More changes in US midstream

PLAYING WITH ASSETS

MIDSTREAM • MAKING SURE THE RIGHT ASSETS ARE IN THE RIGHT PLACE IS KEY TO PROFITABILITY IN THE US OIL AND GAS PATCH, AS 2018’S FINANCIAL RESULTS ILLUSTRATE

FINANCIAL RESULTS REPORTED by many of the midstream operators in the US lately have indicated that 2018 was something of a turbulent year, with “volatility in the energy space”, as Magellan Mistream Partners put it. And it is also difficult to compare performance directly with that in 2017, a year that was marked by hurricane damage and a one-off tax bonus, while many operators have bought and sold assets, received drop-downs from their sponsoring entity or, more recently, engaged in merger and acquisition activity.

Indeed, it is perhaps indicative of the state of the market that late 2018 has seen some moves in terms of ownership. Many of the midstream operators are established on master limited partnership lines, with the beneficial treatment they receive in terms of taxation being a major draw for investment funds looking for reliable returns. It is in the nature of that relationship that those funds will, at certain times in the cycle, look to cash in on their investments or, conversely, make new investments.

So it has been in recent months. Buckeye Partners has completed the sale of its 50 per cent interest in VTTI to its partner Vitol and IFM Investors, and plans to use the cash proceeds of $975m to pay down debt. Announcing the completion of the deal, Buckeye’s chairman, president and CEO Clark C Smith said: “The closing of this transaction represents the final step in our announced strategic review. The completion of these actions will serve to improve Buckeye’s financial flexibility, which, along with our advantaged portfolio of pipeline and terminal assets and attractive growth opportunities, are expected to provide attractive long-term returns for our unitholders.”

NuStar Energy, meanwhile, sold its European operations to Inter Terminals, the storage subsidiary of Canada-based Inter Pipeline, for $270m. Speaking at the closing of the deal at the end of November 2018, NuStar president/CEO Brad Barron said: “This was a very important strategic decision for NuStar but also a difficult one given the quality of the assets and workforce. But as we have said, the assets were not synergistic with our other operations, and the sale helps us achieve the final component of our comprehensive plan launched earlier this year to position NuStar for long-term success by significantly lowering our debt metrics in order to deliver strong, sustainable distribution coverage for the future.”

DEALS TO BE DONE Another ongoing sale involves the intended purchase by an affiliate of ArcLight Energy Partners of American Midstream Partners. The deal has been on the table since late September 2018 but, as this issue of HCB went to press, had not yet closed. ArcLight amended its offer in early January 2019 to reflect the sale by American Mistream of its two refined products terminals in Caddo Mills, Texas and North Little Rock, Arkansas to Sunoco, which generated some $125m in cash.

A more recent move involves Blackstone Infrastructure Partners, which at the end of January 2019 made an offer to acquire Tallgrass Energy’s general partner and a 44 per cent interest in Tallgrass Energy itself, for approximately $3.3bn. The selling parties are Kelso & Co, The Energy & Minerals Group (EMG), and Tallgrass KC LLC, an entity owned by some members of management; on the buying side, GIC, Singapore’s sovereign wealth fund, is to take a minority share.

Speaking at the time of the announcement, Tallgrass president/CEO David G Dehaemers Jr said: “Blackstone’s scale, long-term capital, and investment expertise across the energy industry make it an ideal partner for our business as we continue to create value and invest capital in accretive growth opportunities. We appreciate the successful partnership we have had with Kelso and EMG since 2012 and thank them for their significant support. We look forward to working with

Blackstone to continue maximising value for all stakeholders.”

“This transaction represents a rare opportunity to invest in a large-scale US midstream infrastructure platform that connects high-production supply basins to key markets and is underpinned by long-term contracts,” said Sean Klimczak, global head of infrastructure at Blackstone. “We are excited to partner with and to support the established Tallgrass management team over the long term as they execute on their robust backlog of attractive growth projects.”

OPENING IN TEXAS Looking more closely at operational matters in terms of tank storage, a number of midstream operators have been expanding terminalling and loading capacity at their marine facilities, especially in the Houston area. In January, for instance, Moda Mistream successfully commissioned an upgrade at the Moda Ingleside Energy Center (MIEC) to allow VLCCs to load. “With commissioning of our upgrades to Berth 2A, we now have the US Gulf Coast’s most efficient crude export loading rates,” says Bo McCall, Moda’s president/CEO. “The combination of our enhanced loading rates, short transit times to the Gulf of Mexico and minimal port congestion allows us to provide our customers unmatched vessel turnaround times.” Moda is continuing to build out MIEC, with more dock space planned; it will be able to take advantage of the Corpus Christi Ship Channel Improvement Project, which will involve deepening the draught in the waterway, allowing VLCCs to load more cargo. Moda has also begun construction of an additional 10m bbl (1.6m m³) of tank storage for crude oil and a new manifold and interterminal piping to allow MIEC to receive direct ‘basin to berth’ deliveries via long-haul crude pipelines from the Permian and Eagle Ford production areas.

Magellan Midstream has put the first phase of its joint-venture marine terminal in Pasadena into operation; it has opened with 1m bbl of tank capacity and a dock capable of handling Panamax tankers. Work is continuing to add another 4m bbl of storage and an Aframax dock, which are due in service by the end of the year.

Enterprise Products Partners, meanwhile, expects to put its new ethylene export terminal on the Houston Ship Channel into service this year.

SHOW US THE MONEY Each of the midstream operators takes its own approach to the business; while there is a lot of current activity in enhancing the capacity for crude oil exports, for instance, many companies are focused more on NGL gathering and fractionation activities, while others tend to specialise in specific activities or products. Comparing financial results is, therefore, not straightforward, nor does it provide any meaningful analysis.

However, it is notable that – at least in adjusted EBITDA terms, which are probably the most useful given the various changes in assets bases over the past year – most had a reasonably good 2018. Plains All American Pipeline, for instance, saw adjusted EBITDA rise from $2.08bn in 2017 to $2.68bn, reflecting “solid execution of our business plan”, according to CEO Willie Chiang.

Enterprise Products Partners, meanwhile, posted adjusted EBITDA for 2018 of $7.22bn, a 28.6 per cent increase over the $5.62bn recorded in 2017. “All of our business segments reported operational records,” notes CEO Jim Teague. “Compared to 2017, liquid pipeline volumes increased 9 per cent; natural gas pipeline volumes increased 12 per cent; marine terminal volumes increased 12 per cent; NGL fractionation volumes increased 14 per cent; and propylene plant production volumes increased 23 per cent. This volume growth combined with higher natural gas processing and marketing margins led to record gross operating margin for each of our business segments.”

And even with the volatility in the market, Magellan Midstream pushed adjusted EBITDA up from $1.30bn in 2017 to $1.40bn, with its forecast for 2019 further growth to $1.43bn. Whatever problems the midstream sector faces, it seems that there is still plenty of money to be made getting product to market. HCB

DESPITE SOMEWHAT UNCERTAIN TRADING CONDITIONS

IN THE NEAR TERM, FIRM FUNDAMENTALS IN THE

MIDSTREAM SPACE CONTINUE TO ATTRACT INVESTMENT