Crosstex Energy, L.P. (XTEX), connects the growing production domestic production of oil and gas to the downstream petrochemical companies, and also to the new centers of demand such as electricity-generation plants fueled by natural gas and refineries formerly supplied with imported oil, says Michael J. Garberding, Executive Vice President and CFO of Crosstex Energy, L.P.
“We’ve really seen a surge in U.S. energy production. For example, crude oil production is up about 16% year over year, natural gas production is up 26% over the last five years and NGL production is up 20% in the last five years. How do you successfully link this production increase to downstream demand? That’s what we’re really doing — linking that production to where the demand centers are,” Garberding said.
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Garberding says the production from the Bakken and the Utica will eventually be transported by pipeline rather than rail, which presents an opportunity for XTEX. He adds that NGL, a key growth business for the MLP, has seen large potential growth for petrochemical expansions along the Gulf Cost, where about 85% of the petrochemical infrastructure is located.
“When we think about the trends, both from supply and demand standpoints, we can help from a bottleneck perspective to get the product from the supply source — which, again, is in different places than in the past — to the demand center. For instance, how do you move crude oil from the Bakken down to the Gulf Coast? Or how do you move crude oil condensate from Ohio to a demand center potentially in Canada? Crosstex is fulfilling that role by having the infrastructure in those areas and giving the producers and the end users that optionality to get the product to market,” Garberding said.
Eagle Rock Energy Partners, L.P. (EROC) is seeing growth by focusing on large yearly acquisitions, such as last year’s acquisition of BP‘s (BP) midstream assets, and is also devoting $200 million of capital this year to organic growth projects, says Joseph A. Mills, CEO of Eagle Rock Energy Partners, L.P.
“You may have seen, back in the fourth quarter of last year, we closed on a very important acquisition where we bought all of BP’s midstream assets from the Texas Panhandle — very important acquisition, about $230 million acquisition,” Mills said. “Since 2006, when we went public, we have done about $1.4 billion to $1.5 billion of acquisitions. We do, typically, one very large acquisition per year, anywhere between $200 million to $500 million either in the upstream or the midstream business.”
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Eagle Rock Energy is also focused on growing organically, as organic growth projects provide better returns to unitholders in terms of the rate of return on invested capital, Mills says.
“Last year, 2012, we had a record year in terms of capital spend related to our organic growth projects; it was right at about $300 million. This year we pulled back a little bit, so on our menu today we have about $200 million of capital devoted to our organic growth projects. That’s a function of several large projects we completed in 2012, and based on the opportunities we see in front of us, we’ve reduced our total annual spend rate, but we are optimistic there will be some additional projects, so we’d like to see that continue to grow in terms of our organic growth spending,” Mills said.
MPLX LP (MPLX) obtains 90% of its revenue from FERC-based tariffs, and the MLP has no commodity exposure in its business of transporting crude oil, fuel, distillate and jet across its pipelines. Its main client is Marathon Petroleum Corp. (MPC), with about 90% of revenues, and the MLP further sees opportunities to expand with agreements with third parties, says Garry L. Peiffer, President at MPLX LP.
“We are working on ways to both enhance throughputs in business with our major sponsor being Marathon Petroleum, and also looking at ways to get more third-party business. Our light-products pipelines — that being gasoline, distillate and some jet — are roughly 65% to 70% full on annual average basis. Our crude oil systems are 75% to 80% full. So even without any capital investments, we can improve our revenues by just higher utilization of those existing assets,” Peiffer said.
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Peiffer says growth opportunities will come from both through organic means and through acquisitions. He adds that MPLX, unlike other MLPs, was not created to repair the balance sheet of a parent company through accounting spin-offs. He also says MPC has an investment-grade rating, and MPLX had no debt after cash on the balance sheet as of the end of 2012.
“We are looking at MPLX primarily as a growth vehicle, not as a vehicle to spin off cash or to generate cash for the parent, but as a vehicle — or a currency in the case of the units from the partnership — that we can now go out and acquire logistical assets that for most companies that are not in the MLP space are rather pricey, but because, as you probably know, MLPs do not pay any federal corporate income taxes at the MLP level, all of the unit holders pay the taxes,” Peiffer said.
Plains All American Pipeline, L.P. (PAA)‘s asset base and its plan to spend over $1 billion on organic growth projects this year alone show future distribution growth potential of up to 10% CAGR over the next couple of years, says Elvira Scotto, Director at RBC Capital Markets.
“Plains has a well-positioned asset base. Its footprint covers many of the growing oil plays, including the Permian basin, the Bakken shale, the Mississippian Lime and others. Plains has exposure to the strong crude oil logistics environment, and given its well-positioned asset base, its supply and logistics business should continue to generate strong margins as North American crude oil production grows,” Scotto said.
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Scotto sees above-average distribution growth potential for PAA, as the company has plans to spend over $1 billion on organic growth projects this year, cementing Plains as one of Scotto’s top MLP picks.
“We believe this provides visibility into future distribution growth potential. We’re expecting about 8% to 10% distribution CAGR over the next couple of years for Plains,” Scotto said.
Legacy Reserves LP (LGCY) is expected to deliver a total return in the double digits in the next year, and Christopher P. Sighinolfi, Director at UBS Investment Bank, rates this master limited partnership a “buy” name using the investment bank’s total-return approach to investing.
“An 11% total return over the next 12 months generates a ‘buy’ rating under our system today, and so when you have a name like Legacy that yields almost 9% — and we think not only is that going to be paid, but it will grow over the course of the next 12 months — it makes for a very achievable target,” Sighinolfi said.
