MLP Market Update

MLP Market Update
Commentary on Master Limited Partnerships

Published
Oct 19th, 2014

Category:
MLP Market Post

Week Thoughts: MLP Indiscrimination

After last week’s slaughter, MLPs dropped further to start the week, but snapped back Wednesday and Thursday.  MLPs were flat Friday and finished up 2.0% overall this week, well ahead of the S&P 500 and utilities.  The turnaround mid-week was extraordinary, reminiscent of a few years ago during the debt ceiling issue or during the global financial crisis.

Weekly MLP Review_10-17

After the snap back and a calm Friday, it’s tempting to say MLPs are back on their upward sloping track, but volatility like we saw the last few weeks created some big losers and some big winners, which may lead to more choppy MLP trading as we head into seasonal weakness from ex-dates in November and potential tax loss selling in December.

Year to date the equal weight index (+2.8%) has significantly underperformed the market cap-weighted Alerian MLP Index (+7.2%), which is probably the result of weakness in upstream MLPs and KMP/EPB outperformance since August related to their buyout.  All the MLP indices are ahead of the S&P 500 for the week, and for the year so far, and they are all under-performing the UTY utility index (+12.7%).

The interest rate on the US 10-year dropped 8 bps this week and finished Friday at 2.20%, but at one point Wednesday it dipped below 2% for the first time since June 2013, even with the end of QE looming.  Rates were going in the other direction around this time last year, and finished the year above 3%, but so far global (and European in particular) growth has pushed money into US bonds and sent rates lower this year.  WTI crude oil futures dipped below $80 this week, but seemed to find a bottom and ended the week back above $83/bbl.  Larger than expected natural gas inventory injections, along with general commodity malaise, helped to push natural gas and lighter NGLs down this week as well.

Recent Sector Volatility

It was indiscriminate selling on Monday and Tuesday, and indiscriminate buying Wednesday and Thursday.  Driving some of that action was probably some forced unwinding of total return swaps and hedge funds needing to get out at any price.  Also contributing were negative fund flows out of open-end funds, which saw 4 straight days of negative outflows, ending Tuesday.  To fund redemptions, open-end funds have to sell whatever they can the day after the redemptions come through.

MLPs declined 5.0% on Monday, which was the 15th worst single day decline ever for the MLP index.  It was the worst day in an 8 day streak that saw the index decline 13.0%, making it one of the worst streaks we have seen in MLP land in terms of the number of consecutive down days and the depth of the selloff.  The good news is that MLPs have been extremely resilient after corrections in years past.

Speaking of resilient: out of the 4734 trading days of data we have on the Alerian MLP Index, there have only been 17 days of 4%+ performance.  This week, two such days happened back-to-back.  The list of all such days is in the below table.  Two other times the MLP Index was up 4%+ on back-to-back days, both in October of 2008.  Each of those times the index was down on the third day.  This week, day three was slightly positive.

4 Percent Moves Chart

Below is a chart of the last 30 days of the Alerian MLP Index (click to enlarge).  There are some stock specific charts that look much wilder, but this one is pretty wild for a whole sector.  As shown below, the Index is down 7.5% in the last 30 days, including some substantial downdrafts and spikes along the way.

Alerian Last 30 Days

Below is a chart of the Alerian MLP Index year to date.  MLPs started an uptrend in late March, which faded in late July up until the announcement of the KMI/KMP/KMR/EPB deal that sent MLPs up to new all-time highs at the end of August, and it corrected from there.  The bottom appears to be in, but a ways to go (another 8.4%) before we get back up the levels of late August.

Alerian YTD Chart

Winners & Losers

Dominion Midstream was up 32.5% over its first 3 days of trading, and was by far the best performing MLP this week.  Other small-cap, services and upstream MLPs CELP, HCLP and EROC made the top 5 as part of the bounce back in those subsectors.  Recent IPO VTTI rebounded 14.2% this week, and is actually the best performing MLP in the sector since the end of September (+3.9%), not counting DM.  On the downside, recent IPOs JPEP and HMLP performed the worst this week.

