Aug 24th, 2014
MLP Market Post
MLPs (+0.5%) followed the broad market (S&P 500 +1.7%) higher this week. The MLP Index was down on Friday, breaking a 6 day winning streak, and marking just the 2nd negative day in the last 10 trading days, over which time the index rose 6.4%. MLP Index returns were held back by some deal hangover weakness in EPB (-2.1%) and KMP (-1.6%).
Energy commodity prices continue to be under pressure. WTI Oil futures price dropped below $95/barrel this week, and is now down around 11% since this time last year. Natural gas price was higher week over week, but remains significantly lower than the polar vortex-induced heights it reached earlier in 2014. The light end of the NGL barrel was split: ethane followed natural gas higher and propane followed oil lower.
After a weekend that has involved 20 hours of driving with 3 kids and a mini-van (plus 3 Kindles, 2 Nintendo DS’s, and an iPad), I’m going to keep the poetic waxing to a minimum this week in an effort to recharge the verbosity for a week with more MLP action.
Winners & Losers
Small-cap crude and refined products logistics MLPs DKL and WNRL led the sector higher. DKL was the beneficiary of an analyst upgrade and other positive research notes this week, after very strong 2Q earnings a few weeks ago. WNRL seemed to rise in sympathy as a fellow small cap growth MLP. Each of these two MLPs is expected to grow distributions 10-15% per year over the next few years, but neither has the massive pool of drop down assets that are driving expectations of 20%+ distribution growth for MPLX, PSXP and VLP. The valuation gap between those two groups narrowed this week.
On the downside, LGP and MMLP were down this week after very strong price action the last few weeks following M&A announcements. No actual news from any of the top or bottom 5 this week.
Year to date, CMLP caught a bid this week (+5.3%) and edged closer to escaping the bottom 5. OILT dropped out of the top 5, replaced by GLOP.
News of the (MLP) World
The second half of August is largely paperwork catchup time for the MLP capital markets. Last week, we saw 3 recent IPOs file new S-1s to sell equity at some later date. This week we saw similar filing activity, but little actual capital markets activity.
- Tesoro Logistics (TLLP) prices 2.1mm unit offering at $68.57/unit, raising $144mm of gross proceeds (press release)
- Overnight bought deal, priced at 2.8% discount to prior closing price
- Plains All American Pipeline (PAA) files equity distribution agreement to sell up $900mm worth of common units at the market (filing)
- 21 underwriters participating, which is a lot
- NGL Energy (NGL) files S-3 to register up to $300mm of common units (filing)
- ONEOK Partners (OKS) files S-3 to register up to $650mm of common units (filing)
- Martin Midstream (MMLP) announces $45mm sale of common units to sponsor Martin Resource Management (press release)
- With this purchase, Martin Resource now owns 19.7% of the outstanding units of MMLP
- Funds to be used to reduce borrowings on MMLP’s revolving credit facility that were drawn on to fund the acquisition of additional interests in Cardinal Gas Storage announced last week
M&A / Growth
- Plains All American Pipeline (PAA) announces plan to construct crude oil pipeline from Cushing, OK to Valero refinery in Memphis (press release)
- PAA’s new Diamond Pipeline will have capacity of 200,000 bbls/d
- The pipeline is expected to cost $900mm and to be completed by late 2016, and is supported by a long-term contract with Valero
- Valero will retain the option to buy into a 50% stake in the pipeline, and can exercise that option any time before January 2016
- Natural Resource Partners (NRP) announces $205mm acquisition of VantaCore Partners (press release)
- VantaCore is a privately-held partnership specializing in construction materials
- VantaCore owns and operates three hard rock quarries, six sand and gravel plants, two asphalt and a marine terminal
- NRP expects VantaCore to $25mm in EBITDA over the next 12 months (8.2x multiple)
- VantaCore was owned by Trilantic Capital Partners, Kayne Anderson Energy Development, Hartz Alternative Investments and Corridor Private Holdings
- EnLink Midstream Partners (ENLK) announces $250mm condensate pipeline project in the Utica (press release)
- ENLK will construct a new 45-mile, eight-inch condensate pipeline and 6 natural gas compression and condensate stabilization facilities
- Project is supported by a long-term, fee-based agreement with Eclipse Resources for compression and stabilization services and for the purchase of stabilized condensate
- Enterprise Products Partners (EPD) completed its previously announced 2-1 stock split
- It was EPD’s second stock split since going public in 1998, with the first occurring in 2002
Aug 17th, 2014
MLP Market Post
Kinder Morgan’s big Sunday announcement sent MLPs into a tizzy, read more about the deal here. The MLP Index was up 5.3% this week, with much of that attributable to just 2 MLPs (EPB and KMP) that make up more than 10% of the Alerian MLP Index. 5%+ weeks are very rare. There was a period of 6 years from 2002 to 2008 that the MLP Index had no such weeks. This was only the 4th such week for the Index in the last 5 years.
