1、North America Equity Research20 May 2019 Energy Infrastructure/MLPsMEIC Takeaways:Looking to Grow the Midstream Wolfpack with Constructive Fundamentals and Capital DisciplineEnergy MLPsJeremy Tonet,CFA AC(1-212)622-Bloomberg JPMA TONET J.P.Morgan Securities LLCCharlie W Barber(1-212)622-J.P.Morgan S
2、ecurities LLCRahul Krotthapalli(1-212)622-J.P.Morgan Securities LLCJoseph R Martoglio(1-212)622-J.P.Morgan Securities LLCVinay Chitteti(91-22)6157-J.P.Morgan India Private LimitedSee page 30 for analyst certification and important disclosures,including non-US analyst disclosures.J.P.Morgan does and
3、seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment This note
4、outlines key takeaways from our meetings with 28 management teams at the MLP&Energy Infrastructure Conference last week in Las Vegas,an investor dinner with Enbridge and conversations with numerous investors.Attendance improved and investor sentiment appeared upbeat,with new institutional investors
5、attending versus last year.Management teams and investors alike appeared constructive on the industrys positive fundamentals,with steady domestic production growth driving increasedlogistics needs,especially out of the Permian and into premium export markets.At the same time,and as we have discussed
6、 before,a heightened scrutiny on capital disciplineand B/S strength permeated presentations and conversations.Finally,the topics of private versus public valuation disconnect(heightened with the BPL takeout),sponsored entity risk(and general corporate governance concerns),as well as overall regulato
7、ry risks round out some of the more prominent themes at the conference.In the end,we continue to advocate those midstreamers possessing the 4Fs:(1)fully integrated value chains that create barriers to entry;(2)franchise positions that attract new business;(3)footprints levered to advantaged basins;a
8、nd(4)financial flexibility,which provide thestructural advantages to maximize per unit value creation.Improving fundamentals and Vegas slots draw a crowd;attendance up.Conference attendance increased compared to last year as MLP and energy infrastructure enthusiasts flocked to Las Vegas,despite a sh
9、rinking number of MLPs.While the change of location from Orlando to Las Vegas could have played a role,we believe greater c-corp attendance(notably ENB,KMI and TRGP),stronger balance sheets and improving capital discipline more likely fueled investorinterest.As previously noted,we have seen an uptic
10、k in generalist inbounds this year,especially c-corps,which could provide support for the space.Top 3 investor requests,in no particular order,capital discipline,capital efficiency,and please return my capital.With investors agitating for capital discipline and a focus on per unit value creation,mul
11、tiple management teams have taken action and amended their market communication to highlight tangible examples of taking such steps,such as ET moving forward with PE4 in place of PGC and MPLX pivoting to W2W from PGC.While we see plentiful organic growth opportunities for midstreamers with the 4Fs,w
12、e believe that a level of unit repurchases,especially when tied to optimization earnings,would go a long way towards imparting incremental investor confidence,especially for those that have already right sized leverage.Integration key to success,favor EPD and ET.MLPs with the 4Fs should have the ope
13、rating leverage,barriers to entry,and structural advantages to fully capitalize on growing logistics needs and optimization opportunities,thereby maximizing value creation.Overall,EPD offers the optimal mix of offense and defense,with best-in-class financial flexibility,while ET will grow into lower
14、 leverage over the next yearand offers a favorable deep value proposition.With best-in-class cross-hydrocarbon logistics footprints in the Permian and superior export capabilities,we see both as well positioned to continue capturing attractive,capital efficient brownfield expansions.2North America E
15、quity Research20 May 2019Jeremy Tonet,CFA(1-212)622- Fireside chat with Chairman Chatterjee highlights a constructive FERC.In conjunction with management meetings,we attended a fireside chat with Rob Baldwin(PWC)and FERC Chairmen Neil Chatterjee,discussing“All Things FERC.”In addition to displaying
16、a keen wit,Chairman Chatterjee outlined FERCs constructive approach to regulation and emphasized support for energy infrastructure development within the context of upholding the principles and Federal Acts that govern the agency.The discussions ranged from the 2018 income tax allowance to the new a
17、pproach for considering GHG emission for LNG projects.Chairman Chatterjee acknowledges flaws with the 2018 income tax allowance process and believes a more holistic approach,including technical discussions,could create improved transparency and decision making.Looking ahead,Chairman Chatterjee highl
