MLP Market Update

MLP Market Update
Commentary on Master Limited Partnerships

Published
Apr 25th, 2015

Category:
MLP Market Post

Week Thoughts: Friendly Trend Continues for MLPs

MLPs traded positively for the 6th straight week, with the Alerian MLP Index (AMZ) increasing 1.1%.  The AMZ is now 7.8% higher than its most recent low on March 16th.  MLPs seemed to be helped by positive MLP earnings releases, by positive production reports from results of producer corporations, and by strength in the broader U.S. equity markets (notably Amazon and Starbucks). MLPs underperformed both the S&P 500 (+1.8%) and utilities (+2.3%) this week.

Weekly Review_4-24-15

WTI oil was down slightly in the spot market week over week, but the front month futures price climbed over $57/bbl this week.  Natural gas dipped lower, but ethane prices were stable.  WTI oil price is now 27.2% higher than its 52-week low reached on March 17th.

MLP earnings have started strong with more end-market focused MLPs NS and EQM.  Last quarter started strong as well for MLPs, but tailed off as more of the producer-focused MLPs began reporting.  Expectations for gathering & processing names have been written down, but valuations have creeped higher that last few weeks, so it will be interesting to see how the next few weeks plays out.

Streaking

MLPs are on a roll lately, but how historic is a run of 6 straight weeks?  As coach Lou Brown said in Major League 2: it’s called a winning streak, and it has happened before.

There have been 13 streaks of at least 6 straight positive weeks since 2000, with the last streak prior to this one ending the first week of June last year.  Returns during those streaks have averaged 12.2%, helped by two very large return streaks in 2009.  Overall average returns following such a streak are very positive, which may just be a function of most 6 month periods over the last 15 years being positive for AMZ.

Streaks Weeks

The longest ever streak spanned 18 consecutive positive weeks back in 1997.  But back then there were only 18 MLPs that combined had less than $10bn in market cap.  We have a long way to go before we break records with the current streak, and for now each week has coincided with oil price strength, but MLPs continue to edge higher.

Winners & Losers

Distribution announcements seemed to drive relative performance among MLPs this week.  NRP cut its distribution 74%, choosing to maintain some level of distribution and planning to use excess cash flow to reduce leverage.  NRP is basically running the same play BWP ran a few years ago.  HCLP struggled after fellow frac sand producer EMES reduced guidance and distributions this week.

On the positive side, marine transportation MLPs rebounded, helped by GLOP’s announcement that BG Group is chartering 9 newbuilds.  LRE was up on the announcement that it was being acquired by VNR.   GLP was up after announcing a distribution increase.

Not pictured below, NSH (+8.9%), NS (+5.1%) and EQM (+6.8%) all performed well this week after releasing results.

Top5Bottom5_4-24-15

Top5Bottom5_4-24-15_chart

 

Looking at year to date performance, CAPL has dropped into the bottom 5 and LRE climbed into the top 5.  NRP took over the bottom spot after its distribution cut.

Top5Bottom5_4-24-15_YTD

 

Top5Bottom5_4-24-15_YTD_chart

 

News of the (MLP) World

MLP follow-on equity has taken a pause for earnings season, but we still have $650mm of MLP paper in the market in the form of two unconventional MLP IPOs.  M&A was quiet again this week, but we did get a small E&P MLP consolidation and a drop down.  There are reports of assets packages for sale, being bid on in auction processes (like Pioneer’s Eagle Ford midstream assets and BP’s U.S. pipeline assets).  At some point those deals and the winners will be announced, but not this week.

