Mar 1st, 2015
MLP Market Post
After a positive week last week, MLPs declined 1.4% this week. The MLP Index has been unable to string together two consecutive positive weeks in more than 2 months. The market was (understandably) unable to soak up $1.7bn of new MLP equity this week without MLP prices declining. It didn’t help that PAA, which represents 7.5% of the index, was down 3.1% this week after executing a $1.1bn equity offering (its first marketed equity offering in more than 3 years).
MLP trading lately has reminded me of a toddler who is just beginning to try to walk. He takes a step, teeters, takes another step, loses his balance and falls on his butt. Ultimately he either learns to walk or breaks down crying after one too many failed attempts.
Similarly, MLPs trade up, seem to be getting momentum, but quickly lose their balance and fall back again. The challenge for MLPs is that the floor keeps tilting back and forth with changes in commodity prices, de-stabilizing equity offerings, and other risks like producer distress. Ultimately, with time, MLPs should emerge from this lengthy correction with reset expectations, positioned to produce attractive total returns off a lower base.
Despite ongoing choppiness for MLP stock prices, MLPs did manage to post positive monthly performance, breaking the longest streak of negative months (5) in the 20 year history of the MLP Index. Despite the positive month, MLPs remain 14.6% below their end-of-August peak. MLPs are still down so far in 2015, but with another positive month, MLPs may still close 1Q in positive territory.
Winners & Losers
RRMS, CMLP and DKL all reported 4Q results this week that pleased the market. RRMS’s beat and 3 year top tier distribution guidance sent it 8.7% higher on Friday. CMLP rebounded this week after resetting expectations for growth, but also calming the market with respect to maintaining its distribution. DKL put up another strong quarter of results and reiterated its almost top tier growth trajectory.
On the downside, TEP’s equity offering and GP IPO filing sent its stock price reeling. CNNX re-defined top tier growth a bit lower than we did here the last two weeks, and that was not well received by the market on Thursday and Friday, despite very strong quarterly results.
TEP and CMLP flip flopped vs. last week, but no other repeats in a very inconsistent MLP market so far in 2015.
For the year so far, FISH dropped from first last week to off the board this week, replaced by CLMT, EROC and LINE. On the downside, TOO crept up from the bottom spot to 3rd worst, while GMLP replaced fellow shipping MLP TGP in the bottom 5 this week, after falling 8 out of the last 9 days.
News of the (MLP) World
Lots of capital markets action this week, including more than $6bn of bonds and $1.7bn of equity. That’s a lot of paper for an MLP market that is still teetering and lacks the trading volume and daily flows from retail investors that provided tailwinds to the sector the last few years. It’s now an all-out war to attract investors, now that the overall pie isn’t growing quite so fast.
- Tallgrass Energy GP, LP (TEGP) filed initial prospectus for IPO of up to $862mm (filing)
- TEGP will own all of the IDRs of Tallgrass Energy (TEP) and whatever the total amount of “acquired units” ends up being
- Use of proceeds from the offering will be used to purchase TEP units from Tallgrass Development (the “acquired units”)
- TEGP is structured as a partnership, but plans to pay federal taxes and produce a 1099 (like PAGP)
- By comparison, the other filed GP IPO (EQM’s GP) is choosing to be a partnership and to be taxed as a partnership (like WGP)
- Tallgrass Energy (TEP) priced public offering of 10.0mm units at $50.82/unit, raising $508.2mm in gross proceeds (press release)
- Overnight offering, priced at 3.9% discount to prior closing, and traded down an additional 3.7% the next trading session
- Plains All American (PAA) priced public offering of 21.0mm units at $50.00/unit, raising $1.05bn in gross proceeds (press release)
- Overnight bought deal, priced at a 4.9% discount to the prior session’s closing price, and traded down an additional
- Magellan Midstream (MMP) priced $500mm of senior notes (press release):
- $250mm of 3.2% senior notes due 2025 priced at 99.871% of par
- $250mm of 4.2% senior notes due 2045 priced at 99.965% of par
- Cheniere Energy Partners (CQP) announced that Sabine Pass Liquefaction, LLC has priced $2.0bn of 5.625% Senior Secured Notes due 2025 (press release)