18、ighted the 20 year old pipeline permitting process and sees avenues for speeding up the process.Additionally,Neil noted the potential for a lack of quorum with upcoming departures and expects a strong focus on restoring the FERC to five members.With Neils Democrat counterparts lobbying for FERCs inv
19、olvement in upstream and downstream emissions,we see regulatory risks in the future should Democrats take the White House.Private vs public who could be acquired next?After the BPL takeout announcement last Friday,the question of who could be next swept through investor conversations.This transactio
20、n follows a number of deals involving private equity acquiring discrete MLP assets.As such,while the topic of private versus public valuation disconnect has been percolating for some time,recent events have elevated the dialogue to a new level.We believe the BPL transaction(11.3x 2020 JPMe EBITDA)cl
21、early highlights this valuation disconnect and should help provide valuation support for the group.Acknowledging the screens:time to align EPS and DPS?Last year,and before,many of our investor conversations focused on the topic of high debt/EBITDA levels leading to multiple midstreamers failing gene
22、ralist screens.With significant deleveraging and balance sheet repair in the rear view,this topic arises less often.However,more recently,the topic of 100%EPS payout ratios leading to midstreamers failing generalist screens has picked up momentum.We would not be surprised to see management teams piv
23、ot distribution growth strategies to screen better on EPS payout ratios.Regulatory discussions focus on Colorado and Texas bills.While regulatory headwinds normally tend to reside in the Northeast,Colorado and more recentlyTexas have taken the spotlight as of late.In Colorado,WES and DCP managementn
24、oted uncertainties related the final implementation of SB 181,but appeared upbeat on the prospects for eventual clarity to these issues.While the recent changes to the bill do not address all industry concerns,we view increased local control as an overarching positive development.As for Texas,two co
25、mpanion bills,Senate Bill 421 and House Bill 991 would create new regulations regarding energy companies acquiring land rights for pipelines.TRGP noted the potential bill could impact building costs and timelines for new pipeline projects,while KMI acknowledged potential impacts to their PHP project
26、.HB 991 remains in the house and is being referred to the Land and Resource management.3North America Equity Research20 May 2019Jeremy Tonet,CFA(1-212)622- Table of ContentsC-Corps/LLCs.4Cheniere Energy Inc.(LNG).4Enbridge Inc.(ENB).5EnLink Midstream(ENLC).6Kinder Morgan Inc.(KMI).7Targa Resources C
27、orp(TRGP).7Diversifieds.9DCP Midstream(DCP).9Enable Midstream(ENBL).9Energy Transfer LP(ET).10Enterprise Products Partners(EPD).11MPLX(MPLX).12Liquids T&S.14Holly Energy Partners(HEP).14Magellan Midstream Partners(MMP).14Plains All-American Pipelines(PAA).15NuStar Energy LP(NS).16Shell Midstream Par
28、tners(SHLX).17Natural Gas G&P,T&S.19Crestwood Equity Partners(CEQP).19CNX Midstream Partners(CNXM).19EQM Midstream Partners(EQM).20Hess Midstream Partners(HESM).21Noble Midstream(NBLX).21TC Pipelines,LP(TCP).22Western Midstream Partners(WES).23Contract Compression.25Archrock Inc.(AROC).25USA Compres
29、sion Partners(USAC).25Propane Distribution and Fuel Marketing.27Global Partners LP(GLP).27Sprague Resources(SRLP).27Suburban Propane Partners(SPH).28Sunoco LP(SUN).284North America Equity Research20 May 2019Jeremy Tonet,CFA(1-212)622- C-Corps/LLCsCheniere Energy Inc.(LNG)How do weaker LNG prices imp
30、act CMI expectations and 2019 guidance?With LNG prices sliding since management originally presented 2019 guidance,Cheniere acknowledged marketing margins compressed$3/mmbtu from last November.While lower margins present headwinds for 2019 marketing profitability,management now sees 2019 CMI volumes
31、 closer to 8.5mm tons versus 6mm tons,previously.As such,Cheniere expects stronger volumes to largely offset weakermargins.Production gains stem from 1)CCL2 timing assumptions,2)debottlenecking initiatives,3)maintenance optimization,and 4)stronger ramps at SPL5 and CCL1.While management still sees a
32、$1 move in margin equating to a$140mm move in EBITDA,Cheniere anticipates this number to erode over the balance of the year with more volumes placed into the market.Additionally,we suspect Chenieres sensitivity to pricing during 2020 should dissipate significantly as CCL1 and SPL5 reach their respec
33、tive DFCD dates later this year.Lastly,while weak spot pricing will continue to impact CMI cargoes arbitrage opportunities,management pointed to the forward curve,suggesting forward sales can still capture sizeable margins.Do the trade tensions impact SPL6 FID or weigh on capital allocation decision
34、s?While acknowledging trade tensions between the U.S.and China create market inefficiencies and added costs for their Chinese customers,CEI remains relatively insulated from current and future tariffs.Of the companys 18 foundation shippers,only one(PetroChina)faces tariff concerns,who continues to r
