More Useful Earnings and Guidance From the MLP Sector

Among energy infrastructure companies of note delivering earnings this past week was Spectra Energy (SE) and Spectra Energy Partners (SEP), the Master Limited Partnership (MLP) it controls. The results were good, coming in slightly ahead of estimates. More important was that their backlog of new projects remains robust. Last year SE management produced a soundbite “Drive to 35” forecast, meaning they intended to secure $35BN in new projects by 2020. In their Analyst Day (which came a day after earnings), they reported that almost half of this goal is already in hand. This is important because the bear case for MLPs and U.S. energy infrastructure is that future growth will be cut as E&P names respond to the oil collapse by reducing spending. So far that isn’t panning out among the individual names we follow that have reported recently. There have been modest reductions in planned capex, such as Kinder Morgan (KMI) reducing new investment related to its CO2 business, but the changes have been minor, <5% of planned expenditure.

SE currently pays a $0.37 quarterly dividend, generating a yield of just over 4%. Management is confident they can grow the dividend at $0.14 annually through 2020 over the next couple of years while maintaining coverage above 1X, which is growth of around 9%. Also notable was that the majority of the planned capital expenditure (capex) will take place at their MLP, SEP, where it will be funded. In other words, no new equity issuance for SE which owns the General Partner (GP) and Incentive Distribution Rights (IDRs) for SEP. Asset growth at SEP will increase cashflows to its controlling entity SE — just as asset growth at a hedge fund invariably benefits the hedge fund manager. SE does much more than simply collect cash from SEP, but dividend growth at SE is going to be substantially funded  by other people’s money coming in to SEP.

Plains All American Pipeline (PAA) and its publicly traded GP, Plains GP Holdings (PAGP), both reported earnings. PAA reduced its planned capex for 2015 by 9% compared with 2014 as they reassessed certain projects with today’s lower oil price. They also reduced the midpoint of their EBITDA guidance by 6% compared with figures provided in November. This in turn reduced forecast distribution growth at PAGP to a still robust 21%. Management is well regarded and market reaction to this seemed to conclude that they were being conservative. PAGP currently yields 3%, which while lower than many other energy infrastructure securities is still attractive in our opinion because of the very high growth rate. Their 4Q14 distribution was up 27% over the prior year.

In sum, these two businesses are adapting to lower oil prices but are largely continuing along a similar financial path to last year. We prefer the GPs because of their preferential economics and governance rights (just as hedge fund managers are better investments than hedge funds). Of the names mentioned, we are invested in SE, KMI and PAGP.

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