MLP Market Update

MLP Market Update
Commentary on Master Limited Partnerships

Published
Jul 26th, 2015

Category:
MLP Market Post

MLP Week Thoughts: Forced Majeure

The MLP Index declined another 4.6% this week after a 2.7% decline last week.  MLPs are on track for a third straight negative month, unless there is serious follow-through next week to Friday’s gains next week.  It’s hard to bet on that when Friday was the first positive day following a 9.5% decline in the AMZ over 7 straight negative days.  This week’s negative price action game in a rough week for U.S. equities in general with the S&P 500 down 2.2% and utilities down 2.6% (despite lower interest rates).  Oil prices declined sharply and closed the week well below $50/bbl, but still down just 9.6% this year.

Weekly Review_7-24

Friday’s rally came despite another negative day for oil prices, which was nice to see and probably reflective of the flurry of distributions increase announcements overnight Thursday and stable earnings from the two midstream MLPs that reported.  Friday was also perhaps, possibly helped in some way by the tirade Jim Cramer went on his show regarding MLPs and forced liquidations (click here to about it).

As usual, Cramer didn’t get all the facts right, but directionally, this week’s negative action did feel desperate and representative of forced selling.  On the other hand, it is tough to distinguish forced selling from regular selling though.

The bottom line is the sector needs regular buyers, and forced buying from subscriptions into open end products.  To get those investors to come back and for MLPs to sustain a rally, the market probably needs oil prices to stop falling and visibility into an improved commodity price outlook for 2016. In the interim, perhaps more solid MLP earnings and distribution growth rates next week can stem the tide of MLP sellers.

Winners & Losers

The biggest winner of the week was SXCP on a well-received earnings report, sponsor dropdown and 3rd party acquisition.  Among other top performers, there was no real trend.  HCLP was the worst performer for the week after announcing a 30% distribution cut while upstream MLPs continue to pop up in the bottom 5.  DKL dropped 15.2% this week and was down 21.0% in 8 trading days on no news, before gaining 1.7% Friday to stop the bleeding.

Top5Bottom5_7-24-15

 

Top5Bottom5_7-24-15_chart

On the YTD chart, DKL fell out of the top 5, replaced by BKEP.  Notable when looking at the winners how short the list is of MLPs with double digit positive returns this late in the year.  SXCP climbed out of the bottom 5 after a strong week and is replaced by EVEP.  Now all 5 biggest MLP losers are either coal or E&P MLPs.

Top5Bottom5_7-24-15_YTD

Top5Bottom5_7-24-15_YTD_chart

General Partner Holding Companies

Performance for GPs was negative across the board.  After last week’s M&A fueled rally, OKE and SEMG more than gave back last week’s gains and EXH sank after pulling a notes offering and delaying the international business spinoff.

Top5Bottom5GPs_7-24-15

Top5Bottom5GPs_7-24-15_chart

News of the (MLP) World

It was a light news week.  There were no MLP equity deals.  There was action in the yieldco sector, however. Over the last couple of years, yieldco’s have attempted to mold themselves in the image of MLPs, which has probably led to some poaching of the MLP investor base.  So, add $1.3bn+ of yieldco equity to the list of MLP trading headwinds this week.

Capital Markets

  • EQT Midstream (EQM) files equity distribution agreement to sell up to $750mm worth of units at the market (filing)
  • Yieldco deals:
    • Terraform Global IPO of 56.6mm shares, seeking to raise $1.1bn at the midpoint $20.00/share price (prospectus)
    • Pattern Energy Group, Inc. priced public offering of 5.4mm shares at $23.00/share, raising $125mm in gross proceeds (press release)

M&A / Growth Projects

  • EQT Midstream (EQM) announced agreement with Range Resources to develop a natural gas header pipeline expected to cost $250mm (press release)
    • The 32-mile pipeline, expected to have 0.5 bcf/d of capacity, will support Range’s dry Marcellus and Utica gas development and is supported by a long-term firm capacity reservation contract
    • Expected to be in service in two phases in 3Q 2016 and the first half of 2017
  • SunCoke Energy Partners (SXCP) announced acquisition of Convent Marine Terminal, a coal export hub in Louisiana, for $412mm (press release)
    • SXCP also announced authorization for $50mm unit repurchase program to support its unit price (press release)
  • NGL Energy (NGL) announced additional gathering system to be connected to Grand Mesa pipeline project, increasing project guidance (press release)
    • The disclosure was buried in the distribution growth announcement
    • NGL now expects the Grand Mesa pipeline to produce annual EBITDA of $160-175mm compared with $150mm previously reported guidance

