Oil and gas pipeline companies produced materially better financial results for the fourth quarter of 2017, but the gains in earnings and cash flow could not stem the sectorwide valuation slump in the sector.
North America's 10 largest oil and gas transport companies and partnerships all increased adjusted EBITDA, while just one recorded a negative distributable cash flow. But with fundamental shifts affecting the master limited partnership structure that is popular in the sector, share prices did not produce a parallel positive response, instead continuing their 2018 decline as some partnerships struggle with debt and required cash contributions to their general partners.
"I don't think too many people are actually looking at the earnings for the fourth quarter," Guggenheim Partners LLC Midstream Research Director Matthew Phillips said in an interview. "A lot of these names still have some sort of hangover in terms of too much leverage or an IDR [incentive distribution rights] situation they have to resolve. How that gets addressed will have a big impact on how those entities trade."

Institutional investors in recent months have pressured MLP management teams to make a number of changes aimed at streamlining their balance sheets and corporate structures, including scaling back distribution growth to retain more cash for equity funding and shedding their IDRs, which can increase a partnership's cost of capital. Publicly traded MLPs, which are not taxed as corporations and distribute a relatively high amount of cash to investors, are a popular vehicle in the sector to house midstream energy assets.
While several MLPs pivoted in that direction during 2017, some, like Energy Transfer Partners LP, have hesitated to address these trends. The bellwether Alerian MLP Index, which tracks a basket of the largest midstream MLPs, reflected that uncertainty, dropping almost 3% during the fourth quarter.
Even the 17% spike in West Texas Intermediate crude oil prices during the fourth quarter was not enough to convince Fitch Ratings analysts that the midstream energy sector's financial "high note" was especially impressive. "The midstream sector greenlighted many long-duration construction projects in the months before crude oil prices collapsed in late 2014. The sector kept building as the bust period stretched into years," they wrote in a Feb. 27 note to clients. "Fitch views the current spate of record results as a case of 'better late than never.'"

Higher oil prices and record results were also not enough to boost the post-earnings share prices of pipeline C corporations and MLPs that have reintroduced dividend growth after eliminating IDRs and are able to avoid public equity markets, such as Enterprise Products Partners LP and Kinder Morgan Inc.
During Kinder Morgan's Jan. 17 earnings conference call, the pipeline giant's chairman and co-founder, Rich Kinder, said he hoped the "discrepancy" shown by the company's relatively low stock value after its 2014 consolidation — followed by a 2015 dividend cut to balance the books and a 2017 dividend hike to return value to shareholders — would resolve itself.
According to SL Advisors LLC Managing Partner Simon Lack, midstream sector stock prices will not rebound until there is a critical mass of distribution increases. "MLP distributions are down 30% since 2014. … Maybe it's not surprising sentiment continues to be pretty negative for the sector," he said in an interview. "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's hanging over the sector."
Still, that did not stop Energy Transfer Partners, which retains a significant IDR burden, from getting a stock market boost after beating analysts' expectations. After reporting results following the Feb. 21 stock market close, the partnership's share price finished Feb. 22 up more than 4% at $18.99 per unit. A Stifel Nicolaus & Co. Inc. note cited the MLP's "well-covered 12% distribution yield."
