MLP Metrics 3rd Quarter Update 2018
About the Video.
Miller/Howard Investments' 3rd quarter 2018 MLP Metrics Update offers the latest news in energy with compelling topics, industry trends, interesting data points, and company-specific commentary.
MLP Metrics 3rd Quarter Update 2018

I'm John Cusick, Portfolio Manager at Miller/Howard Investments.

We have been publishing our MLP Metrics update for three years, but this marks the first time we have filmed a video version.

We are going to cover what we believe are the most compelling topics, including industry trends, interesting data points, and company specific news. My colleague Adam Fackler and I will quickly touch on the highlights.

ETE/ETP Transaction: Eliminating the Antiquated IDR Structure

Hi, I'm Adam Fackler, Senior Research Analyst at Miller/Howard Investments. On August 1st, 2018 Energy Transfer Equity (ETE) announced it will acquire Energy Transfer Partners (ETP) and eliminate the incentive distribution rights (known as IDRs). While the transaction was not unexpected, it came well ahead of 2H19 expectations and foreshadowed strong operational results in Q2.

The IDR elimination is a major step toward ridding the space of the antiquated structure, as ETP was the largest constituent in the Alerian MLP Index that still paid IDRs.

The transaction was also a step in the right direction from a corporate governance standpoint as it helps eliminate a conflict of interest between management and LP unitholders. Despite the market’s fears, the transaction did not transfer value from ETP to ETE unitholders.

North America Continues To Need Additional Infrastructure

In June 2018, the Interstate Natural Gas Association of America (or INGAA for short) released a study that estimates ~$520 billion will need to be spent on midstream infrastructure through 2035.

Primary drivers of this spending are continued unconventional resource development and strong market demand, in response to relatively low commodity prices that are the result of these new oil and gas supplies.

The INGAA’s 2018 study increased its projected annual spending.

The INGAA’s 2018 study increased its projected annual spending (through 2035) to ~$29bn from ~$17.5bn in its 2016 study.

While the study does call for capital expenditures to peak in 2019, it is important to note that the 2016 study suggested spending would peak between 2014-2016.

The Permian Basin Remains A Major Growth Driver

In July 2018, Permian crude production reached 3.3 MMBbl/d, an increase of ~920 MBbl/d Y/Y (+38%).

To put these levels in context, crude production in the Permian would make it OPEC’s fourth largest producer.

As production in the basin has ramped and pipeline utilization has increased, differentials (or the, differences in pricing between areas) have soared. The Midland-Houston spread averaged ~$15/Bbl from May-June 2018.

Rising differentials are indicative of constrained takeaway capacity and the need for additional infrastructure. We estimate ~3 MMBbl/d of additional takeaway capacity will be needed over the next 5 years.

Closing Thoughts: MLP Metrics Update

These items are what we believe are the most important highlights of our latest MLP Metrics update. However, we also cover several other topics in the written versions, which focus on our MLP Strategy holdings, and include our open letter to management teams, distribution increases, and an earnings overview.

Please visit www.mhinvest.com for our complete MLP Metrics report. You can find much of our value add content on Twitter and LinkedIn. Thank you for watching and for your interest in Miller/Howard Investments.”

© 2018 Miller/Howard Investments, Inc.

DISCLOSURE
Common stocks do not assure distribution payments. Distributions are paid only when declared by an issuer's board of directors and the amount of any distribution may vary over time. Distribution yield is one component of performance and should not be the only consideration for investment. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. The views expressed here represent Miller/Howard Investments' views and are subject to change at any time. Nothing stated herein, including the mention of specific company names, should be construed as a recommendation to buy, hold, or sell any security, sector, or MLPs in general. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

Past performance does not guarantee future results.

Risk Factors to Consider When Investing in Master Limited Partnerships (MLPs)
  • Cash distributions are not guaranteed and may fluctuate with the MLP's operating or business performance.
  • MLPs typically have a General Partner that maintains an aggregate 2% General Partner interest. Unit holders will have limited voting rights and do not own an interest in, vote with, or control the General Partner. The General Partner often cannot be removed without its own consent, and the General Partner has conflicts of interest and limited fiduciary responsibilities, which may permit it to favor its own interests to the detriment of unit holders.
  • The MLP may issue additional common units, diluting existing unit holders' interests.
  • Unit holders may be required to pay taxes on income from the MLP even if they do not receive cash distributions.
  • The IRS could reclassify the MLP as a taxable entity, which could reduce the cash available for distribution to unit holders.
  • If at any time the GP owns 85% or more of the issued and outstanding limited partner interests, the GP will have the right to purchase all of the limited partnership interests not held by the GP at a price that may be undesirable.

Tax Considerations of MLPs
The tax treatment for investors in MLPs is different than that of an investment in stock, including (a) the investor's share of the MLP's income, deductions and expenses are reported on Schedule K-1, not Form 1099, (b) because of the possibility of unrelated business taxable income, charitable remainder trusts should not invest in this strategy, and other non-taxable investors (such as ERISA and IRA accounts) should carefully consider whether to invest in this strategy, (c) investors may have to file income tax returns in states in which the MLP's do business and (d) MLP tax information is sent directly from the partnership, which generally has until April 15th to provide this information. You should discuss these and any other tax implications with your tax advisor.

DISCLOSURE
Common stocks do not assure distribution payments. Distributions are paid only when declared by an issuer's board of directors and the amount of any distribution may vary over time. Distribution yield is one component of performance and should not be the only consideration for investment. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. The views expressed here represent Miller/Howard Investments' views and are subject to change at any time. Nothing stated herein, including the mention of specific company names, should be construed as a recommendation to buy, hold, or sell any security, sector, or MLPs in general. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

Past performance does not guarantee future results.

Risk Factors to Consider When Investing in Master Limited Partnerships (MLPs)
  • Cash distributions are not guaranteed and may fluctuate with the MLP's operating or business performance.
  • MLPs typically have a General Partner that maintains an aggregate 2% General Partner interest. Unit holders will have limited voting rights and do not own an interest in, vote with, or control the General Partner. The General Partner often cannot be removed without its own consent, and the General Partner has conflicts of interest and limited fiduciary responsibilities, which may permit it to favor its own interests to the detriment of unit holders.
  • The MLP may issue additional common units, diluting existing unit holders' interests.
  • Unit holders may be required to pay taxes on income from the MLP even if they do not receive cash distributions.
  • The IRS could reclassify the MLP as a taxable entity, which could reduce the cash available for distribution to unit holders.
  • If at any time the GP owns 85% or more of the issued and outstanding limited partner interests, the GP will have the right to purchase all of the limited partnership interests not held by the GP at a price that may be undesirable.

Tax Considerations of MLPs
The tax treatment for investors in MLPs is different than that of an investment in stock, including (a) the investor's share of the MLP's income, deductions and expenses are reported on Schedule K-1, not Form 1099, (b) because of the possibility of unrelated business taxable income, charitable remainder trusts should not invest in this strategy, and other non-taxable investors (such as ERISA and IRA accounts) should carefully consider whether to invest in this strategy, (c) investors may have to file income tax returns in states in which the MLP's do business and (d) MLP tax information is sent directly from the partnership, which generally has until April 15th to provide this information. You should discuss these and any other tax implications with your tax advisor.