Top5Bottom5_10-17-14

Top5Bottom5_10-17-14_chart

For the year so far, SUSP returns to the top 5 this week.  On the downside, JPEP is already down 21.5% since its October 1 IPO and is now 4th worst for the year.  MCEP joins the bottom 5 for the first time this year, while VNR and CMLP moved out of the bottom 5.

Top5Bottom5_10-17-14_YTD

Top5Bottom5_10-17-14_YTD_chart

News of the (MLP) World

The capital markets story of the week was DM’s ability to price its IPO at the high end of the range and the strong after-market trading it saw.  No MLP IPO has ever priced in an environment as bad as the market environment faced this week.  During the financial crisis, there were no MLP IPOs from May 2008 until April 2010.  I don’t want to overstate its impact, but the DM IPO seemed to reassure the market of the demand from institutions for high-growth MLP IPOs.  The resilience of this offering will keep the IPO pipeline going (at least for name brand, high growth MLPs) for those in the queue like Shell Midstream, Antero Midstream and Hess Midstream.

The M&A story of the week was Targa announcing the acquisition of Atlas (ex-upstream).  Over the summer, Targa played the role of the target when ETE was in discussions to buy it.  This time, Targa plays consolidator.  Targa gets assets that fit with its current footprint, highlighted by APL’s strong footprint and processing plant pipeline in the Permian basin.  MLPs continue to find value in buying other MLPs, which should continue, and speculation on who might be next should continue as well.

News-of-the-World

Equity

  • Dominion Midstream (DM) prices IPO at $21.00/unit, raising $367.5mm in gross proceeds (press release)
    • IPO yield of 3.33%, lowest ever for an MLP (besting VLP and PSXP, which both priced at 3.70%)
    • DM opened its first trading day Wednesday at $22.50, and closed at $26.41 (+25.8%)
  • Memorial Production (MEMP) files S-3 to sell up to $250mm worth of common units (filing)
  • Ocean Rig Partners LP (ORLP) files initial prospectus for an MLP IPO to raise up to $305mm (filing)
  • Vanguard Natural Resources (VNR) announces $10mm common unit buyback program (press release)
    • Buybacks are very rare in the MLP space, but do happen from time to time (NRGY and ETE come to mind as other that have employed buybacks in the past)
    • The buyback was announced in a press release that touted VNR’s commodity price hedging program, distribution coverage sensitivities and other points to defend its unit price after it fell 24% over 30 days

M&A / Growth Projects

  • Targa Resources Partners (NGLS) announces acquisition of Atlas Pipeline (APL), Targa Resources Corp (TRGP) announces acquisition of Atlas Energy, L.P. (ATLS), after ATLS spins out upstream MLP interests (press release)
    • APL to be acquired in a unit-for-unit exchange, plus assumption of debt, for total value of $5.8bn
    • ATLS to be acquired for stock and cash, following spin-off of holdings not associated with APL. Transaction value of $1.9bn.
    • TRGP expects 35% dividend growth in 2015, NGLS expects 11-13% distribution growth in 2015, both up from current annual growth pace
  • American Midstream (AMID) announces acquisition of Costar Midstream for $470mm (press release)
    • Costar Midstream, a portfolio company of private equity firm Energy Spectrum, is an onshore gathering & processing company
    • Acquisition funded with 6.9mm AMID units and $272mm in cash
    • AMID calculates the EBITDA multiple for the acquisition to be 10.5x ($44.8mm implied EBITDA)
    • AMID expects to spend $70mm to $80mm over the next 12-18 months to complete growth projects that will drive the all-in multiple of the acquired assets down to 8.0x
    • AMID expects to be able to raise its quarterly distribution 3-5% for 1Q 2015, and 8-10% annually thereafter
  • Kinder Morgan Energy (KMP) announces $240mm expansion at Pasadena and Galena Park terminals (press release)
    • Includes construction of 2.1mm barrels of storage between the two terminals, and a new ship dock capable of handling ocean going vessels
  • Sunoco Logistics (SXL) announces binding open season for Delaware Basin Extension project (press release)
  • Mid-Con Energy (MCEP) announces $120mm acquisition (press release)
  • Westmoreland Coal announces acquisition of the GP of Oxofrd Resource Partners (OXF), announces asset contributions and restructuring transactions (press release)
    • GP interest and subordinated units and warrants of OXF acquired for $30mm
    • OXF to change its name to Westmoreland LP
    • Westmoreland intends to contribute assets to OXF after a series of restructuring transactions that include a 12-1 reverse split of common units, a reset of the minimum quarterly distribution and IDR tiers, and the reinstating of a $0.20/unit quarterly distribution (post reverse split)
  • NuStar Energy (NS) announced a JV agreement with a Pemex subsidiary (PMI) to develop pipeline infrastructure to transport propane and refined products from the Gulf Coast US into northern Mexico (press release)

