GSAM Energy & Infrastructure Team. MLP Market Review & Outlook

Transcription

1 GSAM Energy & Infrastructure Team MLP Market Review & Outlook April 2018

2 I. Executive Summary 1

3 What Has Driven MLP Weakness? Poor Execution, Market Sentiment, & Regulatory Uncertainty Points of Concern 1 Commodity Price Pressure Description The decline in crude oil prices led to increased MLP counterparty risks, including possible E&P bankruptcies and tariff/contract re-negotiations 2 Distribution Sustainability Distribution cuts and reduced distribution growth guidance by certain large MLPs 3 Lower Than Expected ROIC 4 Structural Complexities 5 Capital Markets Activity Divergence between expected returns on invested capital (ROIC) vs. realized returns, which we believe can be attributed to the energy downturn and also poor capital discipline 1 Relative to C-Corps, MLPs have a narrower investor base due to accounting complexities, foreign ownership issues, and generally less liquidity. Additionally, the GP s controlling interest and IDR structure has raised concerns around the LP s cost of capital and corporate governance for certain MLPs. Concerns that some MLPs may erode unitholder value by issuing dilutive equity and other MLPs may not be able to access growth capital to fund projects in a period of suppressed equity valuations 6 Interest Rate Uncertainty Mounting concerns around rising rates in February triggered a rotation out of yield-oriented asset classes and raised questions around financing costs for capital intensive sectors 7 Weak Sector Sentiment MLPs have been negatively impacted by weak fund flows, elevated short interest, compressed valuation multiples, and a general lack of institutional interest in the broader energy sector 8 The FERC s Announcement Uncertainty regarding the earnings impact to regulated pipeline owners and questions around other regulatory issues not explicitly addressed in the Federal Energy Regulatory Commission s (FERC) policy announcement Sources: GSAM and Bloomberg, data as of 31-Mar E&P: Exploration and production (upstream) companies. MLP: Master Limited Partnerships. IDRs: Incentive distribution rights. GPs: General partners. LPs: Limited partners. EBITDA: Earnings, before interest, taxes, depreciation, and amortization. 1 Realized returns vs. weighted average cost of capital; sourced from Wells Fargo s Return of the Buck, as of date 07-Feb Past performance does not guarantee future results, which may vary. 2

4 Why Could Things be Different Going Forward? Strong Fundamentals, Greater Capital Discipline, & Improving DCF/Unit Growth Potential Reasons 1 Strong Macro Backdrop Description We believe global oil markets are balanced, with WTI crude oil prices showing stability over $60/bbl. US production trends are healthy and global demand is strong, supporting EBITDA growth expectations for MLPs 1. 2 Earnings Momentum For the 4Q17 reporting cycle, 74% of AMZ constituents either met or beat consensus EBITDA expectations 2 3 Distribution Re-Alignments 29% of MLPs have cut their distributions in an effort to re-align levels with pre-contracted cash flows, with the goal of creating more sustainable distributions 3 4 Reduction in Debt Levels While distribution growth has slowed, we have seen excess cash flow being used to pay down debt and fund capital expenditures, which is a theme we expect to continue 5 Greater Capital Discipline Moderation in capital spending, with consensus expectations calling for aggregate spending in 2019 to be 24.2% lower than the spending in 2017 for the top 10 AMZ constituents 4 6 Self-Funding Model 7 Corporate Simplifications 8 Regulatory Clarity Seeking to improve unitholder returns, MLPs are reducing the need to issue traditional equity by self-funding projects with retained earnings, joint ventures, and/or asset sales Management teams have shown increased focus on simplifying their corporate structure through consolidation transactions (i.e. IDR restructurings and C-Corps simplifications) in an effort to promote LP cash flow growth by reducing the cost of capital burden and attracting a wider investor base As the FERC addresses unanswered questions around more nuanced aspects of their policy revision, and MLPs begin reporting earnings under the new FERC policy regime, investors may gain increased confidence in claims from MLPs that the impact to cash flow is de-minimis Sources: GSAM and Bloomberg, data as of 31-Mar WTI: West Texas Intermediate. AMZ: Alerian MLP Index. 1 Bloomberg consensus expectations, as of 31-Mar Percentage of companies calculated as names who beat or met / total index constituents. 3 Universe defined by the Yorkville MLP Universe Total Return Index; excludes MLPs with variable rates and MLPs with less than $250 MM market cap. 4 Bloomberg consensus expectations, AMZ constituents as of 31- Mar Goldman Sachs does not provide accounting, tax or legal advice. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Past performance does not guarantee future results, which may vary. 3

5 II. Where Are We Now? 4

6 Total Return Where Are We Now? In a Period of Broad Market Volatility & Weak Sentiment for Energy Equities Energy & Broad Market Performance Year-to-Date (YTD) 15.0% 10.0% 5.0% Oversupply Concerns & Strengthening USD Surprise FERC Policy Announcement 7.5% 0.0% -5.0% -10.0% -15.0% Negative Earnings / Guidance From Large Integrated Index Constituents -0.8% -5.9% -11.1% -20.0% Dec-2017 Jan-2018 Feb-2018 WTI Crude Oil Alerian MLP Index (AMZ) Energy Select Sector Index (IXE) S&P 500 Index (SPX) Following a strong year of performance in 2017, the broader market (S&P 500 Index) is down 0.8% YTD. This is largely attributed to concerns around rising interest rates, trade tariffs, and the potential for heightened regulation. Crude oil prices have stabilized over ~$60/barrel, with WTI and Brent finishing the quarter at $64.9/bbl and $70.3/bbl, representing a YoY increase of 28.3% and 33.0%, respectively The IXE, the energy sleeve of the S&P 500, is down 5.9% YTD as large index constituents reported negative quarterly results and guidance, spreading contagion to other energy focused equities, such as MLPs Broad market volatility, weakness in energy equities, and rising interest rates weighed on MLP performance leading up to the March 15 th policy change from the FERC, resulting in a broad-based sell-off in MLPs, which has left the sector down 11.1% YTD Currently, market sentiment is weak for the broader energy complex, and even weaker for MLPs. This is apparent in elevated short interest levels, weak sector fund flows, and a general energy sector underweight from active equity managers. Sources: GSAM and Bloomberg; data as of 31-Mar Past performance does not guarantee future results, which may vary. 5

