Over the last year or so, Plains All American Pipeline — a large, crude oil-focused master limited partnership (MLP) — has twice made significant changes to its corporate structure and distribution process to free capital to fund organic growth, reduce debt, and strengthen distribution coverage. The changes are efforts to fix a problem: As oil prices plunged, PAA’s distribution coverage fell below 100% in 2015 and 2016, forcing the company to add debt and issue equity to raise cash. An initial restructuring that Plains undertook in mid-2016 included eliminating the incentive distribution rights (IDRs) payable to its general partner — the IDRs had been draining $620 million per year. (For more on IDRs, see Changing Horses in Midstream.) The change resulted in a 21% reduction in the distribution to limited partners as PAA set a minimum annual distribution coverage target of 115%. But plunging profits from the company’s Supply & Logistics segment eroded its coverage to 99% in 2017, triggering another comprehensive review of how it calculates its distribution. In late August, Plains announced a 45% reduction in the annual distribution, from $2.20 per unit to $1.20 per unit, and said it would base future distributions only on the results from its fee-based Transportation and Facilities segments. Today we preview our new Spotlight Report on Plains, which provides a detailed analysis of the likely future performance of all three segments of this major midstream MLP.
Posts from Tom Biracree
Hurricane Harvey and major flooding in Houston and other areas may affect energy markets and lead the 21 exploration and production companies in our Oil-Weighted Peer Group to readjust their 2017 investment programs. But in the weeks leading up to the Lone Star State’s most catastrophic weather event in decades, these E&Ps remained committed to their sharply accelerated 2017 capex plans. Their updated guidance issued with first-half 2017 earnings releases reveal a 44% increase in 2017 capital spending over 2016’s level to $26.5 billion, only a 2% reduction from the $27 billion initially budgeted for this year. The peer group also stayed confident in the long-term profitability of the major U.S. resource plays, which are receiving 80% of their 2017 capex, despite investor concern about lower prices that have triggered a 23% decline in the median enterprise value per barrel of oil equivalent for the Oil-Weighted peers since December 2016. Today we continue our review of updated capital spending plans by 43 U.S.-based E&Ps, this time with a look at companies that focus on oil.
Midstream giant Enterprise Products Partners (EPD) has attracted significant investor interest because of its simplified structure, 51 consecutive quarters of dividend growth and strong coverage — $2.7 billion in retained cash in the past three years. The company, with a market capitalization of $58 billion, has also quietly continued to build out its large integrated midstream network despite the plunge in commodity prices, investing almost $18 billion in organic growth projects and acquisitions in 2014-16. The end result is impressive: Enterprise is now connected to every major U.S. shale basin, every U.S. ethylene cracker and 90% of the refineries east of the Rocky Mountains. As a result, the company is well positioned to benefit from the recovery in oil and gas production, especially in the Permian Basin and Eagle Ford Shale; the surge in hydrocarbon exports; and the rapid growth of the U.S. petrochemical industry. Today we discuss highlights from the second part of our new Spotlight analysis of EPD, which focuses on the company’s Crude Oil Pipelines & Services, Natural Gas Pipelines & Services and Petrochemical & Refined Products Services segments.
Of the 43 major U.S. exploration and production companies we have been tracking, the 13 diversified companies — the ones with a balanced mix of crude oil and natural gas reserves — engineered the most dramatic financial reversal in the first quarter of 2017, generating $4.6 billion, or $11.46 per barrel of oil equivalent (boe), in pretax operating profit after almost $65 billion in pretax losses in 2015-16. These producers, like their oil-weighted and gas-weighted counterparts, benefited from higher prices and sharply lower drilling and completion costs and lease operating costs. The magnitude of the turnaround was driven by exceptional results from giant ConocoPhillips, which generated more than one-third of the total first quarter 2017 pretax operating profits for our 43-company universe and nearly one-quarter of the total cash flow. The remaining 12 diversified companies reported $1.3 billion in first-quarter pretax profit after $54 billion in losses over the past two years. Today we look at how the turnaround efforts of 13 diversified oil-and-gas E&Ps have been paying off.
