MLP Market Update

MLP Market Update
Commentary on Master Limited Partnerships

Published
Apr 13th, 2014

Category:
MLP Market Post

Week Thoughts: MLPs Yield Gains

MLPs trounced the broader market this week, with the MLP Index up 0.6% to close the week at new all-time highs.  Meanwhile, the S&P 500 dropped 2.6%, and is now down 4.0% from its own all-time high.  MLPs actually were right on top of the broader market through Wednesday, then way outperformed Thursday and Friday to pull ahead for the week.

For this week at least, MLPs moved in lockstep with interest rates sensitive securities like Utilities (UTY +0.7% this week) and in the opposite direction of interest rates (10-yr treasury rate down 9 basis to 2.62%, lowest level since early February).  Energy commodity prices were universally up, led by natural gas (+4.1%).

Weekly MLP Review_4-11-14

 

Large cap MLPs out-performed small cap MLPs this week, with the Equal Weight MLP Index up just 0.1%, which indicates money flowing into MLP products (ETFs, ETNs, open-end funds) that tend to have higher concentration in liquid names.  This marks the third straight week that MLPs were up, the longest streak of weeks since the 5 week streak from mid-January to mid-February of this year.  

Interest Rate Audible

The interest rate situation is surprising the market this year.  The US 10 Yr closed 2013 at 3.03%, and consensus was that rates would continue their upward trend from 2013 as the economy continued to improve.  But the markets have a way of zagging when you expect them to zig, and the 10 year rate is down 40 basis points so far in 2014.  Investors reacted to that this week, calling an audible back to the old standby yield play.  Hiding out in MLPs until the dust settles on the high growth tech and bio-tech stocks that were sold off this week. The highest growing and most richly valued MLPs and midstream corporations are still flying, and now with a tailwind.

Private Letter Rulings

MLPs made mainstream financial news this week when the Wall Street Journal reported on the IRS’s pause in issuing new private letter rulings (PLRs).  I meant to report on this pause here, but somehow just reported it internally.  I first heard about the IRS PLR pause back on March 19th from a presentation Mike O’Leary (Partner at Andrews Kurth) gave in Houston.

The news has slowly trickled out in research analyst reports and finally this week we get a story on it, with a pretty juicy headline (“Energy Spinoffs are Moving into Tax Limbo”), which is slightly misleading.  MLP tax status is not in question or in limbo for existing MLPs and companies forming MLPs with assets that are similar to existing MLP assets that have received PLRs.  Less supply of fringe MLPs probably doesn’t hurt existing MLPs and their stock prices.  But time will tell if the IRS really does halt the expansion of MLP PLRs that has ramped up in recent years.

Winners & Losers

Enable Midstream (ENBL) was technically the winner of the week on the back of its 11.0% IPO pop Friday. But of MLPs that existed at the beginning of the week, PSXP led the sector with a 10.3% increase on enthusiasm following its analyst day.  The same could be said of CQP, with enthusiasm from last week’s analyst day and the announcement of a new LNG sale agreement between CQP’s parent Cheniere Energy, Inc (LNG) and Endesa for the Corpus Christi terminal (press release).  HCLP had some interesting trading around its equity offering, which ended in a 7.5% decline Friday and a 6.2% negative week overall.

Not much of a theme among the rest of the big movers this week.  GSJK continued its torrid pace, up another 5.2% this week after 15.9% last week. 

Top5Bottom5_4-11-14

Top5Bottom5_4-11-14_chart

Year to date, no changes among the top and bottom five constituents, only real move was PSXP leapfrogging TEP.  The Index overall is up 4.3% for the year, well ahead of a negative broader U.S. stock market.

Top5Bottom5_4-11-14_YTD

Top5Bottom5_4-11-14_YTD_chart

News of the (MLP) World

This week was pretty quiet, outside of the Enable Midstream IPO, and the Hi-Crush flurry of activity.  We did get the beginning of distribution announcement season, with EPD, PAA and GEL all announcing distribution increases in-line with their recent distribution growth rates.  With Targa’s pre-announced better than expected quarter a few weeks ago and with distribution growth tracking expectations, excitement seems to be building towards earnings season that kicks off this week with the Kinder Morgan complex.  Strong earnings and guidance follow-through would likely help justify MLP valuations, and could possibly even break the recent streak of poor performance in May.

News-of-the-World

Equity

  • Enable Midstream (ENBL) prices IPO of 25.0mm common units at $20.00/unit, raising $500mm in gross proceeds (press release)
    • Priced at midpoint (5.75% yield)
    • First day trading: opened at $21.50 (+7.5%), high of $23.22 (+16.1%), closed at $22.20 (+11.0%)
    • Now trades at 5.18% yield
    • Largest change in total equity value for an MLP on its first day of trading ever, with $916.7mm of equity value added to ENBL on day one.  See chart below.