Other

  • Exterran Holdings (EXH), sponsor of Exterran Partners (EXLP), announced the withdraw of its senior notes offering due to adverse market conditions, and announced delay in the spinoff of its international business until market conditions improve (press release)
  • Distribution increases:
    • SHLX +8.6%
    • ETE +8.2%
    • PSXP +8.1%
    • MPLX +7.3%
    • TRGP +5.4%
    • SXL +4.5%
    • TLLP +4.0%
    • RRMS +2.5%
    • ETP +2.0%
    • ENLC +2.0%
    • USAC +1.9%
    • SXCP +1.8%
    • RMP +1.9%
    • HEP +1.4%
    • ENLK +1.3%
    • NGL +1.2%
    • ENBL +1.1%
    • MWE +1.1%
    • SMLP +0.9%
    • CPLP +0.9%
    • NGLS +0.6%
  • Flat: WPZ, NRP, OKE, OKS, CMLP, CEQP, AMID, MMLP, NS
  • Cut: HCLP (cut to MQD, or 30%), RNO (suspended entirely)

Published
Jul 18th, 2015

Category:
MLP Market Post

MLP Week Thoughts: Stuffed

MLPs declined 2.7% this week, hurt by weaker oil prices and two equity deals that proved particularly hard for the market to digest.  The back half of the week was brutal, with the index declining 4.4% over the last 3 days of the week, each day more than 1% negative.  Any M&A read through to other MLPs created Monday with the MWE/MPLX merger was gone by Wednesday. The equal weight version of the AMZ was down much more than the AMZ as the MWE and MPLX price movements balance themselves out in an equal weight index and the few remaining upstream MLPs were sharply negative impacting the equal weight index more than the market cap weighted AMZ.

Weekly Review_7-17

We were off the lows last week, but this week, the MLP Index established a fresh 52-week low with Friday’s close.  The MLP Index is 27.9% below (24.6% including distributions) its all-time peak at the end of August last year, 25.1% (20.7% with distributions) below 12 months ago, and 14.1% below its recent peak in May.

Oil was 3.6% lower, grinding lower throughout the week, with the Iran deal most often cited as the reason for the weakness.  But, dollar strength relative to European and Canadian currency didn’t help oil prices.  The rig count released Friday indicated a week over week decline for the US, which helped stem the tide on weak oil.

Meat Reversion

The MLP market did its best to choke down more equity issuance this week, in the face of fund outflows and what appears to be short selling.  The MLP market is finding it increasingly difficult to digest equity of almost any size, and given a lack of new money flowing in, dedicated MLP institutions are having to sell existing MLP positions to fund purchases in offerings, weighing on the entire sector.

In a post published in March of last year, I compared the MLP market to the calf scramble at the Houston Livestock Show and Rodeo.  At the time, there was more money than MLP ideas, and certain stocks were chased higher than they probably should have been.

Fast forward to today and I’m struck by another meat-related image.  The current market can be compared with a competitive eater in the final minutes of the Nathan’s Hot Dog eating contest, trying to squeeze a few last hot dogs into his already stuffed mouth without gagging.

Hot Dog

The balance of fund flows and equity issuance has been a challenge for the sector over the years.  The MLP sector could not have grown as much as it has over the years without growing its investor base.  But there have been brief times when MLPs have issued so much equity in a short period of time that the market gets off balance.  In the calf scramble post, it seemed like the balance had swung too far in the direction of fund flows and MLP prices climbed higher.  We’ve now tipped way in the other direction as limited new investor activity in the face of equity issuance is pressuring prices lower.

Poll Question Recap

Last week, we asked readers to choose which type of MLP they’d want to own in a rising rate environment.  The high-growth MLP with a 2% yield was the winner with 44% of the vote, but was closely followed by the 6% yield, 6% growth MLP that garnered 42% of the votes.   The highest yield MLP with no growth came in a distant third place with 11%.  In the real world this week, the answer was none of the above.

