Volatile commodity prices and M&A chatter dominated second-quarter earnings calls as oil and gas pipeline executives responded to an overall lukewarm performance period that saw few "blockbusters."
Many executives did not try to sugarcoat flat results following a period that saw low oil prices drive down share values in the midstream energy sector, but they did set the stage for a more dynamic second half of 2017.
S&P Global Market Intelligence listened to a wide range of first-quarter midstream earnings calls and compiled some of the most insightful and colorful comments. Those standout quotes are in italics below.
Dulled appetite for M&A
Energy Transfer Equity LP and Energy Transfer Partners LP are holding off on further asset acquisitions as the recent rush of midstream energy deal-making has slowed to a trickle.
"Unless the perfect opportunity is presented, we have very little appetite," Energy Transfer's leader Kelcy Warren said Aug. 9. "We are tired. It's been a tough year for us, tough couple of years and ... I think it's time for us to take a little break."
After spending the second half of 2016 defending its controversial Dakota Access, LLC crude oil pipeline, Energy Transfer during the second quarter faced regulatory challenges to its 3.25-Bcf/d, $4.2 billion Rover Pipeline LLC project to carry gas from the burgeoning Appalachian shales to the Midwest and Canadian markets. All this has come on the heels of its failed takeover of Williams Cos. Inc.
Speaking of Williams, President and CEO Alan Armstrong expects private equity to force more midstream consolidation in the Northeast to as shale gas producers like EQT Corp. and Rice Energy Inc. announce mergers and acreage changes hands.
"There's a lot of private equity that's had money up there, and it's probably getting a little stale and a little ripe, because they've been in those positions for quite a while," Armstrong said Aug. 3. "And typically, the way they're rewarded is the management teams have them anxious to get out at some point in time, and it's certainly usually inside of five years. So I do think there's going to be some pressure up there."
Williams executives in May attempted to squash speculation that the company would pursue a buy-in of master limited partnership Williams Partners LP, but acknowledged that acquiring its MLP would "create substantial additional cash tax shield."
After announcing a growth-centered strategy at the end of the first quarter, Tallgrass Energy Partners LP unveiled a series of acquisitions during the second quarter including an additional 49% interest in the Deeprock Development crude oil terminal and DCP Midstream LP's Powder River Basin natural gas gathering system. While the partnership plans to expand beyond its core position in the Rocky Mountains region, there is one asset in particular that Tallgrass will likely not pursue.
"You probably won't see us, as an example, going out and into the Permian and competing in one of the major systems down there like Medallion that's being marketed right now," CEO David Dehaemers said Aug. 2.
Laredo Petroleum Inc. said in July that it may sell its share of Medallion Gathering & Processing LLC's Medallion-Midland Basin pipeline system, which analysts have estimated to be worth more than $1 billion.
Oil prices affecting performance
Plains All American Pipeline LP is reeling after the supply and logistics segment reported a 172% decline in segment adjusted EBITDA year over year, with a loss of $28 million. Chairman and CEO Greg Armstrong blamed the results on increasing competition and reduced arbitrage opportunities and said the segment's issues were magnified by the industry down cycle.
"We're not the only one that's feeling some of this pain," he said. "We're pretty transparent about where we capture these opportunities. … I think in other entities, they group their segments and their business units differently. And that's fine, there's nothing wrong with that. It's just not as evident when there's pressure on that."
"But we're certainly seeing explanations that would suggest margin compression is not limited to PAA," according to Armstrong. "What you should take away from this is that we're tired of missing the numbers on S&L. History has it borne out. Last year and the year before that and the year before that, we did numbers that were meaningfully above, based upon these market and arbitrage opportunities that had always been there going back, as long as I can remember, 15 years. And so here we are today, and they're not there. So we're just basically pulling them out and saying we're going to capture them if they're there. We have the ability and the resources to do it; we just don't know how to predict it."
Plains also announced a potential distribution cut to $1.80 per unit from $2.20 per unit annualized to focus on fee-based cash flows. The partnership's stock suffered a selloff Aug. 8.
For Magellan Midstream Partners LP, continuing oil price volatility may compel management to shelve a planned oil pipeline from the Permian Basin to U.S. Gulf Coast refineries.
"The sense we have at this point is that there's probably at least a few more months before anything material moves, and it may even be longer than that. But the way these things work, I'd kind of characterize this as the pump is primed … and once somebody decides to make a commitment, it'll happen very quick," CEO Michael Mears said Aug. 2.
Magellan faces competition from other pipelines considering projects between the Permian and Corpus Christi, Texas, which is home to a number of large refineries and petrochemical plants.
Enterprise Products Partners LP executives fielded questions on whether producers are concerned about crowding at the Houston Ship Channel now that the U.S. is exporting more petroleum products.
"There's a famous guy in Washington, D.C., that would call that fake news. You look at what producers want. They want to make sure that their product flows and they want market choices," A. James Teague, CEO of Enterprise's general partner, said Aug. 3 before noting the significant storage, dock spaces and refining connectivity advantages for Houston versus Corpus Christi.
"The other thing that producers are demanding ... quality is king," he said. "They want segregations, and they want to control their own barrels. A lot of these guys have already been out kicking tires in the global markets and they're beginning to understand what those customers want, and they want to be in control of their destiny. So when you're in Houston, you're not captive to a limited market, you've got multiple outlets. … You can tell I get a little wired on this subject."
Getting back to growing dividends
Kinder Morgan Inc. kicked off midstream energy earnings with a plan to raise dividends after repaying $5.8 billion in debt in less than two years. The dividend hike will be combined with a $2 billion stock buyback program. Kinder Morgan co-founder and executive chairman Richard Kinder explained how Kinder Morgan landed on $2 billion.
"Well, it is a nice round number, but … look, we did a lot of work, hundreds of hours [CFO Kimberly Dang] and her team with input from all of our business segments to develop this on a bottoms-up basis," he said July 19. "And what we came out with, we stress-test it, we looked at it from a lot of different vantage points. And this we thought was the optimum structure, and that's the number that came out in the wash."
"We'll see how all this plays out over those 3 years," Kinder said. "But that's certainly our game plan ... to take the dividend up and have that amount of money left to buy back shares and, again, very importantly, continue to improve the balance sheet because we're funding our capital expenditures out of cash flow."