MLP Market Update

MLP Market Update
Commentary on Master Limited Partnerships

Published
Dec 14th, 2014

Category:
MLP Market Post

Week Thoughts: Bidless Oil Leaves MLPs Wounded

MLPs made it 3 straight weeks of declines this week and has now declined 7 out of 11 trading days since the OPEC meeting.  The MLP Index was down 9.4% this week, and is now negative for the year after peaking at +21.4% YTD total return at the end of August.  Just like last week, MLPs were crushed Monday and rallied Tuesday, but unlike last week, that rally lasted only 1 day, and MLPs were down each day the rest of the week.  The Equal Weight Alerian MLP Index was down 10.7% this week, and is now down 10.2% YTD including distributions.

Weekly MLP Review_12-12

Oil prices declined another 12.2% to fresh lows this week, while natural gas rallied Friday to finish close to flat on the week.  The broader stock market was down 3.3% this week and interest rates were down as well, which helped utilities outperform everything.  The financial media and the whole world is watching oil’s decline, which this week seemed to only hasten its decline.

A few statistics to put the recent MLP crash in historical context:

  • 4% decline was the 6th worst week ever for the MLP Index, with the other 5 weeks consisting of 4 weeks during the financial crisis of 2008/2009, and then the week of 9/11/2001
  • 7% decline so far this month would rank as the 3rd worst month in the history of the MLP Index, behind only 9/08 and 11/08
  • 0% decline so far this quarter (including distributions) would rank as the 3rd worst quarterly decline ever for the MLP Index, behind only 9/30/08 and 12/31/08
  • Monday’s decline of 5.4% was the 13th worst single day decline ever for the MLP Index, and the worst since March 2009

It’s always darkest before the dawn they say, and once the bottom in oil prices is finally reached and MLPs bottom, history says MLPs should have a lengthy recovery.  After the 2 worst quarters in MLP history that ended on 12/31/08, MLPs went on a 5 year run that produced annual returns of 29.5%.

There was more differentiation in MLP trading the last few days, however, which was likely partially due to MLP management teams meeting with investors at the Wells Fargo Conference in New York this week and getting a chance to defend their fee-based cash flows and growth expectations. That differentiation indicates some investors are selectively buying names that have been oversold.

Winners & Losers

None of the top performing MLPs this week are in the Alerian MLP Index.  When you aren’t in the index, you have a better chance of fighting negative sentiment, because there isn’t a wave of ETF and mutual funds selling of your stock as a result of redemptions.  The bottom 5 is dominated by upstream MLPs, as you would expect, but NGL was crushed this week as well.

Top5Bottom5_12-12-14

CELP’s big move this week offset its bottom 5 showing last week.  There were no other repeats in the top or bottom 5, as volatility whips MLP prices around week to week.

Top5Bottom5MLPs_12-12_14_chart

The updated YTD returns rankings below just all kind of shifted lower.  Every single name in the chart below was down this week, PSXP maintains a narrow edge on the upside, while NKA and RNO are battling for last place with just 12 more trading days left this year.

Top5Bottom5_12-12-14_YTD

Top5Bottom5MLPs_12-12_14_YTD_chart

News of the (MLP) World

As you would expect with the wild swings in unit prices, there were no follow-on equity offerings this week.  MLPs that were hoping to raise equity in December to fund capital projects in 2015 will need to either borrow to fund capex, issue equity at these much lower levels in January, or find alternative forms of equity.  Maybe we’ll see a few PIPEs.

News-of-the-World

We’ve now seen a few MLPs issue press releases confirming and defending 2015 expectations. This week it was Targa.  Starting next week as the holidays draw closer, expect radio silence from MLPs and limited projects or acquisitions announced.  Absent company-specific news, MLPs might trade even more with the price of oil during the last few trading days of the year.

One MLP was brave enough to launch an IPO this week: Rice Midstream.  It doesn’t have the same buzz that it probably would have at $90/bbl oil and $4.50/mcf gas, so we’ll see how it trades next Wednesday.

