JotCast | Energy & Income Advisor Live Chat August 2019

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Energy & Income Advisor Live Chat August 2019

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Roger Conrad

2:02

Hello everyone and welcome to the August monthly EIA chat. Remember there is no audio for this chat. Instead type in your questions and Elliott and I will answer them as soon as we can. We will keep going so long as there are unanswered questions in the queue as well as emails we receive prior to the chat. And there will be a complete transcript of all Q&A shortly after we close the chat.

Let's start with a couple of question from the emails:

2:03

Q. Are you still comfortable with Oasis Midstream Partners (NYSE: OMP)?—Bud E.

A. As we noted earlier this month, Oasis’ second quarter numbers were right in line with its long-standing guidance, which management affirmed again during the August 7 earnings call. Distribution coverage was robust at 1.7 times and would have been 1.9 times were it not for operational downtime at a key gas processing complex that’s since been resolved.

Management again stated the partnership is “on track to deliver our targeted 20 percent annual growth in distributions per unit while simultaneously increasing coverage in coming quarters.” And it affirmed it’s “ahead of schedule on most infrastructure projects” to support future cash flow growth.

Rather, the drop in share price this month is due to the combination of a severe selloff in MLPs across the board and growing concerns its general partner and largest customer Oasis Petroleum (NYSE: OAS) will be unable to follow through on its production plans. These have intensified following a 1 percent cut in the mid-point of full-year production guidance and especially a 14.5 percent lift in the mid-point of expected 2019 capital spending.

The numbers in and of themselves are hardly a disaster. And the company still expects to be able to generate $75 to $120 million of free cash flow for debt reduction this year, at an average price of $50 to $60 per barrel. But coupled with concerns about the direction of oil prices, the news was enough to trigger selling in Oasis Petroleum and therefore Oasis Midstream Partners, which hit a new all-time low this week.

We’re comfortable sticking with this name for several reasons. First, at the current level, the bar of expectations is extremely low for the Oasis family. In the case of Partners, it’s already reflecting a steep distribution cut, though just three weeks ago there was a 5 percent sequential increase. Even a little good news could trigger a big boost. Second, it would take a huge hit in Partners’ cash flow to meaningfully dent distribution coverage, and nothing has happened yet to justify that expectation.

Finally, both Oasis Midstream and Oasis Petroleum are seeing meaningful insider buying. Bottom line we’re not happy about the price action but we don’t see a good reason to jump ship, especially at this price.

2:04

Q. Can you share your view of Suburban Propane Partners (NYSE: SPH) post its fiscal third quarter earnings release—Gary J.

A. As a distributor of propane primarily used for heating, Suburban garners the vast majority of its cash flow in its fiscal first (end December 31) and second quarters (end March 31). By contrast, results from the warmer months of the year are always expected to be seasonally weak and therefore much less important.

Suburban did record a fiscal Q3 loss that was a good deal wider than a year ago. And EBITDA excluding non-recurring items was also lower at $20.1 million, versus $30.5 million a year ago. The shortfall was primarily due to an -8.3 percent drop in retail propane gallons sold, due to average temperatures that were 17 percent warmer than normal and 33 percent warmer than during the year ago quarter.

Third quarter EBITDA, however, was just 7.5 percent of Suburban’s total for the first nine months of the fiscal year. And on a trailing 12 months basis, Suburban’s distributable cash flow covered its distribution by 1.25 times. That was enough coverage to self-fund the company’s growth capital spending and to reduce total debt by $16 million. Consolidated leverage is down to 4.41 times EBITDA.

Since late July, Suburban’s unit price came down from a high of close to $25 and has since traded in a range between $22 and $23 per unit. Our view is that has a lot more to do with the selloff in MLPs in general than what was basically a “no news is good news” earnings report. We continue to expect a takeover offer for what’s now the largest independent propane distributor in the US sometime in the next 9 to 12 months. In the meantime, the yield is north of 10 percent and safe.

Q. Enviva Partners (NYSE: EVA) has a great record and an excellent future. However, they are paying maximum IDRs. Can that continue or will they be forced to merge with the GP and leave unit holders with a dividend cut?--Ken V.

A. We certainly don’t see paying maximum incentive distribution rights as a positive, as it all else equal it increases cost of capital. But neither is it a reason in and of itself for a roll-up merger accompanied by a distribution cut.

In any case, this is not a risk for Enviva. Mainly, the general partners are private capital concerns Riverstone Holdings at 40.61 percent and Carlyle Group at 33.34 percent. The pair have in the past taken private companies they’ve held large pieces of, power producer Talen Energy being one example. The Talen deal, however, was at a big premium to the pre-deal price range. Also, as financial investors, Riverstone/Carlyle have also been known to sell stakes in MLPs where they’ve held big stakes. USA Compression Partners (NYSE: USAC) is a good example

We’d like to see this pair cut Enviva’s IDR structure. But the far more important factor for returns is going to be this MLP’s ability to sell its wood pellets to overseas markets primarily and thereby pull up what was a low coverage ratio in Q2, per management’s current guidance. And that actually looks promising at this time. We continue to cover Enviva in our MLPs and Midstream coverage universe.

Eric

2:06

Are you still positive on OXY? I've read this article that talks about the billionaires (Icahn, Buffett, Munger) and their investment in OXY. We assume they know more than the average investor. Do you see this as a good buy signal too?

https://seekingalpha.com/article/4279376-occidental-munger-icahn-make-...

Elliott Gue