Yield on the U.S. 10 year rates crossed back over the 2.40% threshold again, stocks are up, and MLP consolidation is driving speculation among smaller MLPs. All is right for MLPs…except for weakening energy commodity prices. The U.S. is clearly having an impact on the global supply picture when an aggressive Russia and (that old standby) tension in the Middle East don’t stop oil prices from falling.
Updated Distribution Aristocrats
A few years ago, I published my list of MLP Distribution Aristocrats (see original post here). As part of my work on KMP this week, I updated the list. MLP “Distribution Aristocrats” are MLPs that have raised their distribution in each of the last 10 years. To qualify, the MLP also needs to have been trading for 10 years. There are only 10 MLPs that meet both criteria. After KMP goes away, there will only be 9, but as more MLPs reach the 10 year trading mark, the list will grow.
Winners & Losers
EPB led all MLPs with a 27.7% pop earlier this week. The unitholders that held on even after EPB announced earlier this year its intention to have no distribution growth until 2017 were handsomely rewarded with a white knight. No matter that the savior (KMI) was the company that was responsible for EPB’s slowing growth rate since the 2012 purchase of EPB’s GP.
MMLP also had a nice pop related to an acquisition this week, up 12.0%, after a bottom 5 showing last week. Speaking of the bottom 5, HCLP was down after issuing equity this week, and after being up 8.0% last week. Also, there were 2 upstream MLPs in the bottom 5, perhaps taking cues from weaker commodity prices. Growth is back en vogue as low yield, high growth MLPs were up sharply this week, epitomized by PSXP’s big gains.
Year to date, PSXP is still out in front, although SUSP jumped HCLP to take second place. MMLP climbed out of the bottom 5 this week, replaced by recent coal IPO FELP. CMLP had a positive week, but remains in the bottom 5, until its white knight appears.
News of the (MLP) World
There were a few interesting deals outside of the Kinder Complex this week, including a series of equity deals and announcements. It was a flurry of capital markets activity that I don’t expect we’ll see again until after Labor Day, although there’s always time for M&A.
- Buckeye Partners (BPL) priced public offering of 2.6mm common units at $76.60/unit, raising $199.2mm in gross proceeds (press release)
- Overnight offering, priced at 2.6% discount to prior close
- Hi-Crush Partners (HCLP) priced 100% secondary offering of 3.3mm common units at $62.91/unit, raising $205.1mm in gross proceeds to selling unitholder Hi-Crush Proppants, LLC (press release)
- Overnight offering, priced at 4.2% discount to prior close
- Viper Energy Partners (VNOM) files S-1 to sell 3.5mm common units in an equity offering (filing)
- VNOM also disclosed an acquisition of Permian acreage for $90mm in cash
- Cheniere Energy Partners LP Holdings (CQH) files S-1 to sell 10.1mm common shares in an equity offering (filing)
- GasLog Partners (GLOP) files F-1 to sell up to $125mm of common units in an equity offering (filing)
- Rice Energy announces plans to form a midstream MLP for its gas gathering and water sourcing assets (press release)
M&A / Growth
- Kinder Morgan, Inc. (KMI) to acquire KMP, KMR and EPB
- Click here to peruse around 2,000 words on this deal
- MMLP acquisition of remaining interest in Cardinal Gas Storage for $120mm (press release)
- MMLP to acquire 57.8% interest owned by Energy Capital Partners
- Accretive to distributions by $0.15/L.P. unit by end of 2015, and MMLP expects to increase distribution by $0.02/unit in 4Q14
- Transaction increases MMLP’s coverage to above 1.05x
- Over 90% of working gas storage capacity contracted with 5 year weighted average contract life
- Improves fee-based contract mix and reduces seasonality
- GLOP $328mm acquisition of two vessels (press release)
- Vessels have 5.5 and 6 years remaining on contracts
- Acquisition value represents 9.5x next 12 months EBITDA
- Announced intent to raise distributions by 15%
Aug 15th, 2014
MLP Market Post
In the media, there is the concept of a pre-written obituary. News outlets (TV and print) prepare segments and obituaries in advance of a celebrity’s death, so they have facts straight and are ready to publish when the famous person dies. The New York Times apparently has a database of more than 1,200 pre-written obituaries, with the oldest one written in 1982 (according to this article on the subject).