7 Where Are We Now? In a Period Where Strong Fundamentals are Being Overshadowed by Weak Sentiment Disconnect Between the AMZ s Index Level & the Fundamental Backdrop February 2016 March 2018 Potential Signal Month-End AMZ Level Positive Neutral Negative Commodity Fundamentals Avg WTI Crude Oil Price $30/bbl $62/bbl Increased prices are supportive of US production growth US Crude Oil Inventories ~29% above 5-Yr Avg ~2% below 5-Yr Avg Inventory declines indicate a more balanced crude oil market MLP Fundamentals US 1-Yr Fwd Est. Production (Oil) 1-6.0% Growth +8.9% Growth Higher oil production expectations are positive for midstream volumes US 1-Yr Fwd Est. Production (Nat. Gas) 1-1.5% Growth +6.1% Growth Higher gas production expectations are positive for midstream volumes Avg High-Yield Energy Bond Index 9.0% Yield 6.2% Yield Yield tightening reflects a decrease in E&P customer bankruptcy risk Avg EV/EBITDA Valuation (Top 10 AMZ) x 11.6x The sector is trading cheaper than distressed valuations Avg TTM Leverage Ratio (Top 10 AMZ) 2 5.5x 3.6x Lower leverage is reflective of stronger balance sheets Avg TTM Dist. Coverage (Top 10 AMZ) x 1.18x Coverage is relatively unchanged % of Constituents that Cut Distributions 3 2% 29% A few MLPs may still cut distributions, but we believe broad-based cuts are behind us Total Est. Fwd CAPEX (Top 10 AMZ) 2 $14.3 Bn (2016E) $18.0 Bn (2018E) Funding CAPEX via traditional equity issuances can be negative for unitholder value Sources: GSAM, Bloomberg, Alerian, Barclays, US Energy Information Administration (EIA), and Wells Fargo, latest data available as of 31-Mar February 2016 marks the month where the AMZ fell to its lowest point following the energy crisis. This is compared with current AMZ levels in an effort to highlight the differences in fundamental expectations in February 2016 relative to current expectations. EBITDA: Earnings before interest, taxes, depreciation, and amortization. 1 Crude oil and natural gas 1-year forward production estimates are from Wood Mackenzie. 2 Reflects values for the top 10 AMZ constituents, which comprise ~65% of the index, as of 31-Mar EV / EBITDA and Aggregate Estimate CAPEX reflect full year 2016 and 2018 estimates. Leverage ratio and distribution coverage reflecting trailing latest 12 month values available as of 31-Mar Leverage ratio was calculated using total debt at the end of the respective period. 3 Universe defined by the Yorkville MLP Universe Total Return Index; excludes MLPs with variable rates and MLPs with less than $250 MM market cap. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. Past performance does not guarantee future results, which may vary. 6

8 DCF/Unit Where Are We Now? In a Period of Disconnected Valuation Multiples & Distributable Cash Flow (DCF) Valuation Multiple Compression Case Study: Top 10 AMZ Constituents 1 $4.0 $3.8 $3.5 $3.3 $3.0 $2.8 AMZ Peak Level: 540 Aug x $2.88 $ x $3.49 $ x 13.2x $ x Current AMZ Level: 240 Mar-2018 $ x $3.61 $ x 20.0x 15.0x 10.0x 5.0x Price to DCF Multiple $ E 2019E 2020E AMZ Price Performance* DCF/Unit Price to DCF Multiple 0.0x In our view, multiple compression since 2014 can be attributed to weakness in commodity prices in , followed by more recent concerns around distribution sustainability, lower than expected unitholder returns, structural complexities (i.e. GP/LP, IDRs), corporate governance, and regulatory uncertainty These concerns have driven a ~55% decline in the price of the AMZ Index since the 2014 peak, despite relatively flat MLP cash flows per unit during the same period We believe many MLPs have addressed these market concerns and fundamentals are improving as evidenced by strong DCF/unit growth expectations. In the near-term, the FERC s recent announcement could drive volatility, however longer-term, we believe multiples could expand to more normalized levels resulting in asset appreciation. Sources: GSAM and Bloomberg, data as of 31-Mar Estimates provided by Wells Fargo, latest data available as of 31-Mar *Representative AMZ performance. Actual price levels have been reduced by a factor of 21.6 for graphical representation. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. Past performance does not guarantee future results, which may vary. 7

9 Where Are We Now? In a Period Where the Market is Digesting the FERC s Policy Announcement Not Impacted by MLP Policy Changes Impact Breakout 1 Non-FERC regulated midstream assets (intrastate pipelines, gathering and processing, and storage) Pipeline revenues from market/negotiated rates Cost-of-service/indexed pipelines that are under-earning versus the FERC s allowed ROE Pipelines owned by C-Corps (note: C-Corps are still able to claim a 21% federal tax allowance) Not Impacted Impacted Energy Infrastructure Universe MLPs C-Corps 2 Impacted by MLP Policy Changes FERC Regulated Assets FERC Non- Regulated Assets Natural gas and liquids pipelines that meet all of the following criteria: Owned by an MLP FERC regulated (i.e. interstate pipelines) Use cost-of-service and/or indexed rate pricing Earn revenues in excess of the FERC s allowed ROE based on the new FERC policy (over-earning) Over-Earning Impact: Lower Revenue Cost-of-Service and/or Indexed Methodology Just & Reasonable Returns Market Rates and/or Negotiated Rates No Impact Sources: Wells Fargo, Goldman Sachs Investment Research (GIR), and the Federal Energy Regulatory Commission (FERC); data as of 31-Mar For illustrative purposes only. 2 Only C-Corps that own underlying MLPs could be impacted. 8

