Darren McCammon has a few articles out this week on how a federal drilling permit ban might affect different midstreams (maybe producers, too, but I didn’t look for those). It starts on October 9 with an article about how such a ban might affect WMB and MPLX. He starts with the premise that a Biden ban probably wouldn’t be retroactive, it would be prospective. On this assumption, the effect on oil/gas production would be delayed because of all the permits that have already been issued. He also thinks any prospective ban would be temporary or that a lot of exceptions would be allowed. (Example: a ban on federal lands in the western Niobara Basin would result in a natural ags shortage in the Pacific Northwest, causing Oregon and Washington to turn Republican. Not sure I buy that.) Also, it would lead to reliance on natural gas piped in from Canada and that would be politically unattractive. Then he goes on the say that a federal ban on new drilling would move producers to the Permian. Then to specific companies _ WMB – the ban would hurt WMB with its Niobara operations, and help Canadian companies. But WMB’s Transco pipeline still process enough cash flow to cover the dividend so he thinks the damage would be limited. MPLX – Similar to WMB, MPLX’s operations that are not dependent on federal lands will benefit, and offset any damage caused by the Federal ban.
Then, on October 12, the identical article, but now with a focus on AROC. AROC’s compression business does not depend much on federal lands ldn’t be hurt much; plus its focus on the Permian would benefit. That’s about it, plus Mr. McC likes AROC’s business and dividend coverage.
CCR – October 12 article by Jeff Boyd (new to me and nothing to sell), Bullish rating, 7 comments. A bullish rating on a col miner MLP? Pretty cool. CEIX is a corporate coal miner that was spun out of CSX a few years ago. It owns the majority interest ( 75%) in some coal mines, plus some export assets and some other coal mining stuff. It also owns the majority of CCR, which is an MLP that owns the other 25% of CEIX’s coal mining complex (but none of the other CEIX assets). Very solid company in a declining industry, and COVID caused losses in the first half and CCR suspended its high distribution. IT was paying $ 2/unit annually and it is now trading at $ 3 and change. So maybe a cigar butt investment, if you think things will get better when COVID is in the read view mirror. That apparently is Mr. Boyd’s approach – he compares CCR to a 60-year old facing mortality but who still has some good years left. Just not too many of them. The article has a nice intro to the company, with some discussion of numbers and lots of warnings in bold print. Then some charts to show that until COVD, CCR was cash flow positive in all quarters which gives him hope. Plus, EIA data shows that national coal usage by utilities spiked in July/August so that should help. Overall, he guesses there is a 25% bankruptcy risk and a 75% chance of 4 average years, in which case you get a value of $ 5. Very general article, lots of fair warnings and I put little faith in his estimate of value. I’m sure there is value there (just like with ARLP, which I also used to own) but I think the lenders and the retirement/health care funds for the miners will get most of it.
CEQP – October 16 article by Power Hedge, Neutral rating, 21 comments. CEQP maintained its distribution this week but this article was presumably written before that announcement came out and doesn’t mention it. CEQP did an investor presentation in early September, and this article summarizes that presentation. Intro – CEQP is a mid cap midstream with operations (largely gathering & processing) in basins all over the country. This diversity helps – some basins are mostly natural gas, others mostly oil; some high cost, some low cost. And CEQP has different major customers in each basin. So you get some overall stability (although when everything goes to hell, like earlier this year, the diversity doesn’t help much). Also multiple businesses – in addition to G&P, they do transportation & storage, and marketing. Like everyone else, CEQP has slashed cap ex plans, which will help with leverage. Leverage is currently at 4.2X “cash flow” per PH, but I’m not sure if that number means EBITDA. I assume it does but it’s not clear. DCF coverage ratio is 1.6X so PH thinks the distribution is safe. And as I said, the company just announced its unchnged distribution.
ET – October 12 article by Long Player, Neutral rating, 187 comments. The rating may be neutral, but as with LP’s myriad of anti-ET posts recently, this one is just short of a rant against the company. Things are bad, Mr. Warren leaving the CEO spot is bad, the new co-CEOs are bad, and the only question is how much will ET cut the distribution. Plus, there’s a whistle blower who is reporting that ET did bad things in building the ME2 pipeline in PA.
ET – October 12 article by Daniel Thurecht, Very Bullish rating, 67 comments. Per SA, this is Mr. T’s 13th bullish post about Et this year and the 4th in the last month or so. 1. The shift in the top positions does not signal any change in policy. 2. The distribution is still safe. 3. A distribution cut is already priced into the units, so if it happens, no problem. 4. And if you are worried about a cut, buy the preferreds. They should rally to par if the common distribution is cut.
