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'Maintenance quarter' for midstream drew bright line between haves, have-nots

Large midstream energy companies had a period of "maintenance" in the second quarter, as the market got used to relatively low oil prices and changing business structures in the sector.

Most of the largest oil and natural gas transporters in North America reported relatively flat adjusted EBITDA and distributable cash flow year over year, measures the midstream finance community uses to look at the cash those companies are generating and what they have available to return to their stockholders.

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"This was almost like a maintenance quarter. ... It was right down the middle for the most part," MUFG Securities Americas Inc. analyst Barrett Blaschke told S&P Global Market Intelligence. "There’s power to consistency, I think, right now. You're seeing a very broad spread between the haves and have-nots, [seeing] who sort of has drop-downs and a little more certainty.”

Acquisitions helped Enbridge Inc., which recorded the largest increase in adjusted EBITDA versus the year-ago period out of the large midstream companies surveyed by S&P Global, see significant growth during the second quarter, the first full quarter with Spectra Energy Corp and Spectra Energy Partners LP assets in the fold. MPLX LP's adjusted EBITDA and distributable cash flow, meanwhile, experienced material increases, attributed to record processed and fractionated volumes and sponsor Marathon Petroleum Corp.'s asset drop-down strategy.

At the other end of the spectrum, Plains All American Pipeline LP's supply and logistics segment recorded a 172% decline in adjusted EBITDA year over year, with a loss of $28 million that surprised analysts. Plains also announced that the partnership will consider a dividend cut.

S&P Capital IQ estimates also showed a mixed bag for second-quarter revenues and earnings per share, but most of the largest companies still missed their consensus normalized EPS estimates.

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Still, MUFG's Blaschke said the absence of retail buyers and institutional investors' uncertainty during the second quarter was noticeable in the master limited partnership space, as more midstream MLPs become C corporations. "Between Kinder Morgan Inc. and ONEOK Inc., you're taking some big dollars out of the structure," he noted.

ONEOK announced in February that it is buying out the remaining public stake of ONEOK Partners LP that it did not already own, while Kinder Morgan decided in late 2014 to absorb its MLPs.

During the second quarter, midstream investors were also deterred by low commodity prices that drove down share values and contributed to a nearly 8% loss in the Alerian MLP Index, which tracks major midstream MLPs.

Even though analysts generally expect midstream stocks to rebound, Mizuho Securities USA LLC's Brian Zarahn said he sees no upturn on the horizon unless oil nears $50 per barrel and stays that way. "I think the Alerian speaks for itself. We’re at a 52-week low today with no likely near-term catalyst between now and third-quarter earnings," he said. West Texas Intermediate crude oil settled at $47.59 on Aug. 15.