MLP Market Update

MLP Market Update
Commentary on Master Limited Partnerships

Published
Sep 21st, 2014

Category:
MLP Market Post

MLP Week Thoughts: Blame Canada!

In a busy M&A and equity issuance week, MLPs bounced back with a 2.2% return vs. 1.3% for the S&P 500.  There was a wider than usual spread between performance of the cap-weighted index and the equal-weight index (up just 1.5%), which implies strength in large-cap MLPs vs. smaller cap names.

Interest rates and major energy commodity prices (oil and natural gas) saw little change week over week.  M&A fever helped drive MLPs higher this week, spurred on by announced drop down acquisitions (EEP and PBFX), implied drop down acquisitions (TCP), and third party acquisitions (LINE and VNR).

Weekly MLP Review_9-19-14

Winners & Losers

They say there’s always a bull market somewhere, and this week it was in MLPs with Canadian parents.  TCP was up 20.6% to lead all MLPs and EEP was up 10.1%.  This week’s announced drop-down to EEP was more evidence of ENB placing more strategic emphasis on its MLP than it has in the past.

Top5Bottom5_9-19-14

Top5Bottom5_9-19-14_chart

The drop down acquisition potential of EEP and TCP has always existed, but the parent companies of each have not been nearly as aggressive as some of the large corporations in the US with MLPs in place (WMB or SE, for example).  Of the 14 MLPs that were publicly-traded prior to 2000, and are still trading today, EEP and TCP are in the bottom 5 in terms of last 3 years distribution CAGR.  TCP has grown at a much higher rate than EEP since 2000.

EEPandTCP

The market has been slow to give TCP and EEP credit for its drop downs, even as they each signaled more aggressive stances (TCP consistently has said TRP intends to double EBITDA in the next few years), because of lower than average distribution growth in more recent years.

EEP’s perception (and price) changed over the summer, when EEP announced a major IDR restructuring, and this week’s drop-down announcement provided additional proof of a more aggressive strategy going forward.  EEP’s actions seem to have changed the market’s perspective on TCP, so that TCP is getting an excess of credit for its potential as a drop-down MLP, without announcing any further plans.

Terrance_and_Phillip

Until very recently, investors weren’t missing much by not owning EEP and TCP.  But, in today’s market, the risk of not owning a poor performing MLP is very high, as poor performing MLPs continue to get fixed one way or another.  TCP hasn’t announced any changes, but with each increase in its unit price, the capital cycle between TCP and TRP gets a bit more virtuous.  But until its pipeline projects get approved, TRP won’t have much use for extra capital from selling assets to an MLP.

News of the (MLP) World

One MLP IPO launched this week, the first of what should be a crowded fall equity calendar.  There were also several follow-on offerings and two large upstream MLP deals.

News-of-the-World

Equity

  • CONE Midstream (CNNX) launches $350mm MLP IPO with 4.25% midpoint IPO yield (filing)
    • CNNX is jointly sponsored by CONSOL and Noble Energy, as part of their development joint venture in the Marcellus Shale
    • CNNX will own gathering assets underpinned by acreage dedications for 496,000 acres and 20-year fixed-fee gathering agreements
    • CNNX will have no debt at IPO
    • CNNX plans to grow organically (through well hookups and gathering expansion) and via drop down acquisitions from CONE Gathering, LLC (jointly owned by sponsors)
    • First down-the-fairway midstream MLP since PBF Logistics in May of this year
  • Sunoco Logistics (SXL) prices public offering of 7.7mm units at $48.46/unit, raising $373.1mm in gross proceeds (press release)
    • Overnight offering, priced at 3.0% discount to prior close
  • LeHigh Gas Partners (LGP) prices public offering of 3.6mm units at $33.99/unit, raising $122.4mm in gross proceeds (press release)
    • Overnight offering, priced at 4.0% discount to prior close
  • Viper Energy Partners (VNOM) prices public offering of 3.5mm common units at $28.50/unit, raising $99.8mm in gross proceeds (press release)
    • One day marketed offering, with a file-to-price decline of 5.2%, and traded down another 4.5% in the next trading session
    • Proceeds to be used to repay borrowings on its revolving credit facility

