Pipeline bottlenecks in the prolific Permian Basin and the very future of the master limited partnership structure weighed heavily on midstream executives' minds during the recent earnings season.
MLPs' narrowed tax advantage over C corporations from the 2017 federal tax policy overhaul, combined with the Federal Energy Regulatory Commission's decision to extinguish a key tax benefit for MLPs, dominated conversations about the model's future. Executives also addressed concerns about insufficient takeaway capacity in West Texas' Permian Basin oilfields and the pipeline outlook for up-and-coming shale plays.
S&P Global Market Intelligence listened to a wide range of midstream operators' earnings calls looking back at the first quarter of 2018 and compiled insightful and colorful comments. Those standout quotes are in italics below.
Taxes, FERC and MLPs
Even though the federal tax overhaul slashed the corporate tax rate from 35% to 21%, Energy Transfer Equity LP is not convinced that merging with Energy Transfer Partners LP into a C-corp structure would necessarily benefit investors.
"When you weigh in the taxes drain that you would ultimately have, not just the first couple of years as many partnerships state ... I don't like the answers we're getting," Energy Transfer chief Kelcy Warren said May 10.
FERC's ruling that pipeline MLPs would no longer be able to recover an income tax allowance in their cost-of-service rates, meanwhile, sent Dominion Energy Midstream Partners LP shares into a tailspin at the end of the first quarter. But after parent company Dominion Energy Inc. committed to selling assets worth at least $1 billion to buoy the struggling partnership, Dominion Energy Midstream CFO Mark McGettrick is confident that the MLP can afford to wait out the stock market slump.
"Our whole approach on this is going to be there's been a lot of interest and requests to FERC to go ahead and provide clarity," he said April 27. "We think that will springboard the market if they do that and are supportive of the MLP structure long term, and we are going to be patient and wait for that."
Williams Cos. Inc. is expected to acquire the Williams Partners LP shares it does not already own sooner rather than later to mitigate the MLP's exposure to cost-of-service rates through its flagship Transcontinental Gas Pipe Line Co. LLC system. Such a transaction, however, does burden shareholders with additional costs.
"I think the notion is that through a buy-in or a roll-up, there's a payment of all taxes due by the unit holders," Williams CFO John Chandler said May 3. "And I think we're just processing through what that means relative to our specific scenario where 74% of the partnership is owned by a corporation."
The corporate tax rate revision and FERC's policy change have Boardwalk Pipeline Partners LP executives seriously considering making the partnership a corporation if parent company Loews Corp. does not exercise its purchase right and buy out the partnership at a steep discount.
"We are evaluating whether remaining a publicly traded master limited partnership is the appropriate structure for Boardwalk," CEO Stanley Horton said April 30.
With record crude oil volumes flowing from Permian Basin wells, Plains All American Pipeline LP is feeling the the pinch as bottlenecks limiting pipeline takeaway capacity have emerged sooner than expected. Until new projects including Plains' Cactus II pipeline come online in the third quarter of 2019, the MLP is doing whatever it can to retain customers, including using trucks to deliver supplies.
"Some of these things that we're doing right now ... we may not be making much in terms of incremental value to us right now by moving that barrel around these bottlenecks," CEO Greg Armstrong said May 8. "What we're doing is providing service to a customer that says, 'We told you we would move your barrel' and it will, and it's a long-term relationship. ... At the end of the day, it's about the certainty of ... moving that barrel from the wellhead to the best market on a routine basis."
DCP Midstream LP CEO Wouter van Kempen emphasized that the planned expansion of the partnership's joint venture Front Range NGL pipeline from Colorado to Texas and proposed capacity boost to the Texas Express pipeline that carries NGLs from the Texas Panhandle to a fractionation and storage facility in Mont Belvieu, Texas, should help to prevent DJ Basin midstream operators from eventually facing a similar predicament.
"What is really important and what we're trying to do here is you want to make sure that you don't get into a place with the DJ Basin where basically the Permian is today," he said May 8. "What we are doing in the DJ Basin is to alleviate all of those in one big fell swoop deep into the next decade."
Midstream operators, meanwhile, are aware that producers are watching the pipeline infrastructure build-out and potential choke points to make sure their own bottom lines are secure.
"It's kind of like having a gallon of water in the middle of the desert. A gallon of water may be worth $5 in a Mountain Valley Water cooler, but if it's in the middle of the desert, it isn't worth anything," Tallgrass Energy Partners LP CEO David Dehaemers Jr. said May 3. "And so the point being that a barrel of oil or 100,000 barrels of oil in the ground isn't worth anything until you get it out and get it to a market where it's liquid."