Winners & Losers
The most relevant MLPs on the chart below are the biggest winner, MWE, and the biggest midstream loser, MPLX.  The remaining top and bottom 5 MLPs are just noise, with pockets of strength among small cap MLPs and another haircut to upstream MLPs on the downside.

Top5Bottom5_7-17-15

Top5Bottom5_7-17-15_chart

On the year to date chart, DKL dropped from the top spot and TLP dropped from the top 5 altogether, replaced by USAC.

Top5Bottom5_7-17-15_YTD

Top5Bottom5_7-17-15_YTD_chart

General Partner Holding Companies

In the aftermath of the MWE/MPLX merger announcement, long-rumored potential takeout candidate OKE caught a bid along with other M&A targets SEMG and TRGP.  Not surprisingly, their subsidiary MLPs caught no such bid.  Overall, GPs were ugly this week, and while the median performance was better than the Alerian MLP Index, a cap-weighted average would be much worse, given the biggest GP (ETE) was down the most.

Top5Bottom5GPs_7-17-15

Top5Bottom5GPs_7-17-15_chart

News of the (MLP) World

A staggering amount of news this week, and MLP earnings season hasn’t even really started yet.  M&A activity is clearly ramping up, with nearly $25bn worth of M&A announced this week.  To help finance all that, equity deals had to be executed, and in a market as weak as this, the $600mm of MLP equity issued weighed on the sector like only billions of dollars of equity would have in better times.  Some MLPs that announced better than expected distribution growth saw positive price performance (TEP and CNNX), but the effects were temporary or muted by sector-wide selling.

News-of-the-World

Capital Markets

  • Sunoco LP (SUN) priced public offering of 5.5mm units at $40.10/unit, raising $220.6mm in gross proceeds (press release)
    • One day marketed offering, with a file-to-price decline of 7.9%, but SUN did outperform in the next session, falling just 0.5% vs. the MLP Index down 1.2%
    • Proceeds to be used to partially fund acquisition of retail assets from ETP (see below)
    • SUN also priced $600mm offering of 5.5% senior notes due 2020
  • Genesis Energy (GEL) priced public offering of 9.0mm units at $43.77/unit, raising $393.9mm in gross proceeds (press release)
    • One day marketed offering, with a file-to-price decline of 5.85%
    • Proceeds to be used to partially fund the acquisition of offshore oil pipeline assets from EPD (see below)
    • GEL also priced $750mm offering of 6.75% senior notes due 2022