News-of-the-World

Equity

  • Enviva Partners (EVA) launched IPO of 10.0mm units expected to raise $200mm in gross proceeds at the midpoint price of $20.00/unit, which represents an 8.25% yield (prospectus)
    • Expected to price 4/28
    • EVA is the world’s largest supplier by production of utility-grade wood pellets to major power generators
    • EVA sources and processes wood into wood pellets, then exports those pellets to utilities in Europe that are seeking to reduce their use of coal in power plants under long-term contracts
    • EVA is selling 42.6% L.P. interest (basically the maximum you can sell in an IPO, given that the 15% underwriters’ overallotment option would make the total 49% and there are 49% subordinated units and a 2% GP)
      • Implies equity value for the overall MLP of $485.9mm and enterprise value of $604.1mm including net debt
    • Black Stone Minerals (BSM) launched IPO 22.5mm units expected to raise $450mm in gross proceeds at the midpoint price of $20.00/unit, which represents a 5.25% yield (prospectus)
      • Expected to price 4/30
      • BSM is one of the largest owners of oil and natural gas mineral interests in the U.S.
      • BSM is selling 11.3% of the L.P. interest in this offering, implying equity value for the overall MLP of $3.8bn with no debt following the IPO
      • BSM will have no incentive distribution rights, but does have a novel structure that has a minimum quarterly distribution that increases each of the 3 years after 2016 that implies average annual distribution growth of 8.7%
    • GPM Petroleum (GPMP) filed initial prospectus to raise up to $100mm in MLP IPO (filing)
      • GPMP is a wholesale distributor of motor fuels to sponsor-owned convenience stores and to third parties on a fixed-fee per gallon basis
      • Sponsor controls more than 500 convenience stores in the Mid-Atlantic, Southeastern, Midwestern and Northeastern U.S.
      • In 2014, GPMP distributed 462mm gallons (CAPL by comparison did 888mm gallons)
      • Sponsor GPM operates stores under the following brand names: GPM operates under brand names including Fas Mart, Shore Stop, Scotchman Stores, Young’s, Li’l Cricket and BreadBox

M&A / Growth Projects

  • Vanguard Natural Resources (VNR) announced acquisition of LRR Energy (LRE) and its general partner in $539mm transaction (press release)
    • Transaction to be financed with $251mm in VNR units and the assumption of LRE’s net debt of $251mm
    • Exchange ratio equal to 0.55 VNR common units per LRE common unit valued LRE at $8.93/unit, or a 13% premium to the prior day closing price
    • LRE was backed by private equity group Lime Rock Resources, which has agreed to support the transaction
  • Exterran Partners (EXLP) announced drop down acquisition from Exterran Holdings (EXH) for $102.3mm (press release)
    • Assets acquired include 244 compressor units that represent 151,000 horsepower of compression and 179 compressor units that were previously leased from EXH to EXLP that represents an additional 66,000 horsepower
    • Acquisition funded with equity (4.0mm units issued to EXH)

Other

  • It is widely reported that BP is seeking a buyer for $2bn worth of U.S. pipelines and storage terminals (Reuters)
    • Two batches of assets are for sale: interest in 4 pipelines along the Gulf Coast and 15 storage terminals in the Midwest and on the East Coast
    • BP’s partners in some of the pipelines include EPD and Enbridge, Inc.
  • Distribution Announcements:
    • Increases: SHLX +7.7%, MPLX +7.2%, TRGP +7.1%, SXCP +5.7%, EQM +5.2%, VLP +4.3%, ENLC +4.3%, TLLP +4.1%, DKL +3.9%, WES +3.6%, MMP +3.2%, QEPM +3.2%, RRMS +2.4%, GLP +2.3%, BKEP +2.2%, HEP +1.4%, ENLK +1.3%, NGLS +1.2%, NGL +1.2%, ENBL +1.2%, USAC +1.0%, SMLP +0.9%, CPLP +0.9%
    • Flat: CLMT, MCEP, CNNX, NS, NSH, EROC, DLNG, CQP, MMLP, HMLP, WPZ, AMID, CMLP, NAP
    • Unprecedented 4 cuts in a single week: LGCY -43%, RNO -60%, LRE -62%, NRP -74%

Published
Apr 19th, 2015

Category:
MLP Market Post

MLP Week Thoughts: Production Cuts, Both Ways

MLPs traded positively for the 5th straight week, with the Alerian MLP Index (AMZ) increasing 1.1%.  The AMZ is now 6.6% higher than its most recent low on March 16th, and has produced total returns of 7.5% since its 52-week low reached on January 13th.  But the index remains 15% lower than its peak in August.  MLPs were helped by higher commodity prices and limited equity issuance again this week. MLPs outperformed the S&P 500 (-1.0%) and utilities (-1.2%) by a wide margin this week.  Year to date, the AMZ is still in the red, but is moving up the leaderboard, distancing itself from utilities and edging closer to the S&P 500.

