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Dividends, volumes and deals on radar as midstream sector places Q3 in rearview

Withthe third-quarter earnings season drawing near, analysts and investors will be scouringfor updates on distribution growth, volumes and deal activity as the midstream sectorsees modest gains after a resounding second-quarter rebound.

Analystsare forecasting a third-quarter distribution growth of 1.3% to 1.5% for master limitedpartnerships, reflecting an annual growth of 5.2% to 6%, according to Rob Thummel,managing director of Tortoise Capital Advisors LLC.

"TheMLPs sponsored by U.S. refiners that own energy infrastructure assets are forecastedto deliver some of the highest quarterly distribution increases amongst MLPs. These'drop-down' stories like Valero EnergyPartners LP, Phillips66 Partners LP and ShellMidstream Partners LP are expected to grow quarterly distributions byalmost 6%," Thummel said in an Oct. 10 podcast.

"We'relong-term believers in those companies," he said in an interview. "Thesedrop-down companies are set up pretty well, based on their existing asset footprint,to deliver on that growth. We expect them to continue to deliver."

Phillips66 Partners announcedthat it is acquiring a suite of assets for $1.3 billion from sponsor , in its biggest drop-downdeal, to date. The partnership aims to finance that purchase largely through a roll-outof senior unsecured notes in two tranches.

PricewaterhouseCoopersLLP's midstream energy consultant Daniel Klausner is bearish about distributionsand midstream cash flows overall as the hard-hit sector rebalances from 52-weeklows seen at the start of 2016. "[Investors] have been more picky about coverages.So, I would expect distributions to continue to be constrained. I don't think that'sany secret," he said.

BrianZarahn, an analyst at Mizuho Securities USA Inc. plans to watch out for updateson crude oil, gas and NGL volumes as well as outlooks for 2017 and insights intogeneral partner restructurings.

"Investorsare looking at where volumes will grow across basins. I will be looking at companies'volumes results in the third quarter and any color they can provide for their fourthquarter outlook," he said. "Everyone is [also] clamoring for informationfor 2017. People are looking at whether CapEx will be higher or lower next year.We [expect to] get some preliminary quantitative and qualitative guidance for thenext year [in terms of] ranges for … EBITDA, CapEx and distributions."

Zarahn,who believes that changes to general partner structures are underway, anticipatesquestions about whether MLPs with high capital costs will alter or eliminate incentivedistribution rights to their general partners. "I would expect one or two companiesto make some type of announcement by the end of the year," he said.

A handfulof mature MLPs that are already mullingover that possibility could follow Plains All American Pipeline LP's warmly received move to consolidate its ownership structure.

"There'sbeen a lot of scuttle out there for different formations, not necessarily C-corpfor C-corp, but mostly LP for LP or a C-corp for LP. So, definitely some transactionswill be discussed," said Brian Gamble, an energy analyst at Piper Jaffray Cos.subsidiary Simmons & Co. International.

Gamblealso believes that Enbridge Inc.'sproposed takeover of could set a precedentfor other midstream players, particularly those aiming for stronger balance sheets."[The Enbridge-Spectra deal] is one example of an end-game scenario for somecompanies. Enbridge wasn't in the best position from a balance sheet standpoint.So, they decided to go the M&A route to eliminate that. And I expect more companiescould go down that route," he said.

"Therewill likely continue to be M&A transactions in the midstream sector, both specificasset [sales] and corporate [takeover] transactions," said Chris Eades of ClearBridgeInvestments LLC, whose midstream holdings include Spectra Energy and , an MLPaffiliate of DCP Midstream LLCowned by Spectra Energy and Phillips 66.

Eades,who co-leads multiple energy MLP strategies as ClearBridge's managing director andportfolio manager, expects a roughly 10% EBITDA growth through the fourth-quarterand in 2017, driven by a combination of organic growth projects, acquisitions andasset drop-downs.

The SNLEnergy Midstream index extendeda nearly 6% gain for the third quarter after a 19% jump in the second-quarter, andmidstream stocks have been decoupling from crude price movements since April.

"Tome, this signifies that investors are once again focused on midstream cash flowfundamentals and how stable such cash flows typically are despite volatility incrude oil or natural gas prices," Eades said.