When Robin Williams died earlier this week, the NY Times may have had a pre-written obituary ready to go, but most news outlets probably didn’t. If it were my policy to have pre-written obituaries on MLPs that could potentially be consolidated and go away entirely, KMP would not have been at the top of the list.
It wasn’t a surprise to see KMP announce a transaction that fixes the IDR burden on a permanent basis. The first post I wrote on this blog asked the question, can KMP sustain distribution growth of 5%+ per year given its huge GP take? It’s a question that’s been around a long time. But Kinder endured with the El Paso acquisition, which allowed KMP to continue its growth for a few more years, while sucking EPB’s coverage dry.
Eventually, KMP needed to fix itself, and certainly the expectation was that it would someone make it happen. But the market (and KMP investors in particular) was surprised at the structure of the transaction that would leave no publicly-traded partnerships bearing the Kinder name. We’ve always seen IDR buyouts where the MLP buys out the parent and continues on as a public company (e.g. EPD, MMP, BPL), even when the GP was held in a corporate structure (e.g. MWE’s buyout of Markwest Hydrocarbon, Inc.).
What follows is my post mortem on the deal announced this past Sunday, after lengthy discussion and reflection on the transaction.
Transaction Review: A Simpler Kinder Complex
Kinder Morgan, Inc. (KMI) is acquiring all of the outstanding units of KMP and EPB, and all of the outstanding shares of KMR, in a cash and stock transaction valued at $71.0bn (press release).
- KMI will have a stepped up tax basis on the acquired companies, and will use higher depreciation from that basis (and from accelerated depreciation) to reduce the effective tax rate at KMI and grow distributions at 10% per year for the next 5 years.
- KMI announced that the combined entity will have target leverage of 5.0-5.5x EBITDA, and that it would be investment grade.
- KMI announced that its lower cost of capital and size would enable it to be an acquirer of other midstream companies.
What will Kinder Look Like in the Future?
KMI may be advantaged relative to MLPs when it comes to buying assets outside the U.S. KMI will be able to buy non-qualifying assets abroad more easily than MLPs. Does this mean they will buy Canadian pipelines, LNG regasification terminals in Asia or Europe, or terminals in Latin America? I don’t know, but it seems like this transaction sets them up to be able to do that.
Kinder will have another MLP someday, whether it’s a spin out of existing assets in 2016 or 2017, or it’s an MLP acquired as part of buying an existing MLPs G.P., I don’t know. But the flow through tax advantages are still there.
Other Open Questions Asked this Week
- Who are the acquisition candidates for KMI?
- Is a 5.0x-5.5x levered company really investment grade?
- How will the new MLP compete on a cost of capital basis against other MLPs when the depreciation and coverage at KMI burns off?
- Doesn’t KMP have an advantage not paying taxes vs KMI over the long term?
- Maintenance capex looked at differently going forward?
- Kinder said this somewhat circular comment on conference call: “Maintenance capex is less relevant with all the extra cash we have, we think it becomes a lot less important given our size”
Impact on the Sector
MLP Structure: Neutral Impact
I don’t think this will lead to other MLPs leaving the MLP structure. EPD is much larger than KMP, with a market capitalization of roughly $70bn. EPD is under no pressure whatsoever to convert its MLP to a corporate structure. EPD solved its cost of capital issues long ago by eliminating the IDRs, as others have done.
- The traditional MLP structure continues to work as is, and if an MLP’s cost of capital becomes a drag because it becomes too big, there are a number of solutions to that, a KMI-type deal being just one of them.
- Shell’s MLP IPO, Dominion’s MLP IPO, Hess’s MLP IPO, and the large shadow backlog of unannounced MLP IPOs should still move forward
- There are MLPs that have high IDR burdens, but none of them is as large as KMP was. The top 5 MLPs that have the highest percentage of cash flow being paid to the GP/IDR interest (excluding KMP and not counting IDR givebacks/waivers): ETP (38.1%), PAA (34.9%), WPZ (32.2%), OKS (31.2%), and ARLP (31.2%). KMP is paying 46.0% to its GP (gross, not counting waivers), and EPB is paying 28.1%.
Capital Flows: Positive Impact
- The retail investor base of KMP includes big pool of investors that have been long-term holders and never wanted to sell for tax purposes, and were probably planning to die and get a step-up in basis on their KMP units. Now those investors are forced to sell and will have to pay out massive taxes. The end result is that that big pool of retail investor money is now free to diversify into other MLPs.