Weekly Review_4-17-15

Oil futures finished 8.6% higher than last week, making it 5 straight positive weeks.  Oil price in the spot market is now 28.3% higher than its 52-week low reached on March 17th, and reached its highest point so far this year on Thursday.  Oil prices rallied sharply after the latest oil inventory report was released by the EIA that showed a smaller than expected inventory build.

Reduced drilling activity is beginning to impact U.S. oil production, which was certainly expected to happen after all the capex cuts we heard about since November.  Good for prices, but bad for gathering, processing and pipeline volumes in the short term.

KMI Stressed over Lack of Distress

The biggest news in MLP land was non-MLP KMI released 1Q results this week that met the market’s expectations.  KMI highlighted the strength of its development backlog, particularly related to demand-pull natural gas pipeline projects.  CEO Rich Kinder also expressed frustration on the conference call with the lack of distress amongst producers.  Producers have been able to issue equity and attract private equity to support them, and that has kept more distressed asset sales from materializing.

We’ve seen that play out with MLP acquisitions from producers this year, which are getting done at non-distressed multiples.  There is a lot of cheap capital chasing returns all along the energy value chain, and that tends to mask what otherwise would be distress, and reduces the acquisition opportunity set for well-capitalized buyers. MLPs have shown that capital is available to them as well, which may limit consolidation activity in the MLP sector this year.

Such is the paradox of oil prices and M&A for the MLP investor.  In the short term, we are rooting for less production to get prices up to stimulate more production in the long term.  And we are caught between rooting for distress among producers to shake loose assets, so long as those distressed producers aren’t major customers of MLPs we may own.  We will see the beginnings of the impact of these paradoxes as MLP 1Q results start streaming in.

CBRE Clarion Web Series

My firm has recently launched a series of videos produced in association with papers we publish on various infrastructure and MLP-related topics.  My colleague Marc DeCroisset was featured in one, and I was featured in another, each of us alongside the head of our infrastructure investment team, Jeremy Anagnos.

Marc discussed the emergence of renewable energy as an invest-able category within the universe of publicly-traded infrastructure stocks. You can watch the video by clicking on the picture below, and you can read the related whitepaper here.

Marc

In the other video, I discuss with Jeremy the technological improvements and cost reductions that are driving production efficiency gains and may lead to a lower breakeven oil price over the next few years, and also how that should allow MLPs to realize volume growth and growth in opportunity set even in a lower price environment. You can watch the video by clicking on the picture below, and you can read the related whitepaper here.

Hinds

Winners & Losers

Oil prices up, upstream and services MLPs up, which explains the top 5.  Marine transport MLPs dominated the bottom 5 (4 out of 5).  Besides CPLP (equity offering), none of them had any news, but there must be some reason they all fell in unison.

Top5Bottom5_4-17-15

GLOP moved from the top 5 to the bottom week over week, but no other repeats week over week.

Top5Bottom5_4-17-15_Chart

As you would expect when looking at the year to date chart of winners and losers, there are plenty of commodity sensitive names among the bottom 5, names you would expect to be down when oil and natural gas prices drop, with one significant outlier at the bottom: CNNX (note that the list does not include NKA, which is down 30.4% year to date).  Expectations for CNNX were very high at IPO, but lately CNNX seems to have slipped into obscurity.

Top5Bottom5_4-17-15_YTD

LINE crept back into the top 5 this week, while FISH dropped out. SDLP displaced EVEP in the bottom 5.
Top5Bottom5_4-17-15_YTD_chart

News of the (MLP) World

Another quiet week all around for MLPs. A few pending MLP IPOs filed amended S-1s this week (PennTex filed first amendment since December this week, among others), implying the IPO market may re-start soon. See below for an updated backlog of energy MLP IPOs, which totals 17.