- MarkWest Energy (MWE) priced additional $650mm of 4.875% senior notes due 2024, priced at 101.625% (press release)
- Williams Partners (WPZ) priced $3.0bn of senior notes (press release):
- $1.25bn of 3.6% senior notes due 2022
- $750mm of 4.0% senior notes due 2025
- $1bn of 5.1% senior notes due 2045
M&A / Growth Projects
- Valero Energy Partners (VLP) announced $671mm drop-down acquisition from sponsor (press release)
- Purchase priced represents attractive multiple of 9.0x expected EBITDA
- Financed with $211mm in cash, $360mm of debt, and $100mm of equity issued to Valero Energy Corp
- Acquisition includes 2 oil and refined products terminal facilities with combined storage capacity of more than 13mm barrels that support a refinery in Houston and one in Louisiana
- Plains All American (PAA) announced formation of JV with Magellan Midstream (MMP) to construct previously announced Saddlehorn Pipeline project (press release)
- Saddlehorn is a 550-mile pipeline that will transport oil from the DJ Basin to storage facilities at Cushing, OK
- Volumes associated with PAA’s marketing activities in the region are expected to help the pipeline owners realize “meaningful upside to base level returns”
- The pipeline is expected to cost $800-$850mm and to be operational by mid-2016
- Plains All American (PAA) announced acquisition of crude oil terminal in the Bakken that is currently under construction (press release)
- 500,000 barrels of existing storage, but is permitted for up to 2.0mm barrels
- Cypress Energy (CELP) announced $52.6mm drop down acquisition (press release)
- CELP acquired remaining 49.9% interest in Tulsa Inspection Resources entities that it did not previously own from Cypress Energy Holdings, LLC
- Purchase price, expected to be financed with borrowings, represents 7x EBITDA
- Enterprise Products (EPD), MarkWest Energy (MWE), DCP Midstream (DPM) and Anadarko form JV for Panola NGL Pipeline (press release)
- EPD will assign 45% ownership interest in its wholly owned Panola Pipeline Company, LLC to the JV partners, distributed evenly among the three new partners
- The JV will fund an expansion of the pipeline by 50,000 bbls/d by 1Q 2016
Feb 22nd, 2015
MLP Market Post
MLPs rebounded this week, with most of the gain came on Friday when MLPs rallied despite lower oil prices. The Alerian MLP Index (AMZ) traded up 0.7% for the week, and is now 3.0% higher than the February low from last Wednesday. Performance was better among midstream MLPs than upstream MLPs, and better among larger MLPs, with significant differentiation among winners and losers within subsectors.
The S&P 500 posted a third consecutive positive week up 0.6% to new highs, while utilities posted 1.0% gains for the week. Oil prices finished 4.6% lower this week on continued U.S. inventory builds, and the latest rig count reports that apparently weren’t draconian enough to sustain a fourth consecutive positive week for oil prices. Continued cold weather helped natural gas prices spike, up 9.6% this week and 17.1% since hitting a 52-week low two weeks ago. Cold weather has also helped propane price change this year outpace all other energy commodities.
Top Tier Over the Years
Last week, I ranked MLPs that have paid a distribution for at least a year (so not including recent IPOs) based on their historical annual distribution growth rates. Top Tier MLPs are growing quite rapidly, with each of the top 20 MLPs growing distributions at an annual rate of more than 15%.
I was curious about how that top tier looked 5, 10, and 15 years ago. I have run the numbers and below I share the summary results. The number of fast growing MLPs has expanded along with the universe of MLPs, but the percentage of MLPs growing more than 15% annually has been higher than it is today before (in 2005).
- MLP distribution growth rates were quite low exiting 2009 after the financial crisis sent commodity prices tumbling. MLPs appear better positioned this time around based on 2015 guidance so far.
- In 2000, there were still many MLPs content not to grow distributions at all, about half of the universe of 19 MLPs had not grown distributions at all in the 3 years prior to 2000. This was the very early stages of the growth MLP model. (KMP led the way with 32.0% 3 year CAGR, followed by BPL at 17% and Teppco Partners at 15%).
- 2005 was close to the apex of the first round of growth MLPs that were able to grow consistently by acquiring assets from third parties. Once more MLPs came to market, competition for acquisitions heated up, and the sector started shifting towards “organic” growth and drop-down acquisitions.