IPO Equity Value Pops

    • The unusually large size and corresponding limited float (6% L.P. interest, $500mm value) of ENBL makes this value creation possible on day one even with a percentage IPO pop (11.0%) that doesn’t even make the top 20 of all time.  The closest comparable in the space to this sort of IPO from a float perspective is WGP, which sold 8% of the entity in its IPO that then created $1.2bn of value in its first day as a public GP holding company.  WGP has a much different growth profile than ENBL, though.
  • Legacy Reserves (LGCY) prices public offering of 2.0mm 8% Series A fixed-to-floating rate cumulative redeemable perpetual preferred units at $25.00/unit, raising $50.0mm in gross proceeds (press release)
  • Hi-Crush Partners (HCLP) prices public offering of 4.25mm common units at $41.29/unit, raising $175.5mm in gross proceeds (press release)
    • One day marketed offering, with file-to-price increase of 2.4%
    • That increase was followed by a steep decline of 7.4% the day after pricing, which is exactly the opposite of what you might expect to happen, and for that I have no explanation…

M&A / Growth Projects

  • Tesoro Logistics (TLLP) announces binding open season by subsidiary Tesoro High Plains Pipeline Company (THPP) and announces another open season on a proposed new THPP gathering system (press release)
  • Hi-Crush Partners (HCLP) announces acquisition of equity interests in Hi-Crush Augusta LLC for $224.3mm in cash consideration (press release)

Published
Apr 5th, 2014

Category:
MLP Market Post

Week Thoughts: April Flowers

The MLP Index was up 2.3% this week in a broad-based rally, and it was the best week for the index since late October.  It also marks the second straight week of large outperformance of the MLP index over the S&P 500.  The US 10 year interest rate was flat, despite rising as high as 2.80%, before dropping back down.  Energy commodity prices were largely down for the week, but NGL prices were mixed with propane up and ethane down.  There was no clear cut catalyst for MLPs to outperform to such a degree, it appears just to be a case of improving sentiment specific to MLPs.

Weekly MLP Review_4-4-14

I’m going to be long on charts and short on words this week.  I do have a day job, after all.

Monthly Recap

For a quick update on the madness of March, MLPs were up 1.5% for the month, making it the best month for MLPs so far in 2014.  TEP was the best performer in the month (+16.2%), and was in the top 5 for the second straight month. High growth and crude MLPs dominated the top 5, while upstream MLPs (LINE, MCEP, LGCY) filled out the bottom 5.  There were no repeats in the bottom 5 month over month.

Top5Bottom5_March14

Top5Bottom5_March14_Chart

MLPs started off April on a very strong foot this week, which if you have followed the Alerian MLP Index, is to be expected.  April has been a positive month for the index for 9 straight years.  As shown below, that’s far and away the longest current streak.  The longest streak ever (with the index data that goes back to 1996) was July, which was positive for 11 straight years from 1996 through 2006.

Consecutive Months

Below is an update to the best returning months for the MLP index ranked from best to worst.  April has been near the top of the list, but May is looming as typically a bad month for MLPs.

Monthly returns_April

Winners & Losers

A rising tide lifts all boats, including BWP (+7.4%), KMP (+3.7%) and EPB (+4.7%), which all showed signs of life this week.  Not all the laggards went higher, as EROC (-2.8%) is still beached.

Small cap compression MLP GSJK was up 15.9% on no news.  NGLS was up 9.9% (and up more than its sponsor TRGP) on its announcement that 1Q and 2014 results will be better than expected.  Not pictured in the chart below, variable distribution MLP EMES was up 12.0% Friday, 25.5% for the week, 63.3% year-to-date, and 325.9% in less than a year since its IPO at $17.00/unit on 5/8/13.

Top5Bottom5_4-4-14

Top5Bottom5_4-4-14_chart

Year to date, every one of the bottom five from last week improved this week, except for EROC.  LGCY dropped into the bottom five to replace SPH.  No changes week to week among the names in the top five, but GSJK catapulted to the top of the list at 44.0% total return for the year.  As noted above, variable distribution MLP EMES has outpaced everyone with 63.3% total return year to date.

