There hasn’t been a lot to cheer about in the midstream Master Limited Partnership (MLP) space in 2017. While President Trump’s policies have been positive for midstream companies, that hasn’t translated into higher unit prices.

The Alerian MLP Index (AMZ), a benchmark that reflects most of the midstream sector’s market capitalization, is down 13% year-to-date. This decline is frustrating given that many of the major midstream MLPs have steadily raised distributions over the past year.  

Despite the negative sector sentiment, this week BP (NYSE: BP) debuted only the second MLP by one of the supermajors (aka “Big Oil”). BP Midstream Partners LP will trade on the NYSE as BPMP. The offering is for 42,500,000 common units at an expected midpoint price of $20.00 per common unit. BP expects to raise nearly $900 million in the offering.

According to BP’s SEC filings, the IPO consists of the following assets:

• BP2, an onshore crude oil pipeline system that indirectly links Canadian crude oil production with BP’s Whiting Refinery, the largest refinery in the Midwest
• The River Rouge refined products pipeline system, connecting the Whiting Refinery to the Detroit refined products market
• The Diamondback diluent pipeline that indirectly connects the Whiting Refinery and other diluent supply sources to a third-party pipeline for ultimate delivery to the Canadian oil sands production areas
• Interests in four offshore crude oil pipeline systems –Mardi Gras, Caesar, Proteus, and Endymion — that link major offshore production areas in the Gulf of Mexico with the Gulf Coast refining and distribution hubs
• A 28.5% interest in the Mars crude oil pipeline
• An interest in one offshore natural gas pipeline system, Cleopatra, that links offshore production areas in the Gulf of Mexico to an offshore pipeline for ultimate delivery to shore

These assets primarily consist of interests in pipeline systems that generate stable revenue under tariffs regulated by the Federal Energy Regulatory Commission (FERC) and long-term fee-based transportation agreements. Substantially all aggregate revenue on BP2, River Rouge, and Diamondback will be supported by long-term commercial agreements with BP Products that include minimum volume commitments.

BP Holdco, a wholly owned subsidiary of BP Pipelines, owns and controls the general partner. BP Midstream Partners expects to make a minimum quarterly distribution of $0.2625 per common unit and subordinated unit, which would translate into a 5.25% annualized yield at the midpoint of the offering.

If cash distributions exceed $0.3019 per unit in any quarter, the general partner will receive incentive distribution rights (IDRs) according to the following percentage allocations:

To support the minimum quarterly distributions, BP Midstream Partners LP must generate approximately $110.0 million in cash available for distribution (an average of $27.5 million per quarter).  According to the unaudited pro forma in the SEC filings, the partnership would have generated $129.1 million available for distribution in 2016, and $64.4 million for the first two quarters of 2017.

The only other supermajor to have spun off an MLP was Royal Dutch Shell (NYSE: RDS-A) when it took Shell Midstream Partners LP (NYSE: SHLX) public in late 2014. Since then, Shell has dropped down many of its midstream assets into the MLP, which in turn has increased its distribution every quarter since going public. In the past two years, that has amounted to a 73% increase in the quarterly per unit distribution. Shell Midstream units currently yield 4.5%, but the unit price has declined by nearly 20% since the IPO. 

BP Midstream Partners LP should be able to mimic Shell Midstream’s success at growing distributions by acquiring midstream assets from the parent company. But the timing may be much better for BP because Shell Midstream went public right at the beginning of the energy bear market.

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