M&A / Growth Projects

  • PBF Logistics (PBFX) announces $150mm drop down acquisition (press release)
    • PBFX will acquire the Delaware City Heavy Crude Unloading Rack from parent PBF Energy
    • To be funded with $135mm in cash and $15mm in units issued directly to PBF
    • Asset is expected to generate $15mm in annual EBITDA (10x) and will be supported by a 7-year throughput agreement
  • Enbridge Energy Partners (EEP) announces $900mm drop down acquisition (press release)
    • EEP to acquire the remaining 66.7% interest in the US segment of the Alberta Clipper Pipeline that it does not own from Enbridge, Inc.
    • Funded with $600mm of equity issued to Enbridge and $300mm in cash
    • Purchase price represents 11x 2015E, driving immediate DCF/L.P. unit accretion of 3%
  • Linn Energy (LINE) announces swap with Exxon for mature California properties (press release)
    • LINE to trade portion of its Permian Basin acreage to Exxon in exchange for operating interests in California’s South Belridge Field
    • California properties are producing 3.4 MBoe/d (100% oil), with 10% annual decline rates
    • Exxon will receive 17,000 net acres prospective for horizontal Wolfcamp drilling in the Midland Basin
    • Swap expected to close in 4Q 2014
  • Vanguard Natural Resources (VNR) announces $525mm acquisition of natural gas and liquids properties in Colorado’s Piceance Basin from Bill Barrett Corp (press release)
    • Assets include proved reserves of 389 bcfe (79% proved developed, 79% natural gas)
    • 67 MMcfe/d of current net production, 16 year reserve life, 11% annual decline rate expected
  • Spectra Energy (SE) and Spectra Energy Partners (SEP) announce details of previously announced Access Northeast natural gas pipeline project (press release)
    • Expected to cost $3bn and be in-service by late 2018
    • Pipeline will be jointly developed with Northeast Utilities

Other MLP News

  • TransCanada gets activist attention from Third Point (Reuters)
  • TransCanada reveals that Keystone XL project costs estimates have doubled (Wall Street Journal)
    • Revealing this may make it easier to justify when the project ultimately gets cancelled
  • TransMontaigne announces new terminalling services agreement with Metroplex Energy relating to Florida refined products tankage (press release)
    • Metroplex is a subsidiary of RaceTrac Petroleum, Inc.
    • Agreement covers tanks with approximately 2.17mm bbls at 4 terminals owned by TLP in Florida
    • The tanks related to the agreement were under contract to NGL Energy as part of the acquisition of TLP’s GP, and this transaction removes that obligation from NGL

Industry

  • A positive study on the impact of fracking on water pollution (Philly.com)
    • Full study available here
  • A firm is considering a $6bn LNG plant that might get Galveston, Texas into the LNG game (FuelFix)
  • Warning of pending train wreck with no crude oil export ban changes from Rice University economist (FuelFix)

Published
Sep 14th, 2014

Category:
MLP Market Post

Week Thoughts: MLPs Fall Back

MLPs held up for most of the week, and were flat heading into Friday, when they fell sharply, along with the rest of the energy sector (the S&P 500 Energy Index -1.5% Friday and -3.7% for the week).  Lower crude oil prices appear to be the culprit when it comes to weak energy stock performance.  Rising interest rates hit utilities hard (UTY -1.8% Friday and -3.1% for the week).   MLPs, susceptible to both rising rates and lower commodity prices, outperformed energy stocks and utilities (MLP Index -1.8% for the week).

Weekly MLP Review_9-12-14

The interest rate on US 10 year Treasuries rose 15 basis points this week, including 8 basis points Friday.  The 10 yr rate is now 2.61%, the highest it has been since July 7th.  That July 7th high came immediately after a week when the rate rose 12 basis points, and marked the beginning of the worst July ever for the MLP Index (-3.6%).

