Back from Florida, analysts reported a generally somber air at the annual Master Limited Partnership Association investor conference in Orlando. MLP management teams maintained a positive outlook, but investors were “decidedly downbeat,” according to one analyst. Another said “near-term sentiment remains despondent,” while a third said the most obvious takeaway was “the reduced attendance and the malaise in the MLP space.”

The focus of the conference was on the Permian Basin and its needs in terms of takeaway.

A more positive evaluation, summarizing the mood of both management and investors, was one of “guarded optimism” in light of a tough tape for energy for much of this year. Some attendees pointed to “the tough trading environment for the equities in a volatile commodity price environment,” in spite of what was viewed as the “improving fundamentals for the U.S. midstream players,” as Seaport Global Securities phrased it in a report.

Generally, market conditions have not been kind to the MLP sector, although MLPs have escaped the harsh treatment dealt to the more commodity-sensitive E&P and oilfield services sectors. According to Raymond James data, the Alerian MLP Index year-to-date was down about 6% through May vs. much steeper drops of 21% and 25%, respectively, for the E&P and oilfield services sectors.

RBC Capital Markets highlighted the varying viewpoints between MLP executives and investors.

Presentations by MLPs indicated “little to no wavering by management on second-half 2017 and first-half 2018 volume and cash flow ramp expectations,” said the RBC report. By contrast, “some investors are not enthusiastic on funds flow and are wary of so many ‘second-half stories,’” it noted.

“However, so long as commodity prices hold up, we think management teams are confident that the volume and cash flow ramp can materialize over the next 6-12 months,” the RBC analysts observed. “We think the midstream space just needs the good news to outweigh the negative sentiment, and we remain constructive into the back half of 2017.”

Similarly, MLP research analysts at Wells Fargo Securities observed that “many companies are still cautiously optimistic that things will improve in the back half of this year, although investors appeared less confident. All in all, they found the mood was decidedly downbeat for investors due to the underperformance of the sector,” reflecting sector volatility “during this prolonged and choppy recovery.”

The Wells Fargo report noted potential pipeline projects for the Permian had been drawn up and were awaiting commitments from producers, in all three commodity sectors—crude oil, natural gas and NGL.

“On the whole,” it said, “we got the sense investors are most concerned about takeaway for Permian gas, followed by Permian oil and, finally, Permian NGL.”

However, while recognizing the need to build out takeaway capacity, investors raised questions as to whether midstream companies risked overbuilding takeaway capacity by “going it alone.”

“Companies with marketing arms are able to support new pipeline projects by using their own equity volumes, which increases the likelihood of these projects proceeding,” observed Wells Fargo. “However, project economics in many cases are close to breakeven in the near term, with an expectation that more third-party volumes could be secured after the pipeline is in service.”

But with rates highly competitive—and in “some cases down to the variable cost of transportation”—investors pressed companies on “whether they have evaluated joint venture opportunities, which could result in more efficient scaling of pipeline capacity to match production growth,” said Wells Fargo. “For now, companies seem content to go it alone. However, some management teams believe joint ventures will occur as projects get closer to the finish line.”

Wells Fargo also highlighted the interplay between Permian gas differentials and ethane rejection.

For mid- and small-cap MLPs trading at markedly higher yields than their large-cap peers, Wells Fargo said management teams must determine whether it makes sense to “sustain/increase the current distribution if the market does not properly value the payout,” and the question of “how to fund future growth if the equity market is not available.”

For some MLPs, consolidation could be the answer.

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