- 2015 growth MLPs rely on sponsor-driven growth (i.e. drop downs). 17 of the top 20 fastest growing MLPs today achieved their growth with the assistance of drop downs. In 2010, just 7 out of 20 relied on drop downs. In 2005 and 2000, drop-down MLPs were even scarcer.
Another Obtuse Index Change
Alerian announced BWP to be added to the 50-member Alerian MLP Index and Alerian MLP Equal Weight Index, replacing APL (press release). BWP was removed from the index last year after cutting its distribution drastically. Prior to its removal, BWP had been in the index since December 2005 (just a month after its IPO in November 2005, before there were 50 MLPs trading). BWP does not currently pay its minimum quarterly distribution, which is a criteria for inclusion in the index. I guess there were no MLPs that met all the qualifications for inclusion, so BWP may have been added because it checked the most boxes of Alerian’s criteria (found here).
Expect more turnover with the index going forward, assuming that distribution cuts beyond the MQD disqualify VNR, EVEP, LINE and BBEP from inclusion in the next rebalancing, and assuming the ETP/RGP deal closes. Below is a chart that highlights the changes to the index since the beginning of 2014, which highlights the massive turnover and the weight redistribution towards large caps, but also some names getting shuffled in and out of the index (yellow shaded names).
Winners & Losers
TEP announced solid results and surprised the market by giving 3 year guidance for 20%+ distribution growth annually. RMP caught a bid this week, presumably on stronger gas prices and a possible read through to higher volumes. PBFX continues to climb higher after its big distribution announcement last week. Better results out of MEP caught the market by surprise, sending its units higher.
On the downside, upstream MLPs VNR and NSLP were dragged down by lower oil prices, but we aren’t seeing the wide daily swings in upstream MLPs that we saw a few weeks ago. CMLP was down on news that a customer that represents 10% of EBITDA may finally throw in the towel and go CH 11. EQM seems to be suffering from some GP overhang, down 6.7% this week. PSXP’s offering contributed to its weakness.
NSLP went from top performer to near the bottom on weaker oil prices this week. MEP made it two weeks in a row in the top 5.
Year to date, small cap, high beta MLPs dominate the top and bottom 5. Of note, I have not included NKA and RNO in these charts and will not going forward. Generally stocks that trade below $5.00 and pay little or no distribution show up on these charts because of volatility, but are mostly meaningless to MLP investors, so it makes sense to exclude them to get a better picture of what’s moving among significant MLPs.
DPM and WLKP escaped the bottom 5 this week, while CELP and NMM made the cut for the top 5, displacing NSLP and LRE.
News of the (MLP) World
Reports of 4Q2014 results were again the focus this week. Results and stock price reactions were mixed, but the market generally reacted positively to receiving clarity on 2015 capital expenditure and distribution growth plans. While trading volumes in MLPs have trended down over the last few months, the capital markets remain open to MLPs, confirmed by a $396mm equity offering from PSXP.