Oil continued its slide this week, with WTI closing at $92.30/bbl, down 1.1% for the week.  Brent crude oil closed below $100/bbl for the first time in 17 months this week, on the strength of supply growth in the U.S. it appears.

2% Down Days

The MLP Index was down more than 2.5% intraday on Friday, and was more than 2% down for most of the day.  I knew it had been a while since the index closed down more than 2% in a single day, so I started tallying up such events over the last 7.5 years.  It hasn’t happened since June of 2013, and it is happening with much less frequency in recent years, as shown below.  MLPs rallied in the final hour of trading to keep 2014 free of 2% down days.

2 percent amz declines

The shallower nature of intra-day MLP selloffs these days may be attributable to the increase in institutional capital monitoring the sector.  When MLPs seems to be so well-positioned fundamentally, and when stock prices continue to show strength, new money has a hard time finding an entry point into MLPs.  In that environment, dips get bought sooner than before.  Does that mean we won’t have a 2% down day this year at all?  I guess it’s possible, but it would be a first for the MLP Index.  On the other hand, we probably won’t see 26 such days in a single year any time soon.

Winners & Losers

Each of the top 5 performing MLPs this week is not a member of the Alerian MLP Index, which may have helped them avoid the sector-wide downdraft Friday.  OILT led all MLPs with a 5.3% gain for the week, making it 2 weeks in a row for OILT in the top 5.  TEP’s announcements around distribution growth surprised the market a bit, sending units higher.  There was no other news around the top 5 MLPs.

On the downside, VLP’s strength earlier in the year makes it susceptible to selling at these levels, same with EQM.  None of the bottom five had any company-specific news and each one was from a different MLP sub-sector.

Top5Bottom5_9-12-14

Top5Bottom5_9-12-14_chart

In terms of year to date total returns, SUSP climbed into the top 5, displacing EQM.  OILT leapfrogged TEP into 3rd place, while the bottom 5 saw no changes in ranking or constituents.  Each of the bottom 5 were down for the week.

Top5Bottom5_9-12-14_YTD

Top5Bottom5_9-12-14_YTD_chart

MLP News

A lot happened this week outside of MLPs.  Fall weather has returned to the Northeast, Apple launched a campaign to make smart watches cool and using plastic credit cards uncool, Ray Rice jerseys are no longer fit to wear in public, and Alibaba’s IPO price range makes it likely to be the largest US IPO ever.

In MLP land, on the other hand, not much happened, especially compared with last week’s flurry of pipeline announcements and equity deals.  A preferred offering, two debt deals, one growth project and one tiny acquisition is all there was.

News-of-the-World

Equity

  • Vanguard Natural Resources (VNR) prices public offering of 4.0mm series C preferred units at $25.00/unit, raising $100mm in gross proceeds (press release)
    • Cumulative redeemable perpetual preferred units with a 7.75% coupon
  • Scorpio Tankers, Inc. and International Paper Company are (separately) exploring MLP IPOs (Bloomberg)

Debt

  • Buckeye Partners (BPL) prices $600mm of senior notes (press release)
    • $300mm worth of 4.35% senior notes due 2024 at 99.825% of par
    • $300mm worth of 5.6% senior notes due 2044 at 99.876% of par
  • Dynagas LNG (DLNG) prices $250mm of 6.25% senior notes due 2019 (press release)

M&A / Growth Projects

  • Sprague Resources (SRLP) announces $22mm acquisition of natural gas and electricity marketing business for $22mm from New Jersey-based Metromedia Gas & Power, Inc. (press release)
  • Boardwalk Pipeline (BWP) announces open season for natural gas transportation project to serve Freeport LNG’s planned liquefaction terminal (press release)
    • Gulf South Pipeline, a subsidiary of BWP, has entered into a 20-year firm transportation agreement with shippers to transport 1.4 bcf/d of natural gas to serve the first two trains of the Freeport LNG terminal
    • Gulf South will construct a 65-mile pipeline supply header to serve the LNG terminal
    • Open season is seeking binding commitments for additional capacity above 1.4 bcf/d
    • Expected to be in-service by 2018