Top5Bottom5_4-4-14_YTD

Top5Bottom5_4-4-14_YTD_chart

Updated IPO Backlog

It was a very busy week for securities attorneys working for MLPs.  Enable Midstream Partners launched its IPO, detailed of which are in the news section below.  Foresight Energy Partners filed an updated S-1 nearly two full years after its last filing, and for an IPO that will potentially be 3 times as large (up to $300mm in latest filings, vs. $100mm in original 2012 filing).  PBF Logistics, which had previously filed a bare bones registration statement back in August confidentially, has now made its first official public filing for its IPO.   These filings come on the heels of last Friday’s Dominion Midstream MLP IPO filing.

IPO Backlog_4-4-14

Also, not on the list above, Hoegh LNG Partners (owner of 3 floating LNG regasification units) has confidentially filed a registration statement for an MLP IPO.  In total, that’s 5 MLP IPOs that are much more real than they were a week ago, even if they were all expected to execute MLP IPOs at some point.  Also, not on this chart, Memorial Resource Development Corp (the GP of upstream MLP Memorial Production Partners) filed for an IPO of its own.

News of the MLP World

The news was all splitters and IPOs this week, with some debt deals sprinkled in…

News-of-the-World

Equity

  • Enable Midstream (ENBL) launches MLP IPO with 5.75% midpoint IPO yield (latest S-1)
    • Midpoint price of $20.00 would raise $500mm in gross proceeds
    • Implied equity value of $8.3bn and $10.2bn of enterprise value at IPO would make this the largest MLP at its IPO ever
    • Selling just 6% of the company, with sponsors Centerpoint, OGE and Arclight retaining the remaining units
    • Next 12 months projections: $848mm of EBITDA, $550mm of distributable cash flow, 1.15x coverage
  • PBF Logistics (PBFX) files initial S-1 to sell up to $100mm of common units in an MLP IPO (filing)
    • PBFX is a refined products subsidiary MLP of PBF Energy Inc. (NYSE: BPF)
    • Next 12 months EBITDA of $44.0mm
    • Initial assets include Delaware City Rail Terminal and Toledo Truck Terminal, and PBF retains several other crude and refined products logistics assets for eventual sale down to PBFX
  • Foresight Energy (FELP) files revised S-1 to sell up to $300mm of common units in an MLP IPO (filing)
    • Thermal coal mining operator, backed by Riverstone, FELP had filed its original S-1 in February 2012, and the last updated S-1 before this one was filed nearly 2 years ago
    • Next 12 months projections: $387.7mm of EBITDA, $190.8mm of distributable cash flow
  • Hoegh LNG Partners files confidential registration statement for MLP IPO of indeterminate size (Reuters)
    • Hoegh LNG Partners will own 3 floating LNG storage and regasification units
  • Sunoco Logistics (SXL) files  equity distribution agreement to sell up to $250mm of common units at the market (filing)
  • Memorial Resource Development Corp (MRD) files initial S-1 to raise up to $700mm in an IPO (filing)
    • MRD is the sponsor of upstream MLP Memorial Production Partners (MEMP), owning 50% of the IDRs and 8.7% L.P. units
    • MRD also owns 1.1 Tcf of proved reserves of its own

Debt

  • Sunoco Logistics (SXL) prices $1bn offering of senior notes in two tranches (press release)
    • $300mm of 4.25% senior notes due 2024 at 99.774% of par
    • $700mm of 5.30% senior notes due 2044 at 99.836% of par
  • Exterran Partners (EXLP) prices $350mm private placement of 6.00% senior notes due 2022 at 98.371% to yield 6.25% (press release)

M&A / Growth Projects

  • Magellan Midstream (MMP) announces plan to construct $250mm condensate splitter (press release)
    • Splitter will be constructed at MMP’s Corpus Christi terminal and will be capable of processing 50,000 bbls/d of condensate
      • Expandable by an additional 50,000 bbls/d
    • Splitter is supported by a long-term, fee-based, take-or-pay agreement with Trafigura AG
    • MMP to construct more than 1 mm barrels of storage, dock improvements and two additional truck rack bays at the terminal
    • Project expected to be complete and operational during the second half of 2016
  • Crestwood Midstream (CMLP) announces further expansion of its Willow Lake Project in the Permian Basin (press release)
    • Phase 2 of the expansion will include construction of a cryogenic natural gas processing facility with 20 mmcf/d capacity and additional gathering pipelines across the acreage dedications included in Phase 1
    • Phase 2 expected to cost $25mm to $30mm and is expected to be completed in 3Q14
  • Targa Resources Partners (NGLS) announces $115mm condensate splitter on the Houston Ship Channel, and 40 mmcf/d cryogenic processing plant in the Williston Basin (press release)
    • Splitter will be constructed at its Channelview Terminal, backed by a long-term, fee-based contract with Noble Group
      • Will have capability to split 35,000 bbls/d of condensate into its various components
      • Splitter is expected to be completed ~18 months after all permits have been obtained
    • The Williston processing plant in the Williston Basin will effectively double capacity to support Bakken and Three Forks shale plays
      • Plan could be on line before the end of 2014
    • These project updates were part of a press release in which NGLS also raised its 2014 EBITDA to a midpoint of $850mm, up 13% from its prior $750mm guidance midpoint on the back of strong demand and throughput at its LPG facility