10 Where Are We Now? In a Period Where the Market is Assessing FERC Related EBITDA Degradation Estimated EBITDA Impact of the FERC s Policy Change for the Top 15 AMZ Constituents Ticker Company Name Index Weight EBITDA Impact to 2018 Cons. Perf. Post FERC Policy Change 1 1 ETP Energy Transfer Partners LP 10.7% -3.3% -4.9% 2 EPD Enterprise Products Partners LP 10.5% -0.9% -1.8% 3 MMP Magellan Midstream Partners LP 9.6% 0.0% -6.9% 4 MPLX MPLX LP 7.0% -4.7% -3.1% 5 PAA Plains All American Pipeline LP 6.8% -1.6% -3.4% 6 WPZ Williams Partners LP 6.6% -5.7% -2.7% 7 BPL Buckeye Partners LP 4.6% -5.6% -9.5% 8 WES Western Gas Partners LP 3.3% 0.0% -3.6% 9 ANDX Andeavor Logistics LP 2.9% -0.8% -5.0% 10 EQM EQT Midstream Partners LP 2.6% -1.0% -5.6% 11 DCP DCP Midstream LP 2.4% 0.0% -5.7% 12 SEP Spectra Energy Partners LP 2.3% -10.5% -15.3% 13 APU AmeriGas Partners LP 2.1% 0.0% -2.6% 14 EEP Enbridge Energy Partners LP 2.0% -10.9% -25.6% 15 TCP TC PipeLines LP 1.8% -21.1% -26.6% Total / Weighted Average 75.1% -2.4% -4.4% Although lower rates likely won't be realized until 2019 and beyond, we chose to take a conservative approach and bring the full future EBITDA impact forward to Based on that, we believe the full impact of the FERC's policy announcement could result in a 2.4% weighted average reduction to 2018's EBITDA estimates for the top 15 AMZ constituents. Sources: GSAM, the Federal Energy Regulatory Commission (FERC), Alerian, and Bloomberg, data as of 31-Mar Cons: consensus. Perf: performance. Top 15 MLPs based on Alerian MLP Index (AMZ) constituents as of 14-Mar Performance calculated from 14-Mar-2018 through 21-Mar-2018 in order to isolate performance primarily driven by the FERC s policy announcement. Estimates are based on Law IQ data (an Energy Regulatory Analytics Company) and the FERC s filings (Natural Gas Pipelines: Annual Form 2, & 3-Q. Liquids Pipelines: Form 6, 700). No guarantee that these estimates are accurate and may change over time. Refer to the appendix for more details on methodology. Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities. The economic and market forecasts presented herein have been generated by GSAM for informational purposes as of the date of this presentation. They are based on proprietary models and there can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. 9

11 Millions of Barrels (MMbbls) Millions of Barrels (MMbbls) Where Are We Now? In a Period of Stable Crude Oil Markets & Strong Commodity Prices US Crude Oil Storage Levels OECD Crude Stocks vs. 5-Yr Average Mar-2017: Crude Inventories were 34.8% Above the 5-Yr Avg Yr Avg: 4,344 MMbbls 5-Yr Crude Stock Peak: 4,690 MMbbls Decline from Peak: 7.4% Mar-2018: Crude Inventories are now 1.7% Below the 5-Yr Avg Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Year Range (2008 through 2017) Year Average (2013 through 2017) 2018 US crude oil inventories and OECD stocks, which are used to gauge global crude oil balances, have converged to their key 5-year average levels as a result of OPEC production limits, a decline of global upstream investment, and robust global demand US crude oil inventories are now below their 5-year average and 106 MM barrels, or 19.7% below peak levels set in March 2017 OECD crude oil stocks, which are an indicator of global inventories, are now only 1.7% above their 5-year average, down 7.4% from peak levels set in July 2016, suggesting a balancing crude oil market On a days to cover basis, where the 5-year average is 30, OECD stocks are currently 1 day below average The reduction in US crude oil inventories and OECD stocks have helped stabilize WTI and Brent prices over $60/65/bbl, supporting US E&P break-even levels Sources: Bloomberg and US Energy Information Administration (EIA); latest data available as of 31-Mar OECD: The Organisation for Economic Co-operation and Development. OPEC: Organization of the Petroleum Exporting Countries 10

12 Millions of Dollars (MM) Shares Sold Short (as % of Shares Outstanding) Where Are We Now? In a Period of Weak Sector Flows & Peak Short Interest Net Sector Fund Flows Short Interest Levels 1 $1, % $1,200 $1,000 $800 $600 $400 $ , , % 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% Mid-March: Short Interest is 162.9% Above the Trailing 5-Yr Avg $0 -$ % 1.0% -$ Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar % Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar Monthly Avg: $488 MM 5-Yr Monthly Avg: $950 MM Short Interest (% of Shares Outstanding) 5-Yr Avg In 1Q18, the sector posted $759 MM of net inflows, marking the worst first quarter of sector flows since the energy downturn in 2015 February posted the largest month of outflows since 2015, with $305 MM of net outflows across open-end funds and ETFs/ETNs, representing a decline of 127% from January inflows Weakness was led by $526 MM of outflows from ETF/ETNs, as short-term investors unwound positions built in late December and early January, this marked the largest monthly outflow from the passive category since the inception of the AMZ Index in June 2006 Additionally, short interest is at all time highs relative to history as some investors have bet against high yielding equities in a rising interest rate environment and have attempted to capitalize on near-term uncertainty created by the FERC s policy announcement Sources: GSAM and US Capital Advisors, data as of 31-Mar ETF/ETN: Exchange traded fund/note. 1 Short interest levels ran on the Alerian MLP ETF (AMLP); the largest MLP ETF by assets. Past performance does not guarantee future results, which may vary. Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities. 11