ET – October 13 article by Bill Zettler, Bullish rating, 196 comments. Dangerous title – “ET – What’s the Worst that Can Happen?” Don’t tempt fate. 5 things to consider when deciding to buy ET: 1. A distribution cut is possible but not likely. No discussion. 2. The DAPL Environmental Impact Statement won’t find any problems. 3. Pipeline regulations are confusing. “Any pipeline company building a new pipeline today has to fudge, skip, assume gray areas, and re-interpret rules to fit the situation in order to get the job done.” (Me – I don’t think that’s a really good argument to use in a court room.) 4. Pipelien safety has improved over the last 20 years. 5. The challenge to the DAPL pipeline involves where it crosses under Lake Oahe. But there are 7 other pipelines under the lake, built years ago with inferior technology. If DAPL is so bad, why are the other 7 allowed?
ET – October 14 article by Trapping Value, bullish on the preferreds of ET and ENB, 140 comments. ENB and ET are superficially similar – both move oil & gas around and both are huge. ET is US-only and ENB is US and Canada. But they are valued entirely differently by the market. Why? ET trades at an EV/EBITDA ratio of 8X, while ENB is valued at twice that ratio. Same thing for their comparable yields and comparable price/DCF ratios. ENB is valued much higher. ENB has more debt on a debt/EBITDA ratio basis. ET has regulatory issues, but TV doesn’t think this is the big problem. Instead ENB has 3 advantages: 1. ENB essentially has a monopoly in Canada and that has helped this year. 2. ENB has stronger customers – they are higher cost producers, but the decline rates in production are much lower than US producers. 3. And ENB’s return on its growth cap ex has been much better than ET’s. So TV semi-likes both companies but prefers their preferreds.
And speaking of ENB, Dividend Athlete has an October 14 article, Bullish rating, 110 comments. I don’t usually follow ENB and I know very little about it. But it has outperformed just about every US midstream over the last few years. Because it didn’t fall as far earlier this year, it also hasn’t rebounded as much as the other midstream names. Anyway, if you’re interested – the usual arguments – 98% of EBITDA is fee-based and 95% of its customers are investment grade. Most of the numbers in the article are in Canadian dollars, which confuses me so I’ll just tell you that the article is there.
EVA – October 15 article by Harrison Schwartz, Neutral rating, 5 comments. A brief intro to EVA, saying he likes the yield but it trades at the upper end of its valuation ratios so it may not be a good time to buy. EVA takes wood in the US southeast (supposedly garbage wood), turns it into pellets and sells the pellets to European coal-fired power plants to reduce their carbon footprint. It has been growing rapidly, with new sales into Asian markets, but it has its detractors who say burning wood is no better than burning coal. Mr. Schwartz says the critics may have a point because it takes a long time to regrow the trees. I think he misses the point about EVA being green or not, but that’s not important to his neutral rating.
KMI – October 15 article by Paul Franke (new to me; nothing to sell), a rare Bearish rating, 146 comments. 2 ½ years ago, Mr. Franke wrote a bearish post about KMI, saying it had too much debt, and now he’s taking a victory lap. That’s about it. Since March 2018, KMI has underperformed the S&P, the Canadian midstream sector, and has outperformed EPD. Mr. Franke still doesn’t like it. (Me – if you included ET in the comparisons, KMI would look like a star.)
FEI – October 12 article by Trapping Value, Bullish rating, 44 comments. Now that my September 15 and October 15 tax returns are filed, I may go back to tracking MLP CEFs. FEI is a First Trust MLP CEF, with 2 nuances. 30% of its investments are in utilities and it’s leverage is on the low side – 19.7% currently. One thing that isn’t unusual about it is how far it has dropped this year – it’s the best performing MLP CEF per TV, but it’s still down 60% YTD. TV compares it to passive MLP funds and active MLP CEFs over the last 5 years and it has mostly outperformed everyone because of its utility investments. It yields 11% which sounds high considering its heavy weighting to 4%-yielding utilities, but 1. It trades at a large discount to NAV. 2. It sells options (Me – this year, it would have been better off selling MLPs). And 3. It has a little leverage. So TV likes it.
