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Major pipeline companies positioning for improving cash flow, boosting dividends

Midstreamcompanies could be better positioned to grow their distributions as cash flowpressures show signs of abating with rising stock values and commodity prices.

BrianCollins, senior analyst with S&P Global Market Intelligence affiliate RegulatoryResearch Associates, expects an overall cash flow improvement in the midstreamsector over the next few quarters. He tagged Williams Cos. Inc., MPLX LP and Enable Midstream Partners as pipeline players that arelikely to bolster their cash flows first.

"Itmay not be apparent until we get into the second half of 2017 or 2018. But I dothink we will see a hint of improvement in the 12-month period ending September30," he said in an interview.

"Asinvestors become more comfortable, not only are we not going to see wholesalecuts in distributions, but we will also see a modest distribution growth in2017. I'm estimating around a 3% to 5% distribution growth in 2016, and I seethat closer to 5% to 7% in 2017," Chris Eades, managing director ofClearBridge Investments LLC, said in an interview, referring to the fundmanager's midstream holdings, which include Spectra Energy Corp and .

Eadesnoted that midstream stocks "were clearly discounting a negativedistributable cash flow year over year" in February, when stocks in thesector plunged to their nadir after oil prices dipped below $30 a barrel. Crudespot prices have now pushed through the $45 mark, and the Alerian MLP index ofmidstream stocks has grown by more than one-third since its 12-month low Feb.11.

"Thoughour expectation is for oversupplies of oil and natural gas to persist for sometime, downward pressure on DCF performance may be lessening with somewhatstronger commodities trends this year," Collins said in an Aug. 30midstream industry notein which he found a slowdown in deterioration of midstream companies' DCFcoverage.  

Collins is optimistic about the cash flow promise of Enable'sstrong presence in the Permian and SCOOP basins. Meanwhile, MPLX anticipates a step up ingathering and processing volumes in the Marcellus and Utica shale plays throughthe rest of 2016, while hopes to monetize its stake in an olefins facility in Geismar, La., througha sale or a long-term tolling agreement. Williams Partners also to the debt-laden

Collinsalso named Spectra, the target of a pending acquisition by Enbridge Inc., as a top pick for near-term cash flowgrowth. Spectra's stock has gained 50% year over year, and the company is ontrack to post cash EPS of $2.42 in 2016, rising to $2.71 in 2017 and $2.84 in2018, according to Capital IQ estimates. Enbridge CEOAl Monaco said in announcing the transaction that the combined company wouldhave 10% to 12% annual distribution growth through 2024.

Gatheringand processing companies have especially faced pressures to maintain highercoverage ratios than interstate pipeline operators, owing to risks of revenueloss from drillers seeking price readjustments on pipeline contracts or troubledproducers pushing toditch those contracts altogether.

Athawing of capital markets activity could also contribute to cash flowincreases and coverage ratio improvements for midstream entities, according toEY's U.S. master limited partnership leader, Greg Matlock.

Matlockjoined other WallStreet observers in commending Noble Midstream Partners LP's to into the primary markets aftermore than a year of zero IPO activity in the midstream sector. "Theexpectation is that others could likely follow," he said in an email."[Assuming] the current landscape remains stable and operationalefficiencies increase, an increase in cash flow could certainly result."