M&A / Growth Projects

  • MPLX (MPLX) and MarkWest Energy (MWE) announce $20bn merger (press release)
    • MWE will become a subsidiary of MPLX via a unit-for-unit transaction, plus a one-time cash payment to MWE unitholders
    • MWE unitholders will receive 1.09 MPLX units for each MWE plus a one-time cash payment of $3.37/unit
    • Purchase price (prior to price movements) represented 32% premium for MWE
    • Agreement includes a $675mm breakup fee, which should limit potential topping bids, despite the lower implied premium after MPLX units sold off after the announcement
    • MPLX reiterated 29% 2015 distribution growth, announced 25% annual distribution growth through 2017 and “peer-leading growth profile thereafter”
    • Transaction is expected to close in 4Q2015
  • Genesis Energy (GEL) announced acquisition of offshore oil business from Enterprise Products (EPD) for $1.5bn (press release)
    • Acquired assets include 36% interest in the Poseidon Oil Pipeline System, a 50% interest in Southeast Keathley Canyon Oil Pipeline System (SEKCO) and a 50% interest in Cameron Highway Oil Pipeline System (CHOPS)
    • The acquisition consolidated ownership of the pipelines, as prior to the acquisition, GEL owns 28% of Poseidon, 50% of SEKCO and 50% of CHOPS
    • GEL management indicated the assets will produce $200mm in EBITDA, implying a 7.5x forward multiple
    • Acquisition is expected to close in July 2015
  • Sunoco LP (SUN) announced the acquisition of 100% of Susser Holdings Corp for $1.94bn from sponsor Energy Transfer Partners (ETP) (press release)
    • SUN will pay $970mm in cash and will issue approximately 22mm units to ETP
    • The acquired assets consist primarily of retail operations of convenience stores in Texas, New Mexico and Oklahoma under the Stripes brand name
    • All income from the acquired assets is non-qualifying and therefore the assets will be contributed to SUN’s corporate subsidiary PropCo.
    • According to management, the acquisition is breakeven to distributable cash flow for SUN in 2015 and significantly accretive thereafter
  • Energy Transfer Equity (ETE) and Energy Transfer (ETP) announced $1.2bn exchange of Sunoco LP (SUN) IDRs (press release)
    • ETE will acquire 100% of the IDRs of SUN in exchange for retiring 21mm ETP common units and an extension of $35mm annual IDR subsidiary for an additional 2 years (through 2017)
    • ETP to realize cash flow accretion of more than $0.30/unit, while ETE acquires IDRs at an attractive multiple relative
  • Arc Logistics (ARCX) announced the acquisition of UET Midstream, LLC from two private companies for $76.6mm (press release)
    • To be funded with $44.3mm in cash, $32.3mm in units issued to sellers at $18.50/unit
    • Assets include the Pawnee crude oil terminal (200,000 bbls of storage capacity) and nearby development property in Weld County, Colorado
    • The terminal produces contracted annual EBITDA of $9.0-9.5mm, implying an 9.5x multiple including $11mm in capex
  • Kinder Morgan (KMI) announced acquisition of remaining 49% interest in Elba Liquefaction Company from Shell for $630mm (press release)
    • Shell subscribes to 100% of the LNG offtake capacity (planned at 2.5 million tons) of the facility, which is yet to be constructed and awaits non-FTA approval for LNG exports
    • Overall project cost expected to be $2.1bn, with initial production expected in late 2017
  • Kinder Morgan (KMI) announced plans to move forward with Northeast Energy Direct pipeline project (press release)
    • KMI announced board approval to proceed with $3.3bn pipeline investment to supply natural gas to natural gas and electric utilities in New England
    • KMI has contracted for roughly half of the expected 1.3bcf/d capacity on the pipeline and expects to continue to sign up customers as the project progresses
  • Energy Transfer Equity (ETE) disclosed that it has indeed signed a confidentiality agreement to join the WMB sale process (Bloomberg)
    • The CA does not have a standstill provision, and apparently the confidentiality part does not extend to talking about the confidentiality agreement

Other

  • Distribution increases: TEP +11.5%, DM +7.1%, WGP +6.2%, AM +5.6%, CNNX +3.5%, WES +3.4%, KMI +2.1%, OCIP +1.2%

Published
Jul 11th, 2015

Category:
MLP Market Post

Week Thoughts: MLPs Off the Lows!

MLPs defied falling oil prices and rising rates to finish this week higher than last week.  The Alerian MLP Index ended its 7 week negative streak with a bounce this week, despite dual headwinds of falling oil prices and rising interest rates.  The bounce comes just in time for distribution and earnings season to kick off next week, raising hope for follow through based on MLPs showing that cash flows are more stable than stock price action would imply.

Weekly Review_7-10

Fears over demand weakness from China and Greece fallout seem to be less important factors to oil’s recent decline than supply, which globally still faces headwinds.  U.S. supply continues to level off, but oil in storage has grown the last two weeks.  The Iran trade deal has the potential to unleash another significant OPEC member’s oil onto the global market, adding to already maxed out supply from others in OPEC.

Poll Question Recap

Last week, we asked readers to predict where MLPs will finish 2015 after the worst first half in the sector’s history.  There were 3 choices: lower from here, slightly higher from here and much higher from here.  The runaway winner at 67% of respondents was that MLPs would finish higher than the June 30th closing price (-11.0% return YTD), but still below 0.0% total return for 2015 overall.  21% of respondents were expecting a large rally that would see MLP total returns finish 2015 positive overall, and just 11% expected MLPs to continue their downtrend lower from here.

Given that readers of an MLP blog are likely invested in or are in some way involved with the MLP sector, it’s no surprise that optimism would outweigh pessimism.  If enough of those readers put their money where their mouse clicks are, maybe positive MLP performance becomes self-fulfilling.  My sense is that investors not currently invested MLPs need to notice value in MLPs and flow some of their funds into or back into the sector to get a sustained rally from here.

