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After Enterprise move, more MLPs could look to rein in distributions

Master limited partnerships reining in cash distributions, long an unwelcome sign for investors, are making industry observers more optimistic about midstream master limited partnerships' fiscal health.

Most recently, Enterprise Products Partners LP and Genesis Energy LP announced plans to eschew higher payouts to investors for now, in favor of using that cash to avoid equity markets through self-funding. Some analysts see a potential sector-wide shift brewing at MLPs.

"We've been trying to convince every management team we speak to to worry less about growing your distribution and trying to retain more coverage," CBRE Clarion Securities' Hinds Howard told S&P Global Market Intelligence. "There's been a lot more equity issued than we expected this year."

When capital markets all but closed their doors after oil prices plummeted in 2014, the midstream sector struggled to compensate for its exposure to commodities and slashed distributions to balance their books. Once oil prices stabilized in the back half of 2016, however, MLPs returned to issuing massive quantities of debt and equity to transition back to growth. As of Oct. 10, midstream companies had raised more than $35 billion in capital through those traditional public markets so far in 2017.

Enterprise survived the down cycle due to cash flow from its fee-based processing segment but on Oct. 12 announced a slowdown in its anticipated quarterly distribution growth, from 0.5 cent per unit to 0.25 cent per unit. The partnership plans to use that excess cash flow instead to fund 10% of its 2019 equity capital expenditures.

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"Our view is rather than ... continuing to, if you would, stay a little bit on this treadmill or pay it out and then go raise it and then dilute our limited partners ... let's go ahead and take this small step ... to go ahead and stay out of the equity markets a little bit more and retain some of that capital back in the business," Enterprise Products Holdings LLC President W. Randall Fowler said during a conference call.

In Enterprise's formulation, "anemic" investor interest across the midstream sector that does not recognizing the partnership's steady distribution growth necessitated scaling back those payouts.

Since industry leader Enterprise makes up nearly 10% of the Alerian MLP Index, Mizuho Securities USA LLC's Brian Zarahn said, its distribution growth moderation could indicate a forthcoming trend.

"The Enterprise distribution growth change marks the continued evolution of the MLP business model," Zarahn said in an interview. "Incrementally, the Enterprise announcement might encourage some MLPs to either moderate or pause their distribution growth rate."

Analysts also responded positively to Genesis Energy's 31% third-quarter distribution cut, to be followed by a gradual increase of at least 1 cent per common unit every quarter starting at the end of 2017. MUFG Securities Americas Inc.'s Barrett Blaschke wrote in an Oct. 12 note that the cut will spur "firmer financial footing" as lower distribution coverage reduces leverage and enables Genesis to fund more of its equity needs. Like Enterprise, the partnership may also institute a common share repurchase program.

When it comes to other likely candidates for distribution moderation, eyes are on Energy Transfer Partners LP.

"They’re the last sort of big-cap MLP that has really high leverage, has all the [incentive distribution rights] still in place, has very low coverage," CBRE's Howard said. "I think the first step would be for them to slow down their distribution growth to zero, wait for the cash to come online from Rover and all these other pipelines they’re building, and then once leverage gets low enough, they’re going to have to fix their [incentive distribution right] structure." Incentive distribution rights give a general partner an increasing level of cash from a limited partnership beyond regular distributions.

Guggenheim Securities' Matthew Phillips agreed that Energy Transfer's financial position requires that sort of response from management but also listed Plains All American Pipeline LP and Targa Resources Corp. as targets for moderating distribution growth.

"If you look ... at the names that have had an equity overhang, they've been punished pretty badly for it [on the stock market]," he told S&P Global.