Some oil and gas pipeline executives are frustrated that improving financial results and good corporate governance have failed to translate into higher share prices, a disconnect that experts attribute to lagging equity fund flows and depressed distributions.
With the bellwether Alerian Master Limited Partnership Index down over 4% in 2018 so far, the trend punished even master limited partnerships that avoided public equity markets and reinstituted distribution growth after eliminating required cash payments to general partners. Barclays highlighted in a March 12 note to clients that despite the S&P 500's 3.5% gain last week, the Alerian index and midstream corporations fell to the bottom of the "energy complex ... performance hierarchy."
Enterprise Products Partners LP has felt the pain. Even after getting rid of its general partner's incentive distribution rights, or IDRs, in 2010 and leading the sectorwide equity self-funding pivot, its stock has not reflected either record fourth-quarter results or what analysts widely consider to be one of the top management teams in the industry.
"We closed at below $25 [per unit] yesterday, and when you look at that kind of performance, you think: 'What the heck?' It's frustrating as hell," CEO A. James Teague said during Enterprise's March 7 analyst and investor day conference. "Sometimes I don't think the market gives us credit for having a vision and then exercising it."
Kinder Morgan Inc. co-founder and Executive Chairman Rich Kinder expressed a similar sentiment during the pipeline giant's fourth-quarter earnings conference call on Jan. 17. He noted that he anticipates overcoming the "discrepancy" between Kinder Morgan's undervalued stock and 2017 dividend hike, which followed the corporation's investor-friendly 2014 reorganization, as well as a 2015 dividend cut to balance the books.
According to Citi analyst Eric Genco, Wall Street will not reward midstream outperformers until equity fund flows rebound. "If we get to a period of time where fund flows can be reasonably strong or reasonably supportive of the growth, then I think you'll start to see that differentiation a lot more, and that is kind of what we're waiting on," he said in an interview. "It's just taking longer for these things to play out, unfortunately."
SL Advisors LLC Managing Partner Simon Lack said rebalancing valuations requires more distribution growth. "MLP distributions are down 30% since 2014. ... Maybe it is not surprising sentiment continues to be pretty negative for the sector," he said. "I think it's the real 'show me' element here of companies' ability to demonstrate they really are going to be responsive to what investors want and the money that they’re investing in growth really is going to generate faster cash flow. ... That's essentially what is hanging over the sector."
In the meantime, MLPs that are only just now joining the simplification trend may not necessarily be rewarded for their efforts. That includes Tallgrass Energy Partners LP, which saw a muted stock market response to its Feb. 7 announcement that it will evaluate options for consolidating with Tallgrass Energy GP LP.
"It is beyond my realm of comprehension why our securities have gotten beat down like they have," CEO David Dehaemers said during the partnership's fourth-quarter earnings call on 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."