Other

  • FISH (+1.4%), HCLP (+8.7%), KNOP (+12.9%), OILT (+4.8%), OCIR (+5.0%), KMI (+2.3%), KMP (+0.7%) all announced distribution increases

Published
Oct 12th, 2014

Category:
MLP Market Post

Week Thoughts: Oil Outbreak Spreads to MLPs

As noted and discussed in my Friday post, the Alerian MLP Index was down 7.0% this week, and the Alerian MLP Equal Weight Index was down 7.7%, which is explained mostly by smaller-weighted upstream MLPs vastly underperforming, and mega-weighted KMP outperforming.

Weekly MLP Review_10-10-14

The interesting thing to note about the Equal Weight Index is that after this week’s decline, it is very close to flat for the year (not counting distributions), and is underperforming the S&P 500 by quite a bit.  So, if you didn’t own KMP and you didn’t participate in any hot IPOs, and maybe had a few upstream MLP positions, your MLP portfolio is probably not having a very good year, which seems incredible given how just 6 weeks ago we were sitting at all-time highs.

Enough about MLPs, the real story of the week is commodity price weakness, and questions about where the demand will come from to soak up surplus oil given questions about global economic growth.  WTI oil futures closed at $85.56/bbl, a 4.7% decline week over week.  Natural gas, ethane and especially propane sold off sharply as well.  Oil’s decline was just a continuation of the steady decline from the end of July when oil was above $105/bbl.

This week was a clear reminder that interest rates are second to fundamental commodity flows and prices in terms of impact on MLPs.  The US 10 year rate was down 15 bps to 2.28%.  Treasuries and U.S. utilities were two of the only places to hide out this week (the UTY index was up 1.1%).

Winners & Losers

Upstream MLPs were the clear losers this week (LGCY, QRE and MCEP all in the bottom 5).  LGCY’s relationship with WPX (announced strategic changes to drilling focus this week) contributed to it having the biggest decline of all MLPs.  Well, technically not all MLPs, because variable distribution MLP EMES was down 21.8%, and general partner holdco MLP ATLS was down 20.7%.  CELP’s business is tied directly to upstream activities, which means it gets sold when energy and commodities get sold as well.  SUSP seems to be the outlier among the bottom five, dropping 18.1% despite having a business that is driven by drop downs and not oil prices, but perhaps financing those drop downs gets more challenging in the current MLP environment.

On the upside, IPO USDP did ok, considering it was marketing against Dominion Midstream this week, and then it priced right into the worst MLP sell off in years.  Non-US focused MLPs SDLP and GMLP did well.  Lightly-traded small cap refined products MLP WPT beat everyone and was one of only 2 MLPs that went up in price this week.