- Phillips 66 Partners (PSXP) priced public offering of 5.25mm units at $75.50/unit, raising $396.4mm in gross proceeds (press release)
- One day marketed offering, with a file-to-price decline of 4.2%, and PSXP traded down 0.7% the following day
- Proceeds to be used to partially fund the drop down acquisition announced this week
- Phillips 66 Partners (PSXP) priced $1.1bn of senior notes, including (press release):
- $300mm 2.646% senior notes due 2020 at par
- $500mm 3.605% senior notes due 2025 at 99.967% of par
- $300mm 4.680% senior notes due 2045 at 99.953% of par
M&A / Growth Projects
- EnLink Midstream (ENLK) announced drop down of additional 25% interest in EnLink Midstream Holdings for $925mm (press release)
- ENLK has been very active lately, this transaction represents the 3rd acquisition of 2015 for ENLK and the 5th acquisition in the last 6 months
- 100% equity financed with the issuance of 31.9mm units to sponsor EnLink Midstream LLC (ENLC)
- ENLK now owns 75% of EMH, with ENLC holding the remaining 25%
- Acquisition price represents a 9x multiple of expected 2015 EBITDA
- Phillips 66 Partners (PSXP) announced acquisition of interests in 3 pipeline systems from sponsor for $1.01bn (press release)
- PSXP will acquire 1/3rd interest in Sand Hills and Southern Hills NGL pipeline companies and a 19.5% interest in the Explorer pipeline
- Financed with $880mm of cash (funded with debt and equity issuances above) and 1.7mm units issued to PSX
- Acquisition price represents 9.5x multiple of expected 2015 EBITDA
- Sunoco Logistics (SXL) announced the acquisition of 40% of the West Texas Gulf oil pipeline system for $456mm (press release)
- SXL owned 60% of the pipeline already, and now owns 100%
- Acquisition closed in two separate transactions in December and January
- The pipeline system connects Permian Basin produced oil to multiple markets across Texas
- NGL Energy (NGL) announced plans to increase the size of Grand Mesa oil pipeline to a higher capacity 20-inch diameter design (press release)
- Increase in size of the pipeline will increase the capacity from 130,000 bbls/day to 200,000 bbls/d
- Grand Mesa is currently under construction and expected to be completed by 4Q 2016
- ARC Logistics (ARCX) announced acquisition of an oil terminal in Joliet, Illinois in a JV with GE Energy Financial Services (press release)
- Financed in part with a PIPE of $75mm with “institutional investors” at $17.00/unit
- ARCX closed at $19.82 Friday, up 7.7% on the day, but representing unrealized gains for the PIPE investors of 16.6%
- Acquisition represents 9.0x EBITDA for its portion of the acquisition ($130mm)
- Assets supported by 3-year contracts with a major oil company and with minimum volume commitments
Feb 15th, 2015
MLP Market Post
The MLP Index stumbled this week, but the index remains up 2.8% for the month so far, on track to post its first positive month since August. The index has produced negative 13.9% total return since the end of August, but has rallied 9.4% (including distributions) since January 15th. Performance was balanced across the sector as midstream MLP earnings reports helped them gain traction, while upstream and oilfield services MLPs continued higher with oil prices starting mid-week.
The S&P 500 posted a second consecutive positive week up 2.0% to new highs, while utilities declined for the second straight week and finished down 3.4%. Oil prices were volatile but climbed higher Thursday and Friday and 2.1% for the week, making it three positive weeks in a row. Natural gas spot price rebounded 6.8% this week after 3 straight weeks of declines, with expected cold weather in the northeastern U.S. the likely driver.
In the upcoming week, some very large and active MLPs are set to report earnings, including: ETP/ETE/SXL, WPZ, and ENLK.
What is Top Tier?
Top tier growth is oft alluded to in the MLP sector, and the more hyper growth drop-down MLPs that go public, the higher the hurdle rate is for making it into the top tier club. But when an MLP guides to “top-tier” distribution growth, what does that mean? Below I’ve gathered some data on the top 20 MLPs that have paid at least a year’s worth of distributions, so several of the self-proclaimed top-tier MLPs (e.g. DM, SHLX, CPPL, etc) are not included.
The top 20 fastest distribution growth MLPs over the last year have increased their distributions by an average of 26.9%, while the top 5 averaged 44.8% growth. On a 3 year CAGR (or shorter if the MLP has not traded for 3 full years), the top 20 fastest growing MLPs have grown distributions at an annual rate of 22%, with 31.5% average for the top 5.
Of the 100 or so MLPs included in this analysis, it’s pretty incredible that 20% of them have grown distributions more than 15% annually over the last few years. With new high-growth MLPs and with consolidation of smaller MLPs, the top tier looks like it will push higher for the next few years, and a quarter of all MLPs may grow 15% or more. Visibility into that kind of growth from sponsor-driven distribution growth helps mitigate impact of commodity prices, at least for a little while until the drop-downs slow down for some of these MLPs.
What about GPs? There are only 11 (for now) pure play or nearly pure play GPs that I track. The average growth rate of those over the last year is 30.5%, and 24.4% over 3 years. The top 5 have grown even faster, with average YOY growth of 45.5% and 33% over 3 years.
Next week, I’ll come back with some analysis of how the “top-tier” annual distribution growth rate has changed over time. MLPs may have achieved growth rates this high, but driven by third party acquisitions (which were much less competitive back then). No MLPs publicly-guided to 20%+ distribution growth a decade ago.