IPO Backlog_4-17-15

News-of-the-World

Equity

  • Capital Products Partners (CPLP) priced public offering of 12.8mm units at $9.53/unit, raising $122.0mm in gross proceeds (press release)
    • Overnight offering, priced at 4.0% discount to prior closing price, and traded up 1.1% from pricing in the next trading session
  • Marlin Midstream (FISH) filed $1bn mixed shelf, registered 10.7mm units owned by NuDevco Midstream (filing)
  • Targa Resources (NGLS) filed S-3 to register up to $1bn of equity and debt securities (filing)

M&A / Growth Projects

  • JP Energy Partners (JPEP) announced acquisition of Southern Propane for $14.9mm (press release)
    • Southern Propane is an industrial and commercial propane distributor and logistics provider serving the Houston market
    • JPEP will fund the acquisition with cash and 267,000 units issued to seller
  • Magellan Midstream (MMP) announced joint development agreement with TransCanada Corp (TRP) to pursue a Houston pipeline connection project (press release)
    • Project would include construction of a 9-mile, 24-inch diameter pipeline, in which each party would own 50%
    • The joint project is expected to cost $50mm and be completed in 2015
  • Global Partners (GLP) announced acquisition of retail portfolio from Capital Petroleum Group for $156mm (press release)
    • GLP will acquire 97 Mobil and Exxon branded retail gas stations and 7 dealer supply contracts in New York City and Prince George’s County, Maryland
    • GLP expects to close the acquisition in 2Q15 and to pay with borrowings on its revolve
  • Delek US Holdings (DK), sponsor of Delek Logistics (DKL) announced that it has acquired 48% stake in fellow refiner Alon USA Energy (ALJ), sponsor of variable distribution MLP ALDW (press release)
    • ALJ has discussed potentially launching an MLP for its midstream assets that produce around $50-$60mm in EBITDA annually
    • A full tie up between ALJ and DK may lead to those midstream assets being earmarked for drop down into DKL over the next few years

Other

  • Distribution Announcements:
    • OKS/OKE – flat distributions/dividends
    • KNOP +4.1%
    • OCIP +1.2%

Published
Apr 12th, 2015

Category:
MLP Market Post

Week Thoughts: MLPs Moving Higher

MLPs traded positively for the 4th straight week, with the Alerian MLP Index (AMZ) increasing 1.8%.  The AMZ is now 5.4% higher than its most recent low on March 16th, and has produced total returns of 6.3% since its 52-week low reached on January 13th.  But the index remains 16.4% lower than its peak in August.  MLPs were helped by higher commodity prices and limited equity issuance again this week, and MLPs seem to be gaining some traction heading into 1Q 2015 earnings season. MLPs outperformed the S&P 500 (+1.7%) slightly and outperformed utilities (+0.3%) by a wide margin this week.

Weekly Review_4-10-15

I’m writing this on “moving day” at the Masters.  If stock market performance were a golf tournament, MLPs would be in the middle of the pack vs. other sectors, down 3.1% year to date.  MLPs are way ahead of natural gas and utilities, but behind oil prices and way behind REITs and &P 500.  The last 4 weeks of positive returns have kept MLPs in contention vs. stocks, but they need to put up some big numbers to move up the leader board.

Commodity Divergence

Oil prices in the spot market finished 5.1% higher than last week, making it 4 straight positive weeks.  Oil is now 18.8% higher than its 52-week low reached on March 17th.  Oil prices rallied early in the week before falling sharply Wednesday after the latest oil inventory report was released by the EIA that showed U.S. oil in storage rose by 10.9mm barrels to a record level of 482.4mm barrels.

Natural gas price closed at a 52-week low in the U.S. spot market, down 1.6% on the week.  Storage levels for natural gas are 10.5% below the 5 year average for this time of the year, but 79% higher than this time last year.  So, the natural gas situation is considerably less dire than oil, but not great.  The oil rig decline will have a supply impact on natural gas production, given that natural gas production has been supported by associated gas.  On the demand side, a cold winter wasn’t enough this year.  First LNG is approaching for Cheniere and there will be growth from coal plant retirements at some point, but the market has lost patience.