13 Where Are We Now? In a Period Where Valuations are Disconnected from Fundamentals Historically Cheap Valuations Strong Fundamentals Valuation Method Current Sector Level Long-term Average 1 Premium / (Discount) 2 Price Revision to Historical Levels 3 Long-Term Average CAGR E E Average Growth EV/EBITDA 4 High: 15.5x (2Q14) Current: 10.2x Low: 9.9x (4Q15) 12.5x (2.3x) 34.3% 6.4% (DCF/Unit) 8.4% (DCF/Unit) P/E High: 24.7x (3Q14) Current: 13.3x Low: 13.1x (1Q16) 19.5x (6.2x) 46.4% -5.4% (EPS) 9.5% (EPS) Yield Spread 5 High: 10.4% (1Q16) Current: 6.0% Low: 2.4% (2Q11) 4.4% (1.7%) 30.3% N/A N/A In our view, the sector remains attractive relative to historical levels on an EV/EBITDA, P/E, and yield spread basis. Sector yields are elevated, but have been becoming more secure by cash flow growth: As of 31-Mar-2018, the weighted average yield of the AMZ was 8.8%, which is supported by growing EBITDA expectations and strong distribution coverage 6 We believe there is a case for multiple expansion as evidenced by DCF/unit and EPS growth, which are expected to experience a 8.4% and 9.5% growth rate, respectively, from 2018 to On a EV/EBITDA basis, MLPs remain attractive relative to Utilities and REITs, trading at a 2.9x and 1.2x respective discount to their historical spreads Sources: GSAM, Bloomberg, Wells Fargo, and Alerian, data as of 31-Mar DCF: Discounted cash flow. EPS: Earnings per share. CAGR: Compound annual growth rate. DCF/unit: discounted cash flow per unit. 1 Time period from 1Q11; oldest data available from our provider. 2 Premium/discount calculated by subtracting the long-term average from the current level. 3 Price revision to historical levels calculated as the appreciation of the initial equity component of an enterprise value using the 10.2x multiple to the final equity value component of an enterprise value using the 12.5x multiple, assuming an initial corporate capital structure of 65% equity and 35% debt and constant debt. 4 Based on Wells Fargo MLP universe. EV / 2018 Adjusted EBITDA: enterprise value divided by next twelve months earnings before interest, taxes, depreciation, and amortization. EBITDA is adjusted to reflect the portion of cash flow the General Partner (GP) is entitled to due to its incentive distribution rights (IDRs). Time period from 2Q06 (Alerian inception) to present. 5 Versus the US 10 Year Treasury Note. Calculated by taking the percent change of the sum of the current 10 Year US Treasury and the historical spread and the current MLP yield, assuming a constant Treasury yield and distributions. 6 Bloomberg consensus EBITDA expectations for top 10 AMZ constituents (by weight). 7 Sourced from Wells Fargo; multiple expansion is the increase in the level of valuation multiples. These examples are for illustrative purposes only and are not actual results. If any assumptions used do not prove to be true, results may vary substantially. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. Goldman Sachs does not provide accounting, tax or legal advice. Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities. Past performance does not guarantee future results, which may vary. 12

14 III. What Drives the MLP Market From Here?

15 What Drives the MLP Market From Here? Continued Momentum in MLP Earnings EBITDA Results & 2018 Estimates for the Top 10 AMZ Constituents 1 Ticker Company Name Index Weight % Beat/Miss (4Q17) 2018E/2017 YoY EBITDA Growth 1 EPD Enterprise Products Partners LP 10.3% 6.7% 11.4% 2 MMP Magellan Midstream Partners LP 10.0% 2.2% 5.8% 3 ETP Energy Transfer Partners LP 9.6% 10.2% 16.6% 4 MPLX MPLX LP 7.2% 1.4% 64.0% 2 5 PAA Plains All American Pipeline LP 7.0% 1.1% 11.3% 6 WPZ Williams Partners LP 6.6% 2.3% 3.4% 3 7 BPL Buckeye Partners LP 4.1% 5.9% 0.9% 8 WES Western Gas Partners LP 3.2% 3.5% 13.2% 9 ANDX Andeavor Logistics LP 3.0% 8.6% 20.3% 10 EQM EQT Midstream Partners LP 2.6% -2.1% 24.8% Average 4.0% 17.2% Median 2.9% 12.3% Of the 42 MLPs in the Alerian MLP Index, 31, or 73.8% of constituents, who reported 4Q17 earnings in February 2018, either met or beat consensus expectations 4 The median YoY (2018E vs. 2017) EBITDA growth for the top 10 AMZ constituents was 12.3% 5. We believe this growth is supported by a healthy commodity production outlook and expectations for a ramp up in projects coming to service in Some high-profile projects include Dakota Access Pipeline (ETP s crude oil pipeline that came into service in June 2017) and Atlantic Sunrise (WPZ s natural gas pipeline that is expected to come online in mid-2018) Sources: GSAM, Bloomberg, and Bloomberg, data as of 31-Mar Top 10 AMZ constituents by index weight as of 31-Mar MLPX is expected to grow substantially as a result of acquisitions during 2016, 2017, and 2018, which required significant equity issuance. 3 YoY EBITDA growth figures account for WPZ s sale of its interest in the Geismar plant and complex in July 2017, for a transaction valued at $2.1 Bn. 4 Bloomberg consensus expectations. 5 Bloomberg consensus expectations for each respective calendar quarter. Beat is defined as >2% EBITDA surprise; miss defined as <-2% EBITDA surprise; and in-line defined as >-2% but <2% EBITDA surprise. 6 Supported by the EIA s production outlook. Past performance does not guarantee future results, which may vary. Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities. 14

