Several master limited partnerships (MLP) received a surprise gift to the start of the 2019 fiscal year when they posted stronger-than-expected earnings. Among the companies reporting higher than expected earnings in the first quarter were Plains All American Pipeline, EnLink Midstream, and DCP Midstream.

Though the level of the earnings may have been unexpected, these improvements were years in the making and were the result of careful planning. For example, Plains All American is now forecasting full-year earnings to be $100 million higher to about $2.85 billion.

These results were due to the completion of the company's 2017 deleveraging plan, which was designed to improve financial health by reducing debt by $1.4 billion to about $9.7 billion. This debt reduction included various asset sales, distribution cuts, and a reduction in crude oil and natural gas liquids (NGL) inventory levels.

Plains All American also funded its expansion programs in the second-half of 2017 and all of 2018 through a combination of non-convertible, perpetual preferred stock and the proceeds from its asset sales. The remainder of its retained cash and asset sales were used to further reduce debt.

The first quarter earnings of $862 million reported by Plains All American were a 45% year-over-year increase. These results were driven by strong supply and logistics (S&P) operations. However, the company anticipates S&P operations to be lower in 2020 with new pipeline capacity helping to alleviate logistical constraints.

"We're taking a balanced long-term approach to enhancing per-unit value creation through our commitment to improving financial flexibility and making disciplined investments and prudently increasing cash return to equity holders over time," Willie Chiang, Plains All American's CEO, said during the company's conference call to discuss first quarter earnings.

While the deleveraging plan has now been completed, the company will continue to focus on improving returns to unitholders by optimizing its asset base through capital efficient projects, strategic joint ventures, and further divestitures.

"We remain highly focused on capital discipline and project returns and, if sanctioned, a number of additional strategic and accretive projects that extend or expand our existing systems, increasing our capabilities," Chiang said. He noted that Plains All American's 2019 capital program has been increased by $250 million to about $1.35 billion.

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A large focal point of the company's focus will be on the Permian Basin, where it has added about 1.7 million barrels per day (MMbbl/d) of new capacity since the start of 2018. This is expected to further increase to 2.2 MMbbl/d by the end of 2019 as Plains All American continues to work on debottlenecking its system.

Al Swanson, Plains All American's executive vice president and CFO, said that despite the increased capital expenditures the company is committed to maintaining significant financial flexibility. In order to maintain this flexibility, Plains All American will retain a cash flow that will limit, and potentially eliminate, the need to issue common equity to fund routine capital growth programs.

The company reported more than $3 billion of committed liquidity at the close of the first quarter and anticipates closing the fiscal year with cash flow in excess of distributions of about $970 million.

Focus On The Permian

EnLink Midstream's earnings and distributable cash flow for the quarter also beat forecasts by coming in at $268 million and $185 million, respectively. EnLink is also committed to improving its liquidity and reducing its reliance funding its expansion projects through capital markets.

"From a capital allocation standpoint, our priorities remain to increasingly fund highly accretive projects with cash flow from the business and create and return value to our stakeholders while maintaining our key financial metrics," Eric Batchelder, EnLink CFO, said during the company's conference call to discuss quarterly earnings.

Similar to Plains All American, EnLink is focused on the Permian Basin. Its Permian segment grew by 100% on year-over-year basis in the first quarter of 2019 compared to the same quarter in 2018.

Further growth out of the Permian is expected through two projects the company recently in the play's Delaware Basin. These projects will support XTO Energy's production in the region and include the accelerated expansion of EnLink's Lobo natural gas processing plant and the construction of a 200 million cubic feet per day processing plant in the Delaware that will cost about $240 million to build.

An area where EnLink differs from Plains All American is divestitures. While asset sales were an important part of Plains' deleveraging plan, Batchelder said EnLink has no plans to sell assets any time soon. "We've taken steps over the last few years to high grade our asset base and don't have planned asset sales of any magnitude at this time. There may be a small asset here and there that we monetize, but nothing significant at this time," he said.

Investment-Grade Status

The Permian isn't the only play helping midstream companies grow, as DCP Midstream continues to focus on the D-J Basin. In the first quarter, DCP reported total gas well head volume in the play increase by about 10% on a year-over-year basis. The company anticipates continued growth out of the Rockies.

"With Colorado's political uncertainty decisively and significantly minimized, we are progressing well in the construction of our O'Connor 2 facility and will continue to advance plans to add new processing capacity to the DJ Basin in the middle of 2020," the company's CEO, Wouter van Kempen, said during a conference call to discuss first quarter earnings.

This new capacity will be part of DCP Midstream's integrated system in the region. This system, like the rest of the company's super systems, provides customers with natural gas processing, natural gas liquids and natural gas takeaway, and NGL fractionation.

"Throughout our asset base, this ability to leverage full value chain economics from the well heads of the Permian, the D-J Basin, the midcontinent and Eagle Ford all the way to Gulf Coast markets, enhances our competitive advantage and drives strong long-term cash flows. All in all, our footprint, or strategy and our balance sheet allows us to take low risk high return projects in the country's top-tier basins, thereby creating a distinct strategic advantage for our company, our customers and our unitholders," van Kempen said.

The company's super-system approach is combined with a strategy of working closely with producers to ensure that capacity on its assets align with production growth in the Rockies. "We expect to provide initial processing capacity of roughly 200 MMcf/d to 300 MMcf/d in the middle of 2020, underpinned by life of lease acreage dedications from our core Weld County customers," van Kempen continued.

This strategy helped DCP Midstream realize $326 million in earnings in the quarter with $224 million in distributable cash flow. This puts the company in line to achieve its long-term goal of reaching investment grade status from Standard & Poor's.

Each of these three companies achieved strong earnings differently, but the key to these results was long-term planning focused on adapting to the new reality for MLPs. This takes a more measured approach to growth than in years past. While MLPs are just as focused on earnings as they were previously, distribution growth has lessened in importance as companies seek to self-fund larger portions of their capital growth projects.

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