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Sighinolfi says Legacy benefits from the current backdrop of exploration and production oil and gas companies looking to obtain capital through the sale of some of their assets, especially given the capital intensity of their operations.
“Legacy offers an 8.7% current distribution yield; LINN (LINE) is at about 7.7%. So a significant current income, and then, as I mentioned before, we are seeing a very nice backdrop for acquisition opportunities, given cash flow pressures at independent E&P companies and a desire to use asset sales as a means of closing cash flow deficits. And given the disparity in where these companies trade versus where they are able to buy assets, it’s a very nice accretive opportunity set for them,” Sighinolfi said.
Western Gas Partners, LP (WES) is expected to see 15% annual distribution growth as it continues to acquire midstream assets from its corporate sponsor, Anadarko Petroleum Corporation (APC), says Elvira Scotto, Director at RBC Capital Markets.
“Western Gas Partners is a drop-down story. Anadarko (APC) is Western Gas’ corporate sponsor, and we expect Western Gas to acquire midstream assets from Anadarko about every six to eight months, which we believe provides visibility into future growth,” Scotto said.
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Scotto adds that Western Gas Partners‘ limited commodity-price exposure as well as the company’s organic growth projects will drive additional distribution growth up to 15%.
“Importantly, the majority of Western Gas’ margins are fee-based, so there is very little commodity-price exposure. Western Gas also has organic growth projects that can drive additional distribution growth. For Western Gas, we are expecting annual distribution growth of about 15% over the next couple of years,” Scotto said.
Linn Energy LLC (LINE) developed LinnCo LLC (LNCO) to access capital in order to satiate its appetite for growth, and has piqued investor interest in LinnCo as the company is trading at a tighter yield than Linn Energy, says Christopher P. Sighinolfi, Director at UBS Investment Bank.
“What we have seen most recently is LINN‘s development of LinnCo (LNCO), which was really centered on that question of getting enhanced access to capital. LINN had successfully done three overnight transactions at about $0.75 billion, but their appetite for growth was larger than their ability to finance allowed,” Sighinolfi said.
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Investor interest has risen in LinnCo, as its development has allowed Linn Energy to have a currency that is palatable to institutional investors and opens up their capital access beyond retail networks to institutions and foreign owners, and also to those within the retail network that wish to own LINE in a tax-advantaged account, says Sighinolfi.
“If you were to look at it, LinnCo trades at a yield that is tighter than LINN Energy, so it’s further enhanced the company’s cost of equity as well as allowing it broader access to capital,” Sighinolfi said.
DCP Midstream Partners, LP (DPM) is expected to act as the funding vehicle for its general partner, DCP Midstream LLC, which will provide visibility into future growth as the MLP grows annual distribution and maintains a well-positioned asset base, says Elvira Scotto, Director at RBC Capital Markets.
“DCP Midstream Partners is also a gathering-and-processing MLP, and we view it as a transformational story. Its general partner, DCP Midstream LLC, is the largest producer of natural gas liquids in the U.S. and has a well-positioned asset base with significant growth opportunities over the next few years,” Scotto said.
Scotto says a large part of the revenue at DPM comes from fees, lowering its exposure to shifts natural gas prices, and she expects the MLP to increase the dividend in the coming years.
“Importantly, about 90% of DCP Midstream’s anticipated 2013 margins are either fee-based or hedged, which mitigates commodity-price exposure. For DCP Midstream Partners, we expect about 7% to 8% annual distribution growth over the next couple of years,” Scotto said.
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Magellan Midstream Partners, L.P. (MMP) builds new infrastructure pipelines to service oil crudes moving from the Permian into the Gulf Coast, tapping into the the growing production of oil and gas in North America for organic growth opportunities and helping to drive above-average distribution growth among oil and gas MLP companies, says Elvira Scotto, Director at RBC Capital Markets.
“[A] crude-levered name that we favor is Magellan Midstream Partners. Historically, this has been more of a refined products pipeline MLP, but it has increased its focus on crude. It has become the third largest holder of crude oil storage at Cushing. It’s in the process of converting and reversing a portion of one of its refined products pipelines to crude oil service, and it’s also in the process of building a new crude oil pipeline to move Permian basin crude oil to the Gulf Coast,” Scotto said.
Scotto expects the shift from refined to crude to result in double-digit distribution growth for Magellan, especially as the master limited partnership has a clean balance sheet.
“Magellan has a strong backlog of growth projects, spending close to $1 billion this year. We also like Magellan’s low cost of capital; Magellan has an investment grade balance sheet and does not have general partner incentive distribution rights. For Magellan, we’re forecasting annual distribution growth of about 10% over the next couple of years,” Scotto said.
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BreitBurn Energy Partners L.P. (BBEP), an upstream MLP that had an active last year in the acquisition market, is expected to use $900 million to make additional acquisitions this year, says Daniel Katzenberg, Executive Director and Senior Analyst for Oppenheimer & Co. Inc.
“They currently have about $900 million available to make acquisitions this year. We expect that they’ll most likely use the majority of that and make accretive acquisitions…I expect to get some acquisition announcements soon, and possibly of a large size, that will really improve their outlook,” Katzenberg said.
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BBEP also had a secondary offering a few weeks back, and the company is well-positioned from this point going forward with a lot of liquidity available for them to make attractive acquisitions alongside the rest of the upstream MLP group, Katzenberg says.
“It’s a great time for this group because the C-Corp E&Ps have really outspent cash flow for several years now and have been forced to dump conventional, more mature assets so that they can fund their shale programs, and these conventional assets are perfect for the upstream group, so I expect another very busy year on the upstream side as far as asset acquisitions,” Katzenberg said.