- Combined between EPB and KMP, retail ownership is approximately $21bn. Some portion of the after-tax proceeds of that has a good chance of finding a home with other MLPs, which is good for MLPs.
- With this transaction, KMP will essentially graduate from the Alerian MLP Index up to the S&P 500. KMP and EPB represent more than 12.5% combined in the Alerian MLP Infrastructure Index, which is tracked by the ETF AMLP (and its $9bn).
- The weights of the other large cap MLPs should go up (ETP, PAA, MMP, WPZ, etc.) in this index and others, which has positive implications for their stock prices.
Consolidation / M&A Premiums: Positive Impact
Other MLPs are likely to carry consolidation M&A takeout premiums for a while, given how vocal KMP has been about consolidating the sector. KMP buying other natural gas pipeline MLPs is a challenge given HSR anti-trust issues, but gathering & processing MLPs and liquids-focused MLPs would be logical targets. Also, this transaction may increase pressure on other large MLPs to grow even larger, and could lead to consolidation outside of KMI.
Tax Impact: Turn in Your Deferrals
KMI is basically forcing a huge step up in basis on its largely retail investor base and then will be using that new step up to have higher depreciation and save on taxes at KMI, which is the key driver of KMI’s ability to grow at 10% a year for the next 5 years.
KMI put out an estimated tax cost for the average KMP unitholder of approximately $12.39/unit. But that is going to vary wildly. Newer unitholders will do better on an after tax basis than older ones. I personally know someone who has owned KMP since 1993. His CPA has estimated that he will owe around $27/unit in taxes. In the hypothetical, illustrative example below, I show you what that will mean (using a round number of 10,000 units) to the income he is used to receiving. He will need to sell shares of KMI to pay taxes and the net result is 44.5% less take home cash on an annual basis. This is an extreme example, but you see why long-time KMP investors, who rely on KMP for income, might be a little upset that this transaction messes up tax planning and also actual cash flow.
KMP first went public 22 years ago as Enron Liquids with a market capitalization of approximately $150mm and a 9.5% yield. At the time, there were only 9 MLPs. By the time Rich Kinder took over in 1997, 4.5 years later, Enron Liquids hadn’t grown very much. KMP was only a 3.5% weight in the Alerian MLP Index (Amerigas was the largest at 12.5%). But less than 3 years later, at the end of 1999, KMP had grown its market cap by 10x to $2.4bn, making it the largest MLP of all at the time, a title it carried for several years more before EPD overtook it. At the end of 1999, KMP represented a 22.4% weight in the MLP Index. That was KMP’s peak relative size. As the number of MLPs grew, and the index eventually reached its 50 stock maximum, KMP’s weight in the Index slid down to 8.5% at the end of July.
Before Rich Kinder took over Enron Liquids, MLPs were all about yield. Investors bought them in the early 90s as an alternative to bonds and utilities because of their high yield and stable cash flows, not their growth prospects. Today, annual distribution growth has become as prominent as yield when reviewing the MLP sector. The CAGR-ization of the MLP space began with KMP.
15 years ago, in July 1999, there were 21 MLPs in the Alerian MLP Index (it wasn’t until 1Q 2006 that the AMZ reached its maximum number of 50 names).
- 12 were midstream, 9 were other (including 7 propane MLPs)
- Of those 22, 12 are still trading today, 9 of which are midstream MLPs
- EPD, KMP, PAA, ETP, EEP, OKS, BPL, GEL , TCP
- Of those 9 midstream MLPs, KMP has grown distributions at a faster rate than all of them at a 9.6% annual rate
- The fastest growth for KMP came in its most active dealmaking period, when it grew distributions 15.1% annually from 1999-2004
Landmark Kinder Deals
So, how did KMP grow so big so fast early on and maintain its growth over the years? Well, it wasn’t a single transaction that did it; it was the growth machine that KMP management built, first through acquisitions and later through organic growth. In all, in 17 years, KMP executed 88 acquisitions for a total of $26.5bn. It was a combination of large acquisitions and small bolt-on acquisitions, see below (click to enlarge).
Below are two press releases from two of the larger deals KMP did early on. Reviewing those press releases takes you back to a time when competition for assets wasn’t as great and capital wasn’t as easily obtained, such that KMP could buy another publicly-traded MLP and its GP and still have it be 12.5% accretive to distributions per unit, or could buy a $750mm pipeline asset at 7.5x EBITDA.