35、eceive and pay for LNG cargoes.In fact,management noted no impact to the SPL6 FID and expects to reach a positive outcome in 1H19.Furthermore,management still aims to present a capital allocation strategy to investors in the coming weeks and noted the trade tensions will not impact this framework.Wh
36、ile details remain limited,we believe a versatile strategy that focuses on leverage and then provides a level of capital return at some point in the future without sacrificing the ability to fund future liquefaction growth would represent the most optimal outcome for investors.Additionally,sticking
37、to a 50%or less debt target for future liquefaction projects should enableCheniere to grow into leverage.Management also noted CCL should join SPL at IG in the near future,providing even more attractive financing terms.What would future growth opportunities at CCL look like?Given that future SPL exp
38、ansions would require upstream pipeline expansions,management emphasized CCL stage 3 as the next step in liquefaction growth given the footprints scale and accessibility.Cheniere already filed a FERC application for CCL 3,a 9.5mtpa liquefaction expansion,and anticipates approval by year-end.Once LNG
39、 achieves stage 3 approval,management sees CCL stage 4 coming into focus,which possesses significant acreage to support up to 15-20mtpa of liquefaction capacity,subject to sufficient commercial support and regulatory approvals.Any changes to the long-term view for the LNG market?Management continues
40、 to reiterate a robust outlook for LNG,reaffirming our belief of an increasingly tight LNG market early in the next decade.With a combination of expiring LNG contracts,healthy demand via contracting activity and lack of project FIDs,many eye a supply shortfall in the medium term.We note recent proje
41、ct FIDssignal confidence in the long term prospects for LNG demand.Additionally management noted the recent LNG 2019 conference in Shanghai,which included an 5North America Equity Research20 May 2019Jeremy Tonet,CFA(1-212)622- estimated 10,000 participants from all aspects of the LNG value chain,hig
42、hlighted that the market that remains open and very competitive.Buyers continue to seek optionality and bespoke terms,especially DES flexibility as several Japanese contracts roll.Chenieres market leading position and unique platform allows the company to meet tailored terms,as the companys low cost
43、 supply visibility and shipping offerings differentiates them from other competitors.Enbridge Inc.(ENB)Vern Yus Vegas dinner debut with US investors garners rave reviewsWe hosted dinner for ENB and institutional investors Wednesday night.ENB attendees included Liquids Pipelines President&COO Vern Yu
44、,previously EVP Corporate Planning&Chief Development Officer,as well as Director of Investor Relations Jon Gould and Investor Relations Senior Advisor Elizabeth Palermo.Although most investors had not had the opportunity to spend time with Vern,bulls and bears alike were equally impressed with his e
45、xtensive company expertise,deep industry knowledge,and very composed demeanor as conversations ranged from regulatory and legal intricacies associated with L3R to DCP delivering an equity self-funding plan this summer to French wind farms.How are CTS negotiations proceeding?Vern noted the only subje
46、ct more topical than L3R has been the CTS renegotiation process.Reaching a CTS agreement will not be an easy process,but management appears confident that an agreement that benefits both ENB and shippers can be reached.The new agreement could capture a win-win structure,with shippers locking in long
47、-term secured takeaway,with contract terms up to 20 years,while ENB secures cash flow certainty and incentives to develop further Mainline optimizations.The agreement could also incorporate toll discounts for longer terms and high volume shippers.Based on the conversations,we feel confident that the
48、 new agreement will be a revenue positive event for ENB.As for the timeline,ENB continues to advance discussions with shippers and expects to launch an open season by mid-July to enable filing with the NEB before year-end.NEB Hearings and Approval would then occur in 2020,allowing for the new struct
49、ure to be in-place by the mid-2021 expiration of the existing CTS.Finally,we note that incremental takeaway challenges for competing pipelines continue to better position ENB for renegotiations with producers seeking access to Gulf Coast markets and refiners looking to lock-in discounted WCSB produc
50、tion.How is L3R progressing?ENB expects to complete construction on the Canadian segment of L3R by the end of May.In North Dakota,ENB has already completed regulatory and permitting work with construction expected in 2020.However,MN likely remains the critical path with the current permitting timeli