TEAF – October 12 article by Nick Ackerman, Neutral rating, 48 comments. Speaking of MLP CEFs, TEAF is a Tortoise fund that isn’t exactly an energy fund. It invests in energy, infrastructure, and other “essential” assets. NAV performance YTD is -15%, great by MLP CEF standards and about average for funds that are similar to TEAF. But on a price basis, it’s down 30% as the discount to NAV has risen. I point out (as does the article but Mr. A doesn’t connect the dots) that 30% of TEAF’s assets are not publicly traded, so maybe the NAV number is soft. Mr. A also likes the fact that the fund has a “soft” termination date, so if you hold until that time, you will recover the discount. That date is in 2031 so I don’t put much faith in it, and Mr. A says it’s a small benefit. There’s a bit more in the article, if you’re interested.
NGL – a news story about UBS cutting its rating on NGL to sell. I only mention it because it mentions an adverse contract development involving a bankruptcy proceeding of one of NGL’s customers, if anyone owns NGL. It didn’t sound like that big a deal to me, but I know nothing about NGL or its situation.
PAA – October 13 article by Michael Boyd, Very Bullish rating, 61 comments. Another funny title this week: “PAA – Buy the Sell Off.” Hey, the whole year has been a sell-off for PAA and most other midstreams. Thesis – PAA is oversold (Me- who isn’t?), so buy. 1. PAA is heavy on storage and storage is a good place to be. In the last 10 years, US oil production is up 110%, but storage capacity is only up 15%. Because of this, several recent acquisitions of storage-heavy midstreams have been at decent multiples of EBITDA. 2. Investors tend to like pipelines over storage, but that may be changing. Lots of pipes were built in the last 5 years and the original contracts for those pipelines will start falling off for the next 5 years. That’s a risk, with lower oil prices. Storage is still sort of scarce. 3. Plus, PAA is big and interconnected around the various oil regions so it can deal with big producers who have multi locations. 4. Offsets – PAA has cut its distribution 3 times in the last 4 years, leaving investors with a bad taste in their mouths. 5. PAA’s supply & logistics business has been all over the place, profit-wise, leading to seriously inconsistent overall results. Not good. 6. But things will eventually get better, and today’s valuation (7X EBITDA) is too low.
PBFX – October 11 article by Daniel Thurecht, Bullish rating, 21 comments. PBFX is a support midstream to its parent company, refinery PBF. Before the pandemic hit, PBFX was paying out more in distributions than it was producing in DCF. So when the pandemic hit, PBFX cut its distribution 42% even though DCF is actually up quite a bit so far this year, and the DCF coverage ratio is above 2X. Mr. T posted a bullish article about PBFX 3 months ago that concluded it wouldn’t be long before PBFX would probably restore the prior distribution. That hasn’t happened yet and this article explains that the company has changed its focus to deleveraging, even though Mr. T doesn’t think that is necessary. He still likes the 13% yield which he thinks is safe based on FCF metrics. Some speculation about how much deleveraging the company will do before they start raising the distribution again. (Me – I would point out that the sponsor PBF is kind of weak, which can’t help PBFX long-term.)
Also PBFX – October 12 article by Double Dividend Stocks about the company’s senior notes, not the common units. DDS posted a bullish article about PBFX in February, just before the pandemic crushed the MLP market and PBFX is down 50% since then. So DDS is moving up the credit c=ladder now – he is recommending PBFX’s senior notes which trade at $ 95 and mature in mid-2023. Yield to maturity is 10%. He discusses PBFX, good coverage for the interest expense, the repayment seems safe. He also discusses PBF a bit, mostly reviews of the (bad) YTD performance. No discussion of liquidity for the senior notes, or the bid/ask spread.
PSXP – October 14 article by Michael Fitzsimmons, Bullish article, 35 comments. Mr. Fitz bought PSXP units (he doesn’t say when) and is happy that they didn’t cut the distribution in Q2. OTOH, he isn’t happy that the price has dropped 60% this year so that it now yields 14%. Pluses – good assets, long-term MVC contracts underpin the distribution, the close inter-relationship between PSXP and PSX. Minuses – because the equity trades so low, no more dropdowns for now which means no or low growth in the distribution. But 14% isn’t bad, even with no growth. And PSXP owns 25% of DAPL, which has its own set of issues. Overall, buy rating.
6-month report card – Best performance – Harrison Schwartz (see EVA, above) up 171% with his recommendation of NBLX. Worst performance – The Value Portfolio, down 30% with his recommendation of PSXP. To be fair, TVP also recommended MPLX that week and he’s up 48% on that pick. And since I mentioned ENB several times this week, I should mention that both Brad Thomas and Daniel Thurecht recommend it 6 months ago, and it’s up 7% since then, including dividends.