Poll Question: Pick Your Poison

With broad macro volatility from Greece and China issues subsiding somewhat late in the week, expect broader market focus to return to when and how fast U.S. interest rates rise from here.  I read several research reports published this week on which MLP categories outperformed in a rising rate environment.  Generally, higher growth, lower yielding MLPs have outperformed in the past, based on their growth visibility.

The counter to that is a 50 basis points backup in yield for an MLP yielding 2.0% is much more impactful to stock price than 50 basis points backup for a 7.0% yielding MLP.  This week’s question puts the decision of which is better to own on you (note: email subscribers can click through to mlpguy.com to see and participate in the poll question).

If we assume interest rates will rise 100 basis points in the next 12 months, and you had to own one of the 3 MLPs below, which would you choose?

View Results

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If all MLP yields were to increase equally over the next 12 months by 100 basis points, then the obvious choice is to own the highest yielding MLP (see math below).  However, if you believe some level of growth premium will remain even in a rising rate environment, it makes sense to bet on growth.

Pick you poison

Like with most things, the right answer is probably somewhere in the middle, because the highest-yielding MLPs tend to have cash flow issues that led to the higher yields, and the lowest yielders have much higher sensitivity to yield changes.

Winners & Losers

LGCY’s acquisition and development company agreement with TPG drove it from worst performing last week to best performing this week.  WLKP made it two straight weeks in the top 5.  Small cap G&P MLPs AZUR and SXE shot higher as investors started to bid up G&P names across the sector this week.  On the downside, MLPs with coal exposure, sand exposure and E&P exposure continue to get crushed.

Top5Bottom5_7-10-15

Top5Bottom5_7-10-15_chart

No changes among the top 5 constituents this week, but we do have a new YTD leader in DKL.  On the downside, FELP’s terrible weak put the coal MLP in the bottom 5 along with other coal-exposed MLPs NRP and ARLP.

Top5Bottom5_7-10-15_YTD

Top5Bottom5_7-10-15_YTD_chart

GP Holding Companies

GPs underperformed the broader MLP market this week, with no GP gaining more than 2%.  ATLS and EXH continue to fall.  PAGP led the way after a few rough weeks, and seemed to trade better after its dividend announcement.

Top5Bottom5GPs_7-10-15

Top5Bottom5GPs_7-10-15_chart

News of the (MLP) World

Upstream MLPs finalized equity partnerships with private equity firms for development and acquisition vehicles this week, and there were a few other minor announcements, but nothing major announced this week.  Also, the ETE/WMB saga looks like it is no closer to resolution.  No capital markets activity this week probably helped MLP performance a bit.

News-of-the-World

Capital Markets

  • None

M&A / Growth Projects

  • Enterprise Products (EPD) announced propylene pipeline conversions and expansions to serve petrochemical customers in South Texas (press release)
    • EPD did not disclose the expected capital outlay for these growth projects
  • Williams Partners (WPZ) announced that its Transco subsidiary filed an application with FERC for its New York Bay Expansion Project to deliver natural gas to NYC in 2017/2018 (press release)
  • Legacy Reserves (LGCY) announced $440mm acquisition of E&P and midstream assets in East Texas from Anadarko and Western Gas (press release)
    • Upstream assets consist of gas production of 70mmcf/d and reserves of 420 bcf on 89,000 net acres
    • Midstream assets consist of 567 miles of gathering lines and a 502 mmcf/d processing 1plant (20% of volumes come from third parties)
    • LGCY also announced agreement with TPG Special Situations Partners to fund development of certain LGCY Permian acreage (press release)
  • Alliance Resource (ARLP) announced acquisition of remaining White Oak Equity interests for $50mm (press release)
    • ARLP estimates cost synergies by operating the White Oak mine of $12-18mm annually, beginning next year

Other

  • Linn Energy (LINE) announced finalization of strategic partnerships:
    • With Quantum Energy for $1bn of funding into “AcqCo” to pursue selected future acquisitions (press release)
    • With GSO Capital Partners for $500mm of funding into “DrillCo” to fund oil andnatural gas development (press release)
  • Exterran Partners (EXLP) will change its name to Archrock Partners following spin off of non-U.S. business lines from parent company (press release)
  • Energy Transfer Equity (ETE) reiterated its bid for WMB, despite not participating in whatever sales process is being run to sell WMB (press release)