Other MLP News

  • Alerian announces Hi-Crush Partners (HCLP) to replace Martin Midstream (MMLP) in the Alerian MLP Index (press release)
    • MMLP has roughly a 0.37% weight in the index right now, so not a huge change, but this is just the beginning of a series of changes coming to the MLP Index in the next 6 months once the KMI/KMP/EPB and WPZ/ACMP deals close
    • Alerian made no changes to the Alerian MLP Infrastructure Index that is tracked by the largest sector ETF
  • Tallgrass Energy (TEP) announces intent to increase the next 2 quarterly distribution/unit to result in aggregate distribution increase of $0.40/unit on an annualized basis (press release)
    • Announcement was part of press release announcing close of acquisition of 33% interest in Pony Express Pipeline, LLC for $600mm total consideration

Industry

  • The US Department of Energy (DOE) announces final approval of Sempra Energy’s Cameron LNG facility for shipments to non-FTA countries (press release)
    • $10bn project is expected to commence operations in 2018
    • First final authorizations for non-FTA countries since 2012 when Cheniere Energy’s Sabine Pass received DOE clearance
  • Larry Summers outlines the case for crude oil exports: “I don’t understand the opposition.” (Fuel Fix)
  • 17% increase in US exports of refined products year over year, according to EIA, driven by Gulf Coast refinery output (Fuel Fix)

Published
Sep 7th, 2014

Category:
MLP Market Post

MLP Week Thoughts: Expanding Pipeline of Pipelines

MLPs pulled backed this week in a flat broader stock market (MLP Index -0.8% compared with +0.2% for the S&P 500).  Falling oil & natural gas prices, a large number of MLP equity offerings and general profit taking were probably a larger contributor to MLP weakness than rising interest rates.  Utilities were up this week, despite a rising 10-year US Treasury yield.

Weekly MLP Review_9-5-14

See the extensive news section for details on the numerous M&A and pipeline announcements, and on the more than $1.2bn of equity offerings this week.

I listened to many upstream company presentations this week at a conference in New York, and a clear theme I heard (particularly for northeast producers) was their need to have access to firm transportation capacity out of their operating regions.  In an environment where supply is plentiful and regional demand is scarce, producers are stepping up to support pipeline projects to reach viable markets.  Utilities have taken notice of the bottlenecks as and are capitalizing on the opportunity to secure long-term supply access at attractive rates by signing up for pipelines as well.  Companies building the pipelines (MLPs or companies that will eventually drop pipelines into an MLP) are the clear winners.

Winners & Losers

Not much rhyme or reason to the moves at high end of the MLP sector this week.  WLKP led all MLPs with a 9.8% pop this week, making its total return since IPO 39%.  High growth MLPs OILT and MPLX, and low growth high yielders EEP and NMM round out the top 5.

On the downside, notoriously volatile sand MLPs were hit particularly hard this week.  HCLP was down 8.1% (after being up 12.0% last week) and EMES (not pictured below) was down 11.4%.  NSLP announced last Friday afternoon that its Chairman was resigning from the board to spend time growing his other companies, which probably contributed to the drop this week.

It is notable that none of the 4 MLPs that executed public offerings made the bottom 5. SUSP and GLOP made the bottom 5 for the second straight week.

Top5Bottom5_9-5-14

Top5Bottom5_9-5-14_chart

YTD, SUSP dropped out of the top five, replaced by OILT.  PSXP was down 5.1% this week, but maintained its top position, given that numbers 2 and 3 were down big as well.  It seems like a fair amount of profit taking happened this week at the top end of the sector.