16 Billions of Dollars (Bn) What Drives the MLP Market From Here? Increased Fiscal Discipline Within Management Teams Declining Funding Gap & Growing DCF/Unit for Top 10 AMZ Constituents 1 $1.6 $1.4 $1.2 Funding Gap DCF/Unit Growth Declining Funding Gap & Increasing DCF/Unit Growth 12.0% 9.0% $1.0 $0.8 $0.6 $0.4 $ % 3.0% 0.0% DCF/Unit Growth $0.0 YoY DCF/Unit 2012Growth 5.7% % % % % E 1.5% 2019E 6.8% -3.0% E 2019E We believe MLPs may exercise greater fiscal discipline by: Reducing financing needs, or the funding gap, which reflects expenses in excess of earnings (CAPEX + Distributions + Interest EBITDA), by focusing on higher return projects and moderating distribution growth Reducing financing costs (relative to traditional equity issuances) with retained earnings (self-funding), preferred equity issuances, joint ventures (JVs), and/or asset sales Combined with increasing EBITDA, we expect capital discipline from management teams may enhance unitholder returns on a DCF/unit basis while also improving distribution coverage and reducing leverage Sources: GSAM and Wells Fargo, data available as of 31-Mar EBITDA: Earnings before interest, taxes, depreciation, and amortization. DCF: Distributable cash flow. 1 Expectations from GSAM and Wells Fargo, latest data available as of 31-Mar Funding gap refers to unfunded expenses which is calculated by taking expenses (CAPEX, distributions, interest) and subtracting EBITDA. Past performance does not guarantee future results, which may vary. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. 15

17 What Drives the MLP Market From Here? Increased Consolidation & Corporate Simplifications Select Incentive Distribution Right (IDR) Restructurings & Continued Potential for Consolidation Date Acquirer Acquisition Target Description Transaction Value ($MM) IDR Splits (% of Total Market Cap) 3 Jul-16 Plains All American Pipeline LP (PAA) Plains GP Holdings LP (PAGP) MLP units/idrs 1 $7,200 Sep-16 Transcanda Corp (TRP) Columbia Pipeline Partners LP (CPPL) GP acquires MLP $ % GP Take 5.9% Jan-17 Williams Partners LP (WPZ) Williams Companies Inc (WMB) MLP units/idrs $11,400 Feb-17 Oneok Inc (OKE) Oneok Partners LP (OKS) GP Acquires MLP $9,300 Oct-17 Holly Energy Partners LP (HEP) Holly Frontier Corp (HFC) MLP units/idrs $1,250 Oct-17 Andeavor Logistics (ANDX) Andeavor (ANDV) MLP units/idrs $3,600 Dec-17 MPLX LP (MPLX) Marathon Petroleum Corp (MPC) MLP units/idrs $10,100 Jan-18 Spectra Energy Partners (SEP) Enbridge Inc (ENB) MLP units/idrs $7,200 Jan-18* Archrock Inc (AROC) Archrock Partners LP (ARLP) GP Acquires MLP $607 Feb-18* NuStar Energy LP (NS) NuStar GP Holdings LLC (NSH) MLP units/idrs $738 Mar-18* Tallgrass Energy GP (TEGP) Tallgrass Energy Partners (TEP) GP Acquires MLP $1,780 2 No IDRs 68.0% 0-15% GP Take 9.5% >30% GP Take 16.6% As the MLP sector has matured, there have been a significant amount of IDR restructurings in the energy infrastructure universe, which we believe is a theme that may continue Restructurings aim to promote LP growth by eliminating the LP s cost of capital burden (from IDRs) through a GP acquisition of the underlying MLP or through other methods such as an exchange of LP units for IDR interests The FERC s announcement may also encourage MLP roll-ups or C-Corp conversions as management teams attempt to avoid EBITDA degradation from the policy revision. Simplified corporate structures may also promote new investor interest in the space and could increase the energy infrastructure sector s presence in major indices (i.e. S&P 500 Index), possibly resulting in incremental fund flows from active and passive vehicles Sources: GSAM, Bloomberg, Wells Fargo and public company filings; data as of 31-Mar There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. IDRs give a limited partnership's general partner an increasing share in the incremental distributable cash flow the partnership generates. This occurs alongside of per-unit distribution increases to the limited partners. The general partner's share of incremental distributable cash flow usually starts at 2% and climbs to higher levels such as 20% or 50%. 1 MLP units/idrs: MLP units in exchange for removal of IDRs. *Represents deals announced by not yet closed MM remaining TEP units times TEP unit price as of 31-Mar Universe sourced from Wells Fargo Advisors. Analysis is inclusive of 48 MLPs, excluding all MLPs structured GPs and C-Corps; data as of 31-Mar

