We thought yesterday’s Analyst Day (06/05/18) had more positives than negatives on the margin, and the Permian strategy was articulated well. 2018 EBITDA and capex guidance were reiterated, as were expectations for 14-15% fee-based EBITDA growth in 2019. An update on likely acceleration of capex will be given with Q2. PAA is the poster child for what’s going on in the Permian right now – a lot of exciting growth potential, but also a lot of uncertainty given infrastructure constraints and intense competition driving down long-term tariffs. We do not think the premium valuation on 2019 EBITDA is warranted given the risks and maintain our Underperform rating.
Search Coverage List, Models & Reports
Search Results1-10 out of 31
With U.S. production increasing fast, several big simplification announcements, and oil prices much improved, the fundamental tone was positive at MLPA. Turnout was reportedly higher than last year even with each of the large C-corps still sitting out of the event. That said, FERC and structure were clear overhangs. On FERC, we heard more questions than answers. Structure / simplification was discussed at nearly all our meetings and often overwhelmed the conversation. We think continued (and speedy) resolution around FERC / structural issues should help bring investor focus back to a strong fundamental set up, but there will be uncertainty in the meantime.
Last week we had the opportunity to meet with INGAA and the staff of FERC to review the latest on the changes on the pipeline regulatory policy front and the next steps to watch for. Overall we got a better understanding of the legal constraints FERC was under that led to the decision to change MLP tax policy to eliminate the tax allowance for cost based pipelines. We came away with the view that there is not much room to change the policy. In that context it is not a surprise that in front of the 501-G filings this fall that already many pipeline MLPs are moving toward corporate structures - SEP, EEP, WPZ, BWP, and TCP. Despite the MLP tax policy change being unwelcome, we still believe the acceleration of structural changes is a good thing for the sector.
The annual MLPA conference, newly renamed as the MLP and Energy Infrastructure Conference (MEIC), will be held May 22-24 in Florida. Many MLP management teams will be in attendance. This report is a helpful guide for investors attending and includes questions to ask for covered companies, as well as summary model information. Key industry topics are discussed below with company-specific topics in the body of the report.
PAA’s Q1 results AMC yesterday (05/07/18) beat consensus but were in line with our forecast. Facilities was strong, but Transportation volumes were light with Permian up <1% QoQ, largely due to timing / weather issues. Importantly, PAA talked down the potential for near-term windfalls from the massive widening in Permian differentials in 2018 due to hedging and other factors. Results at S&L are even expected to be down YoY in Q2! While PAA reiterated guidance and still sees S&L upside in 2019, their commentary hurt the near-term bull case and may remove some excitement from the stock.
PAA stock has outperformed the AMZ by 27% YTD, fully recouping the 24% underperformance during a dreadful 2017 which saw two guidance cuts, a distribution cut, and a Moody’s downgrade to junk. Memories are fading fast despite PAA trimming 2018 guidance in February. The stock now trades at one of the highest EV/EBITDA multiples in our coverage on a 2019 outlook that already bakes in big growth, but still need to be executed upon. We do not think investors should pay a premium for PAA. The company’s Permian position is solid, but it comes with execution risks, low barriers to entry, and falling competitive tariff rates. Downgrade PAA / PAGP to UP from PP.
After a tumultuous March, MLP markets turned over the past two weeks alongside a run in crude and widening spreads. The last time we saw $70 Brent (outside a few days in early Jan) was December 2014. That said the AMZ remains an underperformer vs. the XLE, oil, and the broader market YTD and valuations remain attractive - the AMZ is still due for a catch-up trade. We see another generally constructive earnings season - Q1 DCF / unit growth up 7.4% YoY on operational leverage, projects in-service, and a more normal winter. The FERC tax order remains an overhang, but recent comments by Commissioner Chatterjee and charged industry feedback signal that more clarity might be forthcoming.
FERC’s proposed policy change to no longer allow MLPs to recover a tax allowance in pipeline rates is an unwelcomed overhang. The timing is bad. Fundamentals had just turned more positive and Q4 results were strong, but stocks have lagged due to a lack of sustained investor sponsorship and MLP fund inflows. Near-term, the new uncertainty and downward rate pressure created by FERC’s move hardly seems likely to now inspire new buying interest in the space. We think the 4.6% drop in the AMZ is a little overdone on a fundamental basis. That said, relative stock moves seemed generally rational with C-corps outperforming and more exposed MLPs down the most.
While Q4 results were in-line, PAA reduced 2018 guidance by $200M with fee-based down $100M and S&L now at the low-end of the prior range. The weaker S&L outlook isn’t too surprising given challenging Midland-Cushing spreads and backwardated curves. However, the reduction in the fee-based businesses is disappointing. If numbers are being cut after oil rebounds to the $60s and production is growing fast, it’s hard to be optimistic. Note, while there may be confusion amongst investors, PAA clearly already updated guidance in August for the $700M of pending / in-progress asset sales – so the lower outlook shouldn’t be related to known sales. 2018 guidance weakness is at Facilities which is down $69M YoY – we expected growth from the Fort Sask projects to more than offset asset sale losses. Transportation EBITDA is up 19% YoY in 2018 with volumes up big. 2018 expansion capital was increased by $700M to $1.4B – likely Cactus II.
The AMZ is up more than 10% year to date and has outpaced the broader market by about 400 bps. Investors have started the year on a cautiously optimistic note. Fundamentally, things look attractive and we think a return to DCF/unit growth with Q4 earnings should set an encouraging tone while sector valuations still appear reasonable. KMI kicked off the season with a solid print, a good read-thru for the broader space, although project issues were a downside. We will be looking for companies to maintain discipline around self-funding plans, de-leveraging, higher coverage, and simplification. Tax reform will also be a focus for cost of service pipelines as well as the long term evolution toward C-corps. Looking forward, we see roughly 6% DCF/unit growth in 2018, which when coupled with 7% average distribution yields offers attractive total return for a sector with an improving fundamental backdrop.
- 1 of 4
- next →