Top5Bottom5_9-5-14_YTD

Also, each one of the bottom 5 declined, which could also have been profit taking in names like BWP and NRP that have bounced off the bottoms they hit early in 2014.

Top5Bottom5_9-5-14_YTD_chart

News of the (MLP) World

MLPs came out of summer with their press release guns blazin’.  There were 4 new pipelines announced and 2 binding open seasons on previously announced pipelines.  With the exception of NGL’s smaller crude pipeline announcement, each of the potential pipelines represents multi-billion dollar investments for the companies involved.  The competition for pipeline commitments from these various regions will be fierce and fascinating.

There were also 4 follow on equity offerings for a total of $1.2bn issued this week.  The last few years, the time period between Labor Day and Christmas has seen much heavier MLP equity issuance than other time periods, so I expect this won’t be the last $1.0bn+ equity week in the next few months.

News-of-the-World

Equity

  • Summit Midstream (SMLP) prices public offering of 4.3mm units owned by Summit Midstream Partners Holdings, LLC at $53.88/unit, raising $234.3mm in gross proceeds for selling unitholders (none for SMLP) (press release)
    • Offering upsized from 4.0mm units to 4.3mm units
    • Overnight offering, priced at 4.0% discount to prior closing price
  • Memorial Production (MEMP) prices public offering of 13.0mm units at $22.29/unit, raising $289.8mm in gross proceeds (press release)
    • Overnight offering, priced at 3.75% discount to prior closing price
  • Buckeye Partners (BPL) prices public offering of 6.75mm units at $80.00/unit, raising $540.0mm in gross proceeds (press release)
    • One-day marketed offering, traded up 1.2% from filing to pricing
    • Offering upsized from 5.0mm units originally offered
    • Proceeds to be used to partially fund acquisition of 80% of Trafigura assets
    • Second offering in a month from BPL, following $199.2mm offering priced on 8/12/14 at $76.60/unit
  • Capital Products (CPLP) prices public offering of 15.0mm common units at $10.53/unit, raising $158.0mm in gross proceeds (press release)
    • Overnight offering, priced at 3.92% discount to prior closing price
  • Sunoco Logistics (SXL) files S-3 registration statement to register up to $1.0bn of common units (filing)
  • DCP Midstream (DPM) files equity distribution agreement to sell up to $500mm of common units at-the-market (filing)

Debt

  • Plains All American (PAA) prices $750.0mm of 3.60% senior notes due 2024 at 99.842% (filing)

M&A / Growth Projects

  • Buckeye Partners (BPL) announces acquisition of Trafigura’s South Texas coastal terminal complex for $860mm (press release)
    • BPL to form Buckeye Texas Partners (BTP), which will be 80% owned by BPL and 20% owned by Trafigura
    • Assets of BTP will include: a deep-water, high volume marine terminal located on the Corpus Christi Ship Channel, a condensate splitter and LPG storage complex in Corpus Christi, and three crude oil and condensate gathering facilities in the Eagle Ford Shale
    • Assets supported by 7-10 year minimum volume throughput, storage and tolling agreements with Trafigura
    • BTP will invest $240mm to $270mm through 1Q 2016 on growth projects related to the assets
    • BPL expects the acquisition will reflect an 8.5x EBITDA multiple in 2016, after completion of growth projects
  • Enable Midstream (ENBL) announces $200mm natural gas processing plant in SCOOP play (press release)
    • ENBL will construct a second new 200 mmcf/d natural gas processing facility in the rich gas region of Oklahoma known as the South Central Oklahoma Oil Province (SCOOP), near ENBL’s under construction Bradley Plant
    • Expands overall ENBL processing capacity in the Anadarko Basin to 1.685 Bcf/d
    • Plant is contracted with Continental Resources and other producer customers in the region based on existing acreage dedications
  • Boardwalk Pipeline (BWP) announces $295mm acquisition of ethylene from Chevron (press release)
    • The Evangeline ethylene pipeline system is a 176-mile interstate pipeline capable of transporting ~2.6 billion pounds of ethylene/year and is supported by long-term, fee-based contracts
    • Transports ethylene between Port Neches, TX and Baton Rouge, LA where it interconnects with the BLM ethylene distribution system
  • LRR Energy (LRE) announces $38.0mm acquisition of mature oil and natural gas properties in Oklahoma (press release)
    • Properties are located in Lincoln and Creek Counties in Oklahoma
    • 2.5 MMBoe of proved reserves acquired, 83% proved developed producing (89%)
    • Average net production of 275 Boe/d for last 6 months (through 6/30), with 4% annual decline rate expected
  • Ferrellgas (FGP) expands Eagle Ford midstream operations with acquisition of two additional saltwater disposal facilities from C&E Production, LLC (press release)