18 S&P 500 Index Weight (Energy) Underweight vs. S&P 500 Index (bps) Underweight vs. Russell 3000 Index (bps) What Drives the MLP Market From Here? Increased S&P 500 Index Weighting & Improved Active Manager Sentiment S&P 500 Index Energy Weighting Over-Time Weak Sentiment From Active Management % 16.0% 14.0% 16.2% bps 12.0% % 8.0% bps % 4.0% 2.0% 5.8% bps bps 0.0% Underweight S&P 500 Index Weight (Energy) LT Avg -60 Dec-17 5-Yr Avg Mutual Funds 0 Dec-17 Hedge Funds 5-Yr Avg A significant portion of investor capital is tied to the S&P 500 Index (either actively benchmarked or passively tracking). Active managers will over/underweight sector exposure based on their market views, while passive vehicles buy/sell sectors alongside Index rebalances. Energy currently represents only 5.8% of the S&P 500 Index, marking the lowest sector weighting in over a decade. This meaningfully hinders passive fund flows and interest from index benchmarked actual managers. If the S&P 500 Index were to revert to historical average weights and active manager sentiment turns positive (i.e. under/overweight positions move in-line with the 5-year average), the energy sector could experience significant fund flow activity Currently, only C-Corps are included in the S&P 500 Index. If MLP/C-Corp conversions and/or MLP roll-ups (a theme we highlighted earlier) continue within the space, this would promote greater energy infrastructure inclusion in the Index, potentially leading to stronger fund flows. Sources: GSAM, Goldman Sachs Investment Research (GIR), and US Capital Advisors, data as of 31-Mar Mutual funds are a collection of all active managers benchmarked against the S&P 500 Index; while hedge funds represented as a collection of managers benchmarked to the Russell 3000 Index. 17

19 Millions of Barrels Per Day (MMBpd) What Drives the MLP Market From Here? A Lack of Global Investment & Potential Supply Disruptions Lack of Global Upstream Oil & Gas Investment Historical Supply Disruptions $ Iran Venezuela Nigeria Libya $700 $ $500 $400 $300 $200 Billions of Dollars (Bn) $ $ The IEA and OPEC have warned that the ongoing lack of global upstream investment raises concerns whether adequate supply will be available to offset natural field declines and meet robust demand growth expectations This is coupled with the potential for short-term supply disruptions from countries with unstable political and/or economic foundations. In a period of unrest, the US is well positioned to become the swing producer, helping bridge the gap between global supply and demand. The replacement of Rex Tillerson by Mike Pompeo increases the likelihood of sanctions on Venezuela and Iran, which combined account for 6.5% of non-us crude output Iran has increased production by 33.2% since the JCPOA in 2016 but could realize a meaningful snapback depending on the form of sanctions pursued. Additionally crude-related sanctions on Venezuela could further production declines, which are down from 2.4 MMbpd to 1.8 MMbpd, representing a ~25% decrease. Sources: Bloomberg, International Energy Agency (IEA), Organization of the Petroleum Exporting Countries (OPEC), and Macquarie; latest data available as of 31-Mar JCPOA: Join Comprehensive Plan of Action enacted Jan

20 What Drives the MLP Market From Here? Continued Growth in US Global Market Share US Total Liquids Market Share Over-Time % % 2020E 17.5% United States OPEC Rest of World 50.7% 40.4% 46.3% 40.2% 44.1% 38.5% Total 87,537 MMbpd 96,637 MMbpd 103,627 MMbpd Strong US production trends underpin expectations that the US will continue to capture global market share from top oil producing countries 1 The global liquids market has grown 10.4% from 2010 through 2017 and is expected to grow an additional 7.2% through 2020 As the total liquids markets has grown in size, the US has captured an increasing share of this growing market. Since 2010, the US has grown its share of the total liquids market by 4.7%, and is expected to expand to 17.5% by Longer-term, the IEA has estimated that production from the US production alone will account for ~60% of global supply growth through 2023 Sources: GSAM, Bloomberg, Rystad Energy, and International Energy Agency (IEA), data available as of 31-Mar Expectations provided by Rystad Energy, latest available as of 31-Mar is shown to highlight the market share evolution over the course of 10 years. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. 19

21 Millions of Barrels per Day (MMbpd) Millions of Barrels per Day (MMbpd) What Drives the MLP Market From Here? Strong Global Demand Expectations 1 Strong Historic Total Liquids Demand Continued Strength in Global Liquids Demand Total Demand Growth 3.7 MMbpd 2020E vs Expected US Production Can Meet 80% of Global Demand Growth Total Demand E Global demand expectations are healthy with no peak oil demand concerns in the near-term. Global demand has grown at a ~1.4% CAGR since 2010 and is expected to continue at this pace going forward. Robust demand expectations are underpinned by: A strong global economy, led by economic growth in emerging markets and non-developed countries with ~50% of demand growth expected to come from China and India An expanding middle class which has led to increased demand for consumer products (i.e. personal care items, food preservative, paints, and lubricants). Currently, the IEA expects ~25% of demand growth from will be derived from the petrochemical demand growth. A favorable demand backdrop is met by strong US production expectations, where the IEA estimates that gains from the US alone are predicted to cover 80% of the world s demand growth through 2020 Sources: GSAM, International Energy Agency, and Bloomberg, data as of 31-Mar All demand expectations provided from the IEA s 2018 Oil Report. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. Past performance does not guarantee future results, which may vary. 20

22 Million Barrels per Day (MMbpd) Billion Cubic Feet per day (Bcf/d) Billions of Dollars (Bn) What Drives the MLP Market From Here? Increased US Production & EBITDA Growth Expectations Crude Oil Production 1 Natural Gas Production 1 Increasing MLP EBITDA Expectations % CAGR 6.0% CAGR 11.8% CAGR $ $ $ $ $ E 2019E E 2019E $ E 2019E We believe MLP fundamentals are attractive with continued production growth expected in crude oil and dry natural gas Domestic crude oil production has hit 10.0 MMbpd as of January 2018, up 12.9% year-over-year (YoY) 1 Domestic dry natural gas production has hit 77.4 Bcf/d as of January 2018, up 9.6% YoY 1 Increased production may translate into strong EBITDA growth for MLPs as a result of ramping volumes on existing storage and transportation systems and new project completions From 2017 through 2019, the EIA expects a 10.8% and 6.0% compound annual growth rate (CAGR) for US crude oil and dry natural gas production, respectively 3 Sources: Bloomberg, US Energy Information Administration (EIA), and International Energy Agency (IEA); latest data available as of 31-Mar MMbpd: million barrels per day. 1 Audited production data is reported on a two-month lag by the EIA. 2 Bloomberg Consensus Expectations of the Alerian MLP Index constituents, as of 31-Mar US Energy Information Administration (EIA). The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. 21