Top5Bottom5_10-10-14

Besides ATLS’s weakness, other GPs were pretty consistent in their under-performance: NSH (-14.3%), SEMG (-14.0%), CEQP (-12.6%), TRGP (-12.4%), ETE (-12.1%), ENLC (-11.1%), WMB (-10.2%), and OKE (-9.2%) were all down between 9-15%.  WGP, KMI and PAGP, which all out-performed the MLP Index.  The under-performing GPs included high-growth, popular GPs like SEMG, ETE, TRGP, and WMB, but also the limited growth GPs like CEQP and NSH.  This is more evidence of widespread selling that (with a few minor exceptions) had little to do with outlooks for individual stocks.

The year-to-date chart looks a bit different this week.  SUSP and RRMS fell out of the top five, replaced by EQM and SRLP.  CMLP joined the bottom 5, while VNR joined the bottom 5 for the first time this year, after falling 24.5% since mid-September.

Top5Bottom5_10-10-14_YTD

Top5Bottom5_10-10-14_YTD_chart

Closeted Indexer

While not top of mind during this week’s meltdown, at some point in the next few months, we will learn the fate of KMP and KMI in the eyes of the MLP indices that Alerian manages.  For now, Alerian has been understandably quiet on the issue, especially given how much capital tracks their indices.

The Alerian MLP Index is not capped, so keeping KMI in the index would make it a very large position, and around 35% of the index comprised of just 2 names (EPD and KMP), based on our calculations.   There is at least one research analyst that believes Alerian might stage a staggered exit for KMP over more than one quarter if it does come out.  Also, KMI could stay in one MLP index (like AMZI) while exiting the original index.  A couple of questions / issues come to mind.

  • If they changed the rules to allow KMI to be in the index, wouldn’t they need to allow in ETE and companies like Columbia Pipeline Group (the spin off from NiSource) as well?
  • Why is the most-followed index in the industry capped at 50 names? It would be great if Alerian used this as an opportunity to change course and become more inclusive going forward.
  • Keeping KMI in any index is problematic if KMI starts to acquire assets outside of traditional MLP assets. KMI will not be obligated to own MLP qualifying assets.

It will be very interesting to see how it plays out, because there are certainly large dedicated MLP managers that would prefer KMI stay in the index.

News of the (MLP) World

News-of-the-World

Equity

  • USD Partners (USDP) prices IPO at $17.00/unit, below the filing range (press release)
    • IPO yield of 6.76%, highest since GLOP in May of this year
    • USDP opened its first trading day Thursday at $15.80, and closed at $16.00 (-5.9%)
  • Natural Resource Partners (NRP) prices public offering of 8.5mm units at $12.02/unit, raising $102.2mm in gross proceeds (press release)
    • One day marketed offering, with a file-to-price decline of 6.8%
  • Dominion Midstream Partners (DM) launches MLP IPO to raise $350mm at a midpoint yield of 3.5% (filing)
    • Midpoint price already represents a record low MLP IPO yield, very confidently priced
    • Still on track to price Tuesday
  • Breitburn Energy (BBEP) prices public offering of 14.0mm units at $18.64/unit, raising $261mm in gross proceeds (press release)
    • Overnight offering, priced at 3.9% discount to prior close
  • Navios Maritime Midstream Partners files initial prospectus for an MLP IPO to raise up to $100 (filing)
  • Markwest Energy (MWE) files S-3 to raise up to $1.5bn worth of common units (filing)