Winners & Losers
MLPs in the same subsector went in different directions this week, a symptom of the volatility we’re seeing week to week. Coal MLP RNO rallied 11.4% while coal MLP NRP declined 12%. Upstream MLP NSLP led all MLPs with a 23.9% gain, while upstream MLPs BBEP and EVEP each made the bottom five.
3 of the bottom 5 were up 25%+ last week, so a selloff was understandable for BBEP, JPEP and EVEP.
For the year overall, CCLP has claimed the top spot from LINE, while FISH, NSLP and LRE join the top 5.
NRP replaced TOO in the bottom 5 this week.
News of the (MLP) World
This week we got the first follow-on equity offering to trade up after pricing so far this year. Not a bad indicator for the state of the capital markets. We got another couple of third party acquisitions and a sizeable drop-down. Also, as has become almost as routine as MLP IPOs, we got another Alerian MLP Index constituent change.
- Rose Rock Midstream (RRMS) priced public offering of 2.0mm units at $40.32/unit, raising $80.6mm in gross proceeds (press release)
- Overnight offering, priced at 4.0% discount to prior close
- RRMS traded up 2.9% in the session following pricing
- As previously discussed by EQT Corp, EQT GP Holdings, LP (EQGP) filed an initial prospectus to raise up to $300mm in an IPO (filing)
- EQGP will own 34.4% L.P. interest, the 2.0% G.P. interest and all of the incentive distribution rights of EQT Midstream Partners (EQM)
- IPO is expected to be for approximately 18-20% of the outstanding units
- Structured as a partnership
- Sol-Wind Renewable Power LP (SLWD) postponed IPO (The Deal)
- A yieldco in an MLP wrapper, SLWD was attempting to raise $174mm at $20/unit (6.5%)
- Price talk trended lower and the deal was pulled on weak demand, a stark contrast from the largest ever MLP IPO (CPPL) that priced above the price range last week
- Suburban Propane (SPH) priced $250mm of 5.75% senior notes due 2025 at par (press release)
- SPH will use the proceeds to fund a cash tender for $250mm of its outstanding 7.375% senior notes due 2020
M&A / Growth Projects
- Rose Rock Midstream (RRMS) announced drop-down acquisition from SemGroup (SEMG) for $325mm (press release)
- Assets acquired include the Wattenburg Oil Trunkline System and SemGroup’s 50% interest in the Glass Mountain Pipeline
- Purchase price will be funded with 1.75mm units issued to SEMG, cash and net proceeds from the above equity offering
- Wattenburg Oil Trunkline is a 75-mile oil pipeline in the DJ Basin, which transports production from Noble Energy to the White Cliffs Pipeline
- Glass Mountain is a 210-mile oil pipeline system that comprises two lateral pipelines originating in the Granite Wash and Mississippi Lime plays
- Kinder Morgan (KMI) announced the acquisition of three terminals and one undeveloped site from Royal Vopak for approximately $158mm (press release)
- Assets include a storage complex in Galena Park, TX, two terminals on the coast of North Carolina and an undeveloped site at Perth Amboy, NJ
- Galena Park assets are adjacent to KMI’s Galena Park complex
- NGL Energy (NGL) announced $280mm acquisition of Magnum NGLs, LLC from Haddington Ventures, LLC (press release)
- Magnum owns and operates a NGL storage facility with potential capacity of more than 10mm barrels
- Facility is located southwest of Salt Lake City, Utah with rail and truck access to Western US market
- NGL will finance the transaction with $80mm in cash and $200mm worth of units issued to the seller
- Transaction represents a 7.1x multiple of 2017 estimated EBITDA, and is expected to be neutral to distributable cash flow per unit initially, and accretive thereafter
- Alerian announced EXLP to be added to the Alerian MLP Index and Alerian MLP Equal Weight Index, replacing OILT (press release)
- Cushing announces changes to the Cushing MLP High Income Index and the Cushing 30 MLP Index to replace Atlas Pipeline Partners (APL) (press release)
- CCLP to join the Cushing MLP High Income Index
- BWP to join the Cushing 30 MLP Index
- Changes will be effective 2/23/15, assuming the Targa / Atlas deals are all approved
- Williams Partners announces Geismer back on line (press release)