23 Earnings Per Share Thousands of Barrels per Day (Mbpd) Million Barrels per Day (MMbpd) What Drives the MLP Market From Here? Constructive US Production Trends From E&P Commentary Commodity Backdrop Driving Returns Ramp-up in Investments and R&D Infrastructure Challenges in Basins Earnings Call If we are in a world where our breakevens are down to $35 to $40, and we re in a $55 world, we will generate huge amounts of free cash flow BP In 2018 we expect to earn double-digit ROCE EOG We re actually adding 2% to 3% ROCE per year. So that [...] ROCE reaches 15% [in 2023] PXD We're progressing plans to ramp up to around 36 operated rigs in the Permian and Bakken by year-end XOM Throughout our organization, we are applying new technologies [...] which has allowed us to save millions of dollars in exploration costs APA Absolutely yes, in the future we expect issues with gas So this entire part of the Permian Basin is going to be challenged with gas takeaway over time HK So we have some concerns for 2018, 2019, 2020 [...]: number one, getting our gas to WAHA; and then number two, getting our gas away from WAHA. CDEV E&P EPS Growth Expectations Rising Production and Rig Count Permian Takeaway Capacity $35 $30 11,500 11, ,000 6,000 Production at $40/bbl Production at $50/bbl Production at $60/bbl $25 10,500 10, ,000 Supporting Data $20 $15 9,500 9, Rig Count 4,000 3,000 $10 8, ,000 8, $5 7, ,000 $ ,000 0 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 US Crude Oil Production Crude Oil Rig Count E 2018E 2019E 2020E Online Projects Announced Projects Sources: Bloomberg and U.S Energy Information Administration (EIA); latest data available as of 31-Mar BP: BP PLC. EOG: EOG Resources Inc. PXD: Pioneer Natural Resources. XOM: Exxon Mobil Corp. APA: Apache Corp. Halcon Resources Corp. CDEV: Centennial Resource Development Inc. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. 22

24 What are the Potential Risks to Our Constructive View? Regulatory/Economic Policy, Competition, & Oil Market Pressure Potential Risks Description 1 Impact of New FERC Policy FERC regulated interstate natural gas, and liquids pipelines that are owned by MLPs could be impacted if they have cost-of-service contracts and have been over-earning relative to the cost of service rate calculation, affecting the tariffs that they charge Questions remain around the treatment of various legal entities (C-Corps, MLPs, etc.) and around accumulated deferred income taxes (ADIT) 2 Increased Competition If commodity volumes grow less than expected and increased competition applies pressure on tariffs in premier basins, some midstream operators could see weaker asset returns, particularly if they have upcoming contract re-negotiations 3 Crude Oil Price Pressure 4 Rising Interest Rates OPEC: failure to adhere to stated production cuts from OPEC and non-opec countries may have a negative impact on the crude market s supply/demand balance. Additionally, a re-negotiation or shortening of current commitments may also negatively impact crude oil market supply. Production: increased production from non-participating countries could lead to pressure on crude oil prices and ultimately energy markets At the corporate level, rising interest rates may make new project investment less attractive at the new cost of debt Additionally, rising interest rates may affect high yielding equities with the possibility of investors rotating to other asset classes 5 Electric Vehicles (EVs) Currently, the Energy & Infrastructure Team is assuming EVs will reduce US gasoline demand by a 1.3% CAGR from 2015 to However, higher than expected EV penetration rates might lead to a stronger decline in demand numbers, which would pressure crude oil prices and consequentially lower throughput volumes on midstream assets. Sources: GSAM and Bloomberg, data as of 31-Mar The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. These examples are for illustrative purposes only and are not actual results. If any assumptions used do not prove to be true, results may vary substantially. 23

25 IV. Appendix & Disclosures 24

26 AMZ Index Appendix & Disclosures MLPs Have Performed Well in Rising Rate Environments AMZ Index Total Returns & 10-Yr US Treasury Yields AMZX Total Returns 95.4% 10.6% 30.0% -2.3% 2, % 1,800 1,600 1,400 1,200 1, % 4.0% 3.0% 2.0% 10-Year US Treasury Yield % 0 0.0% Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Rising Rates AMZ Index 10-Year US Treasury Yield Traditionally, the price of high yielding assets are negatively correlated to rising interest rates However, since inception of the AMZ, the index has returned an average of 33.5% in rising rate environments, while returning an average of -6.3% in falling rate environments We believe positive returns during periods of rising interest rates reflect a strong relationship between MLPs and general economic conditions, rather than a relationship between MLPs and interest rates Sources: GSAM, and Bloomberg, data as of 31-Dec Past performances does not guarantee future results, which may vary. Troughs are defined as periods in which the 10-Yr US Treasury yield falls by more than 1.0% before subsequently rising more than 1.0%. Peaks are the max values in between troughs. Past correlations are not indicative of future correlations, which may vary. 25

