0" project to digitize operations that has so far included Silicon Valley hires and a data-driven integration collaboration center.

"Make no mistake of viewing this as merely implementing slick apps and putting bland screens up in control room. This is all about disrupting the industry to change how we deliver midstream services more competitively and reliably," he said Feb. 14. "From concept to present in less than 18 months, we evolved an idea into a function already delivering a payback equal to its investment in one year."