MLPs Searching For A New Look

Water disposal came up in some discussions, and with volumes of produced water (i.e. water that comes out of the ground with the oil) in the Permian running at 4X the amount of crude output, treatment and disposal is providing additional infrastructure opportunities. Several firms were considering investments in this area.

Plains All American (PAGP/PAA) management was surprisingly defensive when asked about their simplification plans. They feigned surprise at the question (perhaps out of boredom) and suggested to one investor that perhaps he didn’t fully understand their structure. What’s really hard to understand is how the biggest crude oil pipeline operator in the Permian isn’t generating better results when record oil production is exceeding take-away pipeline capacity.

This has caused the Midland-Cushing differential to widen to $15 per barrel recently, far above the $2-3 pipeline tariff between the two hubs (see Dwindling Pipeline Capacity Causes FOMO). It should be a huge win for PAGP, whose investors holds the stock for precisely this scenario. But earlier 2016-17 mis-steps in Supply and Logistics caused PAGP to hedge 2018 basis risk far more conservatively, largely missing out on today’s excess demand for pipeline capacity. At still approximately 60% below their 2013 IPO price, PAGP’s stock reflects the need for better execution by management.

CEQP continues to execute well and met with many happy investors given the stock’s climb over the past couple of years. Meetings with Enterprise Products Partners (EPD) and Magellan Midstream Partners (MMP) were typically reassuring. Neither sees the need to convert from their MLP structure.

Enlink (ENLC/ENLK) Chairman Barry Davis described how they were emulating parent company Devon Energy’s (DVN) investment in IT to manage their operations. DVN has a single Data Control Center that remotely monitors all their activities. ENLC has created a task force to find similar opportunities to automate.

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Disclosure: We are long CEQP, ENB, ENLC, KMI, LNG, PAGP and WMB. We are short AMLP.

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