M&A / Growth Projects

  • Targa Resource Partners (NGLS) announces plans to construct Delaware Basin and Williston Basin natural gas processing plants (press release)
    • Delaware Basin plant (in-service by 1Q 2016): 300 MMcf/d processing plant, a header pipeline originating at the new plant and extending into the southern portion of the play
    • Williston Basin (YE 2015 in-service): A 200 MMcf/d processing plant in McKenzie County
    • No indications on the economics or expected construction costs, but based on other plants, the combined cost of these plants should be at least $500mm
  • Global Partners (GLP) announces acquisition of Warren Equities for $383mm (press release)
    • Warren sells ~500mm gallons of fuel annually through 520 retail locations, and operates 147 Xtra Mart convenience stores
    • This transaction is the latest in what has become the most active asset acquisition corner of the MLP space
    • GLP expects the acquisition to produce $50-60mm of EBITDA in its second full year of operations (7x multiple)
  • NGL Energy (NGL) announces successful open season for recently announced Grand Mesa crude oil pipeline from DJ Basin in Colorado to Cushing (press release)
    • Grand Mesa pipeline is being developed jointly by NGL and Rimrock Midstream, LLC
    • Pipeline should be in-service by 2016 and will include 550 miles of new pipeline, 1,500,000 barrels of operational storage, and multiple truck injection points
  • Natural Resource Partners (NRP) announces $340mm acquisition of non-operated working interests in Bakken oil & gas properties (press release)
    • NRP acquiring 5,700 net acres from Kaiser-Francis Oil Company
    • Expected to generate $58-60mm in EBITDA in 2015, implying a 5.8x multiple

Other

  • EPD, PAA, GEL kicked off distribution announcement season with increases that were in line with recent quarterly raises
  • Oiltanking (OILT) announces new CEO from EPD’s deep management bench (press release)

Published
Oct 10th, 2014

Category:
MLP Market Post

MLP Checkup

MLPs were in free fall this week, the likes of which we haven’t seen since August 2011.  The Alerian MLP Index officially reached correction levels intra-day on Friday, reaching its lowest point since late March of this year.  At its low point for the day, the index was down 5.6% intra-day, 13.0% in 15 trading days since September 19th, and 13.5% since its most recent all-time high reached on the last day of August.  There is more on how recent MLP weakness compares with other selloffs in MLP history below, and more on individual MLP performance in my regular weekly post.

MLP Correction 2014

In times like this, when paper value is evaporating and fear starts to set in, it is important to step back and review the investment case for MLPs.  Last week, we published a marketing commentary on the MLP space.  The focus was to look at some of the fundamentals of the sector and highlight the strengths of the MLP story.  The main conclusion is that MLPs are poised to deliver 6-8% distribution growth, in line with historical averages.

You can click here to read the report, and please take the energy futures chart with a grain of salt as the data is from 9/15.

What the market is willing to pay for that 6-8% growth is the question mark.  After this week, it is clear that the market either doesn’t believe in continued distribution growth along historical levels, or that it believes the growth and doesn’t want to pay quite as much for it.  If growth is in question, that may have some merit if you believe oil prices get so low that drilling slows down or if you believe weaker economic growth reduces global demand for energy.   But the impact of those macro factors is probably overdone, especially given the fee-based nature of cash flow, recent long-term commitments to pipeline projects and LNG projects, and given we sit on the precipice of another potentially cold winter.

Historical Context of the Correction

This week was the 10th worst week for the MLP Index of all time (see below for others, many of which were associated with the financial crisis).  It was also the worst week in about 4 and a half years.  MLPs have been down for 6 straight days, and week over week have been down for 3 consecutive weeks.

Worst weeks ever

This current 6-day streak is the 29th streak of 6 or more consecutive down days for the Alerian index since 2000, and it is the 3rd such streak so far this year, but saw overall declines during the streak of less than 5%, compared with the current streak at -7.2%.   The good news in all of this is that history says after a horrible week like this, the market tends to bounce back, and recoup at least some of the losses from the selloff.

The Alerian MLP Index is at its lowest point since May of this year.  We have seen a 9.7% correction since the end of August, and a 9.2% correction since 9/19 levels.  This is a full correction.  If you go back and track the peaks and troughs of the MLP sector, the average peak-to-trough decline is around 9.6%, based on the below chart I published last year.  The current decline is near the average, which doesn’t mean it’s over, but it may help comfort you after a rough week.

2013 Correction

More on the week in MLPs later this weekend.