Morgan Stanley Updates MLP Sector After FERC Decision

The Federal Energy Regulatory Commission said March 15 it has eliminated tax allowances for master limited partnership pipelines and proposed natural gas pipelines. The decision has implications across the entire sector, which prompted Morgan Stanley to "sort through the rubble" and search for any stocks with value remaining. 

The Analyst

Morgan Stanley's Tom Abrams made the following rating changes:

• MPLX LP MPLX upgraded from Equal-weight to Overweight with a price target lowered from $41 to $40.
• Dominion Energy Midstream Partners LP DM upgraded from Underweight to Equal-weight with a price target lowered from $31 to $17.
• Buckeye Partners, L.P. BPL downgraded from Overweight to Equal-weight with a price target lowered from $60 to $44.

MPLX: Financial Policy Reset

MPLX eliminated its incentive distribution rights earlier this year, which allowed the company to reset its financial policy, Abrams said in the upgrade note. Accordingly, the company is now "relatively advantaged" compared to its peers, especially with a debt/EBITDA ratio of 3.6x at the end of 2017 and a financing plan that doesn't require equity issuance.

MPLX's financial strength now serves as a "key asset during a time of duress" for most of the sector, the analyst said. Companies like MPLX will be in a better position to navigate through industrywide headwinds at a time when other companies won't be able to compete, Abrams said. 

Dominion Midstream: More Balanced Stock

Dominion Midstream expects the FERC's proposed changes to take years to enact, and it will be prospective rather than retroactive, the analyst said. The company is "substantially" exposed to the changes  — with Questar Gas, Carolina Gas and Iroquoi — which naturally weighs on any longer-term valuation models, Abrams said. 

"With DM having declined sharply in the past week, we believe the units now reflect a lower growth or shorter growth scenario." 

Related Link: Height Capital Markets: MLP Sell-Off Was An Overreaction

Buckeye Partners: Difficult Downgrade

A downgrade of Buckeye was a "difficult" decision based on multiple developing negatives and expected positions that never came to fruition, Abrams said. Among the most concerning negatives: FERC's move to begin discussions on its 2021-2025 liquids pipes index, which could result in a negative index adjustment in the mid-single digit range.

Among the positives that never occurred were expectations for Buckeye to participate to a "large extent" in a Permian-to-Corpus pipeline ,which would have given the company long-term growth potential and a more integrated Texas strategy, the analyst said.

Price Action

Shares of MPLX were up 0.61 percent in Friday morning trading. 

Shares of Dominion Energy were up 1.10 percent. 

Shares of Buckeye Partners were down more than 1 percent. 

Related Link:

MLP ETFs Endure Rough First Quarter, Global X Says New Tax Rule Could Help

Photo courtesy of MPLX.