Other

  • WMB explosion at natural gas liquids storage facility in Washington (Oregon Live)

Published
Mar 30th, 2014

Category:
MLP Market Post

MLP Week Thoughts: Baby Steps

MLPs had a very good week, significantly outperforming the broader U.S. stock market, with a substantial portion of the weekly returns coming from Friday’s rally.  The market cap weighted MLP Index and the equal-weight MLP Index were in-line with each other, implying that this week’s positive trading had broad participation.

This week’s rally may have been helped by rising commodity prices across the board, or it may have been helped by ~$700mm of closed-end funds pricing this week.  Whatever the reason, it will be interesting to see if MLPs can sustain their strength as a group for a few weeks, or if the index will go back to trading flat with the “haves” continuing to outpace the index.

Weekly MLP Review_3-28-14

Heading into the last trading day of the month, the Alerian MLP Total Return Index is up 0.9% so far in March.  If that return stands through Monday, March will have been the best month of the year so far, after +0.6% in January and -0.2% in February. Like Dr. Leo Marvin told Bob in the 1991 movie “What About Bob”: it’s all about baby steps. Looking back in a few months, we might be tied to the mast of a boat screaming with delight, “I’m sailing!”…or the sector might be remanded to the straight jacket of continued range bound trading.

Baby Steps

There was plenty of news directly related to MLPs this week, but also some indirectly relevant news. Two MLP closed-end funds priced this week, each with divergent strategies (and divergent aftermarket trading performance).  They combined to raise around $700mm.  Last year, on the exact same date (3/26), two other closed-end MLP funds priced and raised a combined $1.5bn, weird.  The MLP closed-end fund market seems to have evergreen demand from investors that hate K-1s, so I’d expect to see at least a few other funds come to market later this year (assuming discounts tighten up a bit).

It became public this week that John Tysseland, a prominent, long-time senior MLP equity research analyst at a large firm (Citi) had defected to the buyside.  Another senior analyst at a smaller firm also joined the buyside earlier this week.  Prominent MLP research analysts have gone to the buyside before, but it seems to be happening with increasing regularity these days. With the ongoing institutionalization of the sector, I expect to see continued upheaval on the sell side as the big firms replace fleeing talent, smaller firms lure talent away from the big firms, and the buyside continues to poach from big and small shops.

The dwindling supply of MLP-experienced research analysts combined with the growing list of firms offering MLP equity research may lead to some market inefficiencies, which in turn may provide opportunities for dedicated MLP managers…at least that’s what we like to think…

I like to talk about movies and try to make connections between the MLP world and the movies of my youth.  This sell-side to buy-side migration, if taken to the extreme, would be like if Hollywood movie studios began to hire prominent movie critics to produce movies.  A few things might happen in that scenario: (1) there would be fewer authoritative critics out there to tell us what movies to see, and (2) some bad movies would probably get made.

Winners & Losers

SXL led all MLPs with 8.0% return this week on no news.  FGP bounced back from last week’s drop to make the top 5 this week.  None of the MLPs with acquisitions or capital markets transactions cracked the bottom or top five and the mix of MLPs in both buckets was pretty varied.  It does seem like the smaller cap, more thinly-traded names dominate the bottom 5 this week (average market cap of the bottom five less than $900mm).

Top5Bottom5_3-28-14

Top5Bottom5_3-28-14_chart

Year to date, RNO replaced WNRL in the top five, and the a few other names changed places within the top five, but TEP remains comfortably ahead of the pack.  In the bottom five, EPB showed some signs of life late in the week and moved up a spot to third worst, APL ascended out of the bottom 5, replaced by EROC.

Top5Bottom5_3-28-14_YTD

Top5Bottom5_3-28-14_YTD_chart

Trading among general partner holding companies was mixed, but the outliers were KMI (+4.1%) and PAGP (-3.3%), which may be indicative of some rotation into large cap value GPs (NSH was also up) from large cap growth GPs, or it may not mean anything at all.  At this point, however, any time KMI is up when the rest of its peers are mixed, it is worth noting.  Even if you don’t own any of the Kinder complex or you think they’re maintenance capex is suspect, the sector is better off with a healthy and upwardly mobile KMI/KMP/EPB. 