27 Appendix & Disclosures Steel Tariffs May Have Limited Impact on New & Existing Pipelines Example: Impact on Pipeline Costs 1 No Tariff Tariff Hypothetical Project Cost for New Pipelines $1,000 $1,000 % of Project Cost Associated w/ Materials 24.0% 24.0% Hypothetical Material Related Costs $239.9 $239.9 % of Material Costs Attributed to Steel 52.3% 52.3% Hypothetical Steel Cost $125.4 $125.4 % Steel Tariff 0.0% 25.0% Cost Increase from Steel Tariff $0.0 $31.4 % Cost Increase 0.0% 3.1% Event Summary On 08-Mar-2018, the White House authorized a 25% tariff on steel imports and a 10% tariff on aluminum imports. Canada and Mexico will be excluded from the tariffs, while the North American Free Trade Agreement (NAFTA) negotiations are under way. Given that approximately half of the steel used in pipelines is imported, steel-based pipeline projects could see less than a 5% cost inflation. We note, however, that these tariffs may have limited impact on projects as a significant portion of imported pipeline-grade steel comes from Canada and Mexico, and will therefore be unaffected by the tariffs if these countries maintain their exempt status. Additionally, project operators could offset the increased costs associated with the steel tariffs by charging higher rates to pipeline customers Sources: Bloomberg and Wells Fargo; latest data available as of 31-Mar ICF Report: Feasibility and Impacts of Domestic Content Requirements for US Oil and Gas Pipelines. These examples are for illustrative purposes only and are not actual results. If any assumptions used do not prove to be true, results may vary substantially. 26

28 Appendix & Disclosures Electric Vehicles (EVs) Might Only Have a Small Impact on Demand in the Near-Term Global Oil Demand by Usage in 2015 EV Key Statistics Navigation, 7% Residential, 6% Rail, 1% Others (Agriculture, Pipelines,...), 6% Estimated 2017 Fleet Estimated 2017 Sales Demand Displacement Aviation, 8% Industry, 8% Non-Energy, 16% Road Transportation, 50% Light-Duty Vehicles, 30% Heavy-Duty Trucks, 16% Buses, 3% US: 720 thousand EVs, 0.3% of total fleet (265 million) China: 1.2 million EVs, 0.4% of total fleet (180 million) US: 200 thousand, 1.1% of total car sales China: 580 thousand, 2.3% of total car sales About 15 years to turn over the US car fleet if 100% of sales are EVs If EVs reached 100% of US sales by 2025, they would represent 30% of fleet 2- and 3-Wheel Vehicles, 1% World: 3 million EVs, 0.2% of total fleet (1.3 billion) World: 1.2 million, 1.4% of total car sales 1 million EVs displace ~30 kb/d of demand, ~3.5 MM EVs reduce US demand by 1% Road transportation accounts for 50% of global oil demand, which captures demand from light-duty vehicles (30%). In contrast to light-duty vehicles, the remaining 20% of demand from this category does not offer meaningful EV alternatives. If EV sales in the US were to represent 100% of total car sales (currently 1.1%), it would take 15 years to turn over the US car fleet, and would result in a US demand erosion of ~76% However, due to significantly slower adoption rates and a substantial increase in miles driven worldwide, we expect EVs to have a limited impact on US demand, reducing demand by a 1.3% CAGR from 2015 to 2040 Sources: GSAM, Goldman Sachs Investment Strategy Group, and Bloomberg, data as of 31-Mar The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. 27

29 Million Barrels per Day (MMbpd) Million Barrels per Day (MMbpd) Appendix & Disclosures Electric Vehicles (EVs) Expected to Have Minimal Impact on Gasoline Demand US Demand Expectations 1 Global Demand Expectations % Demand CAGR -0.2% Demand CAGR Gasoline Demand Change in Miles Driven Efficiency Impact Impact from Incremental EVs 2040 Gasoline Demand Gasoline Demand Change in Miles Driven Efficiency Impact Impact from Incremental EVs 2040 Gasoline Demand Goldman Sachs Asset Management (GSAM) believes EVs impact on crude oil prices to be limited until 2025 Post-2025, we believe future growth in gasoline demand will be dependent upon EV penetration rates We would note that government regulations, particularly in emerging markets, may be key determinants of global EV penetration in the long-term Morgan Stanley expects gasoline demand to remain relatively flat in the long-term, as an increase in total miles driven may offset efficiency gains and EV usage Miles driven are expected to double in 15 years and to triple by 2040, with China and Western Europe expected to see the highest EV penetration as a result of regulatory initiatives and elevated fuel prices Sources: GSAM, US Energy Information Administration (EIA), and Bloomberg, views as of 31-Mar GSAM Expectations. 2 Morgan Stanley Research. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. 28

30 Appendix & Disclosures The FERC s Policy Estimated EBITDA Impact Calculation Methodology To estimate the impact to EBITDA for the top 15 AMZ constituents (which only includes MLPs and no C-Corps) under the FERC s new policy, we used the following methodology based on whether an MLP s operating subsidiary owns natural gas or liquids pipelines. Natural Gas Pipelines: We determined what % of revenue for each operating subsidiary was attributed to cost-ofservice contracts (CoS) and reduced trailing 12-month CoS EBITDA (used most recent available data) by our 26% assumption (see next page for associated calculation) Liquids Pipelines: We assumed each pipeline was subject to indexed/cost-of-service rates (unless company guidance was given to the contrary) and that EBITDA would fall by any revenues in excess of the new cost-of-service calculation (based on the most recent filings). To calculate EBITDA impact, we removed each operating subsidiary s tax allowance and assumed that every dollar of revenue in excess of the cost-of service would be realized as a loss in EBITDA. Source: GSAM, Law IQ (an Energy Regulatory Analytics Company), The Federal Energy Regulatory Commission (FERC) Filings (Natural Gas Pipelines: Annual Form 2, & 3-Q. Liquids Pipelines: Form 6, 700), data as of 14-Mar Goldman Sachs does not provide accounting, tax or legal advice. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. 29