(Bloomberg Opinion) -- Relying on master limited partnerships in recent years has been great for insomnia – as in, causing it. Two MLPs (and one ex-MLP) hosting earnings calls Wednesday morning showed why.
Western Midstream Partners LP went first. It was not one of those great-quarter-guys calls, what with the company missing estimates by a mile and also cutting guidance. Having dropped as much as 16% in early trading, the units later stabilized (in an ICU sort of a way) at just 12.5% lower as the morning wore on. The company blamed most of the guidance cut on lower volumes running through its pipes as Permian-basin producers took an unusual amount of downtime, due in part to a lot of “weather-related” factors such as lightning strikes.
It doesn’t help that this all comes less than a year after Western Midstream bought a big slug of assets from parent Anadarko Petroleum Corp., collapsed its corporate structure with promises of raising distributions by 6%-8% in 2019 (now 5%-6%), and changed its CEO. Plus majority unitholder Anadarko is due to soon be part of Occidental Petroleum Corp. And Oxy is expected to sell much (or all) of the stake in Western Midstream to help pay down the resulting debt. In short, now is an especially inauspicious time for lightning to strike the earnings outlook.
Oxy, of course, will soon join the ranks of those relying on MLPs because of the Anadarko deal. The of its pro-forma stake in Western Midstream just dropped by roughly $1 billion in a matter of hours. Granted, offloading some or all of the MLP still makes a lot of sense, as it would let Oxy deconsolidate $7.1 billion of net debt on Anadarko’s balance sheet. But a billion dollars is a billion dollars, and Oxy can use every single one as it strives to justify the deal. It was one of only a handful of oil stocks down on a generally bullish morning for the E&P sector.
It didn’t help that Enterprise Products Partners LP, the biggest MLP by market cap, hosted its own call soon after Western Midstream’s. Asked directly whether Enterprise was also seeing the impact of weather issues on its clients in the Permian basin, the answer was no (so Western Midstream was really unlucky, it seems). What’s more – and a hat-tip here to Hinds Howard, midstream portfolio manager at CBRE Clarion Securities, for pointing this out – CFO Randy Fowler dismissed a question about M&A by noting organic expansion offered better growth for less capital. None of this suggests Enterprise is champing at the bit to buy any stake in Western Midstream at a high price.
More broadly, it also didn’t help that Enterprise just reported its seventh quarter of better-than-expected earnings in a row. The resulting 3% gain Wednesday morning took its units to their highest level in almost five years – that innocent early fall of 2014 before oil prices crashed and MLPs entered the meat grinder.
How can good news from Enterprise be bad news? Because of this:
In the intervening five years, Enterprise raised its annualized distributions by 23% while also reducing its leverage at a time when many of peers slashed payouts to protect balance sheets. Yet, now offering a yield of almost 6%, it trades at a 10% discount to the S&P 500 on Ebitda multiples versus a 74% premium five years ago. Enterprise is a good company in a neighborhood – MLPville – most folks now just want to avoid. It also happens to be a very large resident, making it tough for individual fund managers to keep loading up (see this).
As if to drive this point home, ex-MLP Oneok Inc. also fired up its webcast Wednesday. At just under 8%, it beat earnings estimates by almost exactly the same margin as Enterprise. Yet Oneok’s stock jumped by almost 5% – taking it not to where it was five years ago, but close to its recent all-time high. At almost 14 times Ebitda, it trades at a 15% premium to the market, having been re-rated sharply upward in mid-2017, when it ditched its MLP structure in favor of a regular C-Corp.
The latter is a more bustling neighborhood these days, offering a bigger pool of capital on cheaper terms (in return for better liquidity and governance). Barring the equivalent of a lightning strike, that fundamental advantage over MLPs isn’t likely to change soon.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.
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