Midstream giant Enterprise Products Partners, with a market capitalization of $57 billion, has attracted significant investor interest because of its simplified structure, 51 consecutive quarters of dividend growth and strong distribution coverage — $2.7 billion in retained cash in the last three years. The company has continued to build out its large integrated midstream network despite the plunge in commodity prices, investing almost $18 billion in organic growth projects and acquisitions in 2014-16. Enterprise (NYSE: EPD) is now connected to every major U.S. shale basin, every U.S. ethylene cracker and 90% of the refineries east of the Rocky Mountains. As a result, it is well positioned to benefit from the recovery in crude oil and natural gas production, especially in the Permian and the Eagle Ford; continuing NGL and crude oil exports; and the impending growth of the U.S. petrochemical industry. Today we discuss highlights from the first part of our new Spotlight analysis of EPD, which focuses on the company’s NGL Pipelines & Services segment.
After reducing capital expenditures by 70% in 2014-16, U.S. exploration and production companies (E&Ps) have collectively taken their foot off the brake and stomped on the gas, boosting 2017 capital outlays by an impressive 42% to kick-start production growth. At first glance, the move may seem somewhat reckless. After all, E&Ps just weathered a crisis caused by plunging oil prices partially through impressive capital discipline, and the price for benchmark West Texas Intermediate (WTI) crude oil has once again drifted below $50/bbl over concern that U.S. output may be rising too fast. But as we’ve learned from a new report by our friends at Bloomberg Intelligence, most major U.S. oil producers paired their increased investment with significant oil-price protection, aggressively snapping up hedges in late 2016 as oil prices were buoyed by the announcement of planned OPEC output cuts. Today we review BI’s examination of the efforts by many E&Ps to lock in $50/bbl-plus prices for much of their 2017 production.
Adapting to a new era of low crude oil and natural gas prices, U.S. exploration and production companies, have been reconfiguring their portfolios to focus on a small group of shale plays whose production economics can hold up even through tough times. Among the largest producers, no company is a better example of this trend than Anadarko Petroleum, which has sold over $12 billion in assets since the beginning of 2014—including properties that generated one-third of its 2016 production—to focus 80% of its capital investment on just three U.S. plays. Since year-end 2013, Anadarko has lowered its net debt by 16%, or $8 billion, and it exited 2016 with over $8 billion in liquidity. The company forecasts 15% compound annual production growth through 2021 at current prices, with the liquids weighting of output increasing from 44% in 2015 to 65% in 2021. Today we zero in on one of the 43 E&Ps whose new-era strategies are detailed in RBN’s new Piranha! market study.
Enable Midstream Partners stands at a crossroads. It has great assets –– natural gas gathering and processing operations in the Anadarko, Arkoma, and Ark-La-Tex basins; a crude oil gathering system in the Williston Basin; and interstate/intrastate gas pipelines that ship natural gas from its gathering regions to the Texas Panhandle and Illinois. The company also has an excellent position in gathering systems and processing plants in the prolific STACK and SCOOP plays in Oklahoma. But everything is not rosy. Earnings from STACK/SCOOP are being offset by production declines in its other areas of operation. On top of that, CenterPoint Energy, which owns 55.4% of Enable’s limited partnership units, is seeking to divest its shares, which would bring a new majority owner into the picture. In today’s blog we review our latest Spotlight analysis.
The 450-Mb/d Dakota Access Pipeline (DAPL) has broken away from the pack of out-of-the-Bakken crude takeaway projects. On August 2, Enbridge Inc., through its master limited partnership Enbridge Energy Partners, agreed to take a large stake in DAPL from Energy Transfer Partners (ETP) and Sunoco Logistics Partners (SXL), a move that suggests Enbridge’s own 225-Mb/d Sandpiper Pipeline may drop out of the race soon. Joining Enbridge in the $2 billion deal is Marathon Petroleum, its former joint venture partner and anchor shipper on Sandpiper. Today, we consider these recent developments in the long-running effort to transport North Dakota crude oil to market more efficiently.
U.S. oil and gas companies currently have hedge protection in place for less than one-fifth of their expected 2016 production, and the strike price of the remaining derivatives is significantly lower than in previous years. With a bleak gas price outlook for 2016, the result could be even more severe capital spending reductions, potential production curtailments, and increased financial stress for mid-size and smaller firms. In today’s blog, we examine what has happened to producer hedging protection and the implications for capital spending and production trends.