Natural Gas Inventory

Winners & Losers

Commodity prices lifted most MLPs this week.  Outside of QEPM, there was no company-specific news that flowed through to the top or bottom 5.  Falling natural gas prices probably didn’t help FELP and CNNX.

Top5Bottom5_4-10-15

VTTI seemed to be down just because it was up last week, and vice versa for RIGP.  Not much follow through.

Top5Bottom5_4-10-15_Chart

Year-to-date

CCLP had another very good week, maybe helped by management being on the road for a non-deal roadshow following their recent analyst day.  No other changes among the top and bottom 5, although CNNX is now the second worst performing MLP of all, remaining in the doghouse following their revised distribution outlook earlier this year.

Top5Bottom5_4-10-15_YTD

Top5Bottom5_4-10-15_YTD_chart

News of the (MLP) World

News this week was business as usual: equity offerings, acquisition of midstream assets from distressed producer, and a clean-up merger.  Distribution announcements began this week, Kinder releases earnings this week, MLPs kick off the week after.  Business as usual.

News-of-the-World

Equity

  • Genesis Energy (GEL) priced public offering of 4.0mm units at $44.42/unit, raising $177.7mm in gross proceeds (press release)
    • Overnight offering, priced at 5.4% discount to prior closing price
    • Possibly as a result of the wide discount and the smaller size of the offering, GEL traded well in the aftermarket, finishing the week 3.2% higher than pricing
  • Memorial Production (MEMP) priced secondary offering of 4.7mm units at $16.60/unit, raising $78.0mm in gross proceeds for selling unitholder Memorial Resource Development (press release)
    • Block trade, priced at 4.4% discount to prior closing price
    • 100% secondary offering, no new units issued and no proceeds to MEMP
    • Another example of a producer using a secondary sale to shore up their finances (like DVN’s sale of ENLK units)
  • Atlas Resource (ARP) priced offering of 255,000 10.75% Class E Cumulative Redeemable Perpetual Preferred Units at $25.00/unit, raising $6.4mm in gross proceeds

M&A / Growth Projects

  • Williams Partners (WPZ) announced acquisition of additional interest in Utica East Ohio Midstream from EV Energy (EVEP) for $575mm (press release)
    • WPZ’s interest in the midstream JV will increase to 70% following this acquisition
    • WMB has agreed to forego $43mm of incentive distribution rights payments over the next 3 years to support the acquisition
    • M3 Midstream, which currently owns 30% of Utica East Ohio Midstream, has the option to acquire 8% of the 21% WPZ has agreed to acquire, so WPZ may only acquire 13%
  • Tesoro Logistics (TLLP) announced acquisition of remaining outstanding L.P. units of QEP Midstream (QEPM) in a unit-for-unit exchange valued at $392mm (press release)
    • QEPM unitholders will receive 0.3088 TLLP common units for each QEPM common unit
    • The market reacted positively to the exchange ratio that valued the QEPM units at 8.5% premium to its closing price on 4/6/15
  • EPD provided updates on growth projects, including:
    • Completed expansion of LPG loading capabilities (press release)
    • Open season for expansion of the Aegis ethane pipeline system (press release)
  • NuStar Energy (NS) announced expansion and extension of agreement with an affiliate of Pemex to transport and store Naptha (press release)
    • Agreement in place since 2005 has been renewed and extended an additional 10 years
    • NS will expand its storage capabilities by 50,000 barrels to support the agreement, and the related capital expenditures are accretive to cash flow per unit

Other

  • Distribution Announcements:
    • EPD: $0.375/unit, +1.4% quarter over quarter, +5.6% year over year
    • GEL: $0.61/unit, +2.5% quarter over quarter, +10.9% year over year
    • PAA: $0.685/unit, +1.5% quarter over quarter, +8.7% year over year
    • PAGP: $0.222/unit, +9.4% quarter over quarter, +30.2% year over year
  • Pemex considering MLP IPO (per Oro Negro)