New Large Scale Natural Gas Pipeline Projects

  • Williams Partners (WPZ) announces open-season for new Western Marcellus Pipeline Project (press release)
    • New pipeline project would expand Transco interstate pipeline to provide incremental firm natural gas transportation capacity to growing markets in the Mid-Atlantic and southeastern U.S. by late 2018
    • Designed for 1-2 bcf/d of capacity from Western Marcellus and Utica supply receipt points, connecting to Transco at compressor station 165
  • Dominion, Duke Energy, Piedmont Natural Gas and AGL Resources announce JV for new $4.5-5.0bn Atlantic Coast Natural Gas Pipeline (press release)
    • Pipeline would extend 550 miles from Harrison County, WV through Virginia with an extension to Chesapeake, VA and then south through central North Carolina to Robeson County
    • The JV would be owned 45% by Dominion, 40% by Duke Energy, 10% by Piedmont and 5% by AGL Resources
    • All 4 partners plan to be customers of the pipeline under 20-year contracts, along with one additional customer, PSNC Energy
    • Initial capacity is expected to be 1.5 bcf/d, with an in-service date of 2018
    • Project could end up being 2.0 bcf/d or more with additional customer demand

Open Seasons for Previously Announced Pipeline Projects

  • EQT Corporation (EQT, GP of EQM) and NextEra Energy announce binding open season for capacity on Mountain Valley Pipeline project joint venture (press release)
    • Mountain Valley Pipeline project will connect EQM’s Equitrans Pipeline system in West Virginia to Transco pipeline at compressor station 165 (yes, the same connection point as the WPZ pipeline above)
    • 1.5 bcf/d of capacity on the pipeline has been secured already, but EQT is seeking additional commitments for the pipeline, which is expected to have at least 2.0 bcf/d of capacity
    • This pipeline looks like it will run basically alongside the Williams Western Marcellus Pipeline discussed above
  • Kinder Morgan (KMP) announces binding open-season for previously announced UTOPIA (Utica-to-Ontario Pipeline Access) NGL pipeline project (press release)
    • 240-mile, 12” pipeline from Ohio to Windsor, Ontario, Canada
    • Pipeline will initially have capacity to transport 50,000 bbls/d of ethane and ethane-propane mix
    • Expected to be in-service by early 2018

New Oil Pipelines Out of Niobrara

  • NGL Energy Partners (NGL) announces binding open season on joint venture crude oil pipeline called the Grand Mesa Pipeline with initial capacity of more than 130,000 bbls/d (press release)
    • Pipeline will originate in Weld County, Colorado and will terminate at NGL’s Cushing, OK terminal
  • Enterprise Products (EPD) announces binding open season for proposed new pipeline from the Bakken through the DJ Basin in Colorado down to Cushing (press release)
    • 30-inch diameter pipeline would run 1,200 miles to the Cushing hub in Oklahoma
    • Initial capacity of 340,000 bbls/d, expandable to 700,000 bbls/d, with the capability to transport up to 6 grades of crude oil and products, including condensate
    • If demand is there for the pipeline, it would be built in stages, with the DJ Basin to Cushing section coming online in 4Q 2016, with the rest of it in service by 3Q 2017