News of the (MLP) World

This week, we had another Thursday afternoon equity deal, an upsized fixed income offering, and $1.5bn of M&A and growth projects announced.  Also, the Dominion MLP IPO filed, which brings the utility spin-off MLP filed backlog to two (Enable is the other).  While the refinery corporations were in a great rush to get their MLP IPO spin-off done (with great success almost universally), the utility sector’s midstream value-unlocking via an MLP situations have progressed at a much more methodical pace.  Maybe the momentum builds from here.

News-of-the-World

Equity

  • Dominion Midstream Partners (DM) files initial registration statement for MLP IPO of up to $400mm of common units (S-1 filing)
    • The only asset included initially is a preferred equity interest in the Cove Point LNG facility that entitles the MLP to the first $50mm of cash distributions made by Cove Point
    • Expected to remain flat until Cove Point liquefaction facility is completed and liquefaction revenues kick in
    • Growth for DM will be driven by the pace and size of drop down acquisitions from D to DM
    • $47mm of distributable cash flow attributable to DM included in the S-1 forecast
  • Exterran Partners (EXLP) prices public offering of 5.4mm common units at $28.36/unit, raising $153.1mm in gross proceeds (press release)
    • Overnight offering, priced at 3.9% discount to prior close
    • In the session following pricing, EXLP traded poorly from the open and went as low as 2.0% below the offer prices, but closed at the offer price of $28.36/unit

Debt

  • Calumet Specialty Products (CLMT) prices private placement offering of $900mm of 6.5% senior notes due 2021 at par (press release)
    • Upsized from $850mm initially offered
    • Proceeds will be used to fund the $235mm acquisition announced this week, the retirement of $500mm of 9.375% senior unsecured notes at a premium, and for general purposes

M&A / Growth Projects

  • Kinder Morgan Energy (KMP) announces $1bn worth of investment projects related to its CO2 business (press release)
    • KMP to construct new $300mm, 213-mile pipeline to transport CO2 from its source field in Apache County, AZ to the KMP-operated Cortez Pipeline in NM
    • KMP to invest an additional $700mm to drill wells and build field gathering, treatment and compression facilities at the St. John field
    • Project expected to be in service by 3Q 2016
  • Legacy Reserves (LGCY) announces two oil properties acquisitions for a combined $112mm (press release)
    • Properties are located in Chaves County, NM and Sheridan County, Montana
    • Combined current production: 800 Boe/d
    • Proved reserves of 9.0 MMBoe (95% oil, 95% operated)
    • Expected to be funded by borrowings on LGCY’s credit facility
  • Calumet Specialty Products (CLMT) announces acquisition of Anchor Drilling Fluids for $235mm (press release)
    • Anchor is a independent provider of drilling fluid solutions, completion fluids and production chemicals to more than 250 customers in the oil and gas industry
    • 7.4x implied EBITDA multiple based on $31.6mm of 2013 EBITDA
    • Acquisition expands CLMT’s operations to a new customer base that’s closer to the wellhead
  • Memorial Production (MEMP) announces acquisition of oil and gas producing properties in the Eagle Ford Shale for $173mm from Alta Mesa Holdings (press release)
    • Properties with 7.4 MMBoe of proved reserves (63% proved developed) located in Karnes County
    • Current production of 1,650 Boe/d (80% oil, 10% NGLs, 10% natural gas)
    • Transaction structured with an increasing working interest designed to offset declines and create an approximate 9% annual decline rate
    • 12.3 year reserves to production ratio
    • Acquired interests are 100% non-operated and are primarily operated by Murphy Oil
  • Ferrellgas (FGP) announces acquisition of Country Boys Gas, an independent propane company based in Commerce, GA (press release)
    • Transaction terms not disclosed (translation: very small transaction)
  • ETE files LNG application with FERC for Lake Charles facility (press release)

Other

  • Canadian public company Veresen receives approval to export LNG to non-FTA countries from its to be built Jordan Cove LNG facility (press release)
    • Veresen expects commercial LNG production to start in early 2019
    • The approval allows for 6 million tons per annum (mtpa) to non-FTA, Veresen expects the Jordan Cove facility to have ultimate capacity of 9 mtpa
    • Veresen received DOE approval to import up to 1.55 bcf/d of natural gas from Canada for the purpose of exporting from the Jordan Cove LNG facility
  • Canadian government approves 4 long-term licenses to export LNG from proposed projects on Canada’s west coast (Wall Street Journal)
    • Facilities receiving approval: Pacific NorthWest LNG, Prince Rupert LNG, WCC LNG and Woodfibre LNG
    • Combined capacity of up to 73.4 mtpa