Equity

  • Rice Midstream Partners (RMP) launches MLP IPO to raise up to $500mm with a 3.75% yield at the midpoint of the filing range (prospectus)
    • A spinoff of Rice Energy, Inc, publicly-traded Marcellus and Utica producer, RMP provides fee-based gathering services to Rice and third parties
    • Very impressive well results and drilling inventory on just 63,000 acres in the Marcellus are expected to drive top tier distribution growth for several years
  • EQT Corp announces plans to file registration statement for IPO of its GP interests in EQM (press release)
    • GP holding company will own the GP of EQM and 21.3mm L.P. units
    • EQT expects to retain around 80% of the holding company
    • If equity market conditions normalize, don’t expect this to be the only GP IPO in 2015

M&A / Growth Projects

  • CrossAmerica Partners (CAPL) announces $85mm third party acquisition (press release)
    • CAPL to acquire Erickson Oil Products
    • Erickson operates 64 convenience stores in Minnesota, Michigan, Wisconsin and South Dakota, primarily under the Freedom Valu brand
  • Kinder Morgan (KMI) announces long-term transportation and storage agreement with Cheniere (press release)
    • KMI entered into a 15-year agreement with Cheniere to provide 550,000 dekatherms per day of firm natural gas transportation service as well as 3 bcf/d of natural gas storage capacity for use at the Corpus Christi LNG terminal
    • KMI will spend $187mm to expand its pipeline and storage facilities
  • Enterprise Products (EPD) decides not to pursue Bakken to Cushing pipeline
    • EPD had already indicated in a conference call that in a weaker oil environment, this pipeline would probably not be needed, especially when there are two other large pipelines being built already by ETP and EEP

Other

  • Targa Resources Partners (NGLS) reiterated 11-13% distribution growth guidance and distribution coverage above 1.0x (press release)
  • Rentech Nitrogen Partners (RNF) CEO resigns to pursue other opportunities (press release)
  • Alerian announces addition of Enable Midstream (ENBL) to the Alerian MLP Index as part of its normal December rebalancing (press release)
    • EXLP will be removed from the index
    • Alerian made no changes to the Alerian MLP Infrastructure Index

Published
Dec 7th, 2014

Category:
MLP Market Post

Week Thoughts: MLPs Processing a Crude Reality

MLPs recorded their second straight week of declines, with the Alerian MLP Index (AMZ) down 1.5% this week after last week’s 6.0% decline.  Following a 4.4% washout Monday, MLPs bounced higher in each of the next three trading sessions to claw back to flat for the week, but then reversed on Friday when the index was down 1.6%.  Despite the drama, the MLP Index remains 6.4% higher on a total return basis than its 10/14 low.

Weekly MLP Review_12-5

Volatility in both directions should continue at least through the end of the year as investors balance the new commodity price reality with company-specific exposure to that new reality.  Each passing week of declining commodity prices forces ongoing iterations of the re-evaluation process.  This week, many MLPs are presenting at the Wells Fargo conference.  It will be very interesting to see how they address the commodity issue, beyond saying that producers haven’t slowed activity in their regions so far.

The Equal Weight MLP Index is down 5.7% on a price basis this year, but is still up 0.5% for the year on a total return basis, nearly 900 basis points behind AMZ.  AMZ has never beaten its equal weight cousin by more than 800 basis points.  Given the wide performance disparity among growth MLPs vs. commodity sensitive MLPs, it’s no surprise that we’d set that record this year.

Commodity Prices Fall Further

Oil prices continue to dominate the conversation, but milder weather contributed to a bearish natural gas storage report and a 7.2% decline this week, a much bigger decline than oil this week.  Propane and Ethane didn’t trade last Friday, so the big week over week drops were largely a catch up from last Friday’s 10%+ oil price drop.  Ethane prices reached a multi-year low of $0.15/gallon on Wednesday, and current ethane price is much lower than its lowest point during the financial crisis in 2008.  Propane hasn’t reached financial crisis levels yet, but it set a 52-week low this week as well.

There are other factors at play in the MLP space other than oil price.  Interest rates rose this week, which sent utilities lower this week.  A good jobs report helped to confirm the U.S. economic story.  Also, the US Dollar is dominating the world currency market, which doesn’t help oil prices.  See the chart below for what looks like strong inverse correlation that OPEC can’t do much about.

DXY_WTI

Winners & Losers

RIGP bounced hard this week, up 20.4%, but it remains 14.2% below its July 31 IPO price.  RIGP’s IPO could not have been timed better (WTI oil had just crossed below $100/bbl).  Two other 2014 IPOs (DM and GLOP) were the next best performers.  GLOP held an analyst day this week, where it outlined its plan to grow the combined fleet of GLOP and its sponsor to 40 vessels by the end of 2017.

Each of the bottom 5 MLPs this week have substantial commodity price exposure in their businesses.  Not one of them had any news, which generally is necessary to drive 20%+ negative movements, especially after several of them were down big last week.

Top5Bottom5_12-5-14

MCEP is down 45% in two weeks, and is the only repeat member of the bottom 5.  GLOP led all MLPs last week and was second best performer this week.

Top5Bottom5_12-5-14_chart

As MLPs limp into the final weeks of the year, the divergence among MLP performance is as wide as it has ever been.  Choosing the right MLPs among the 120+ names out there has really matter.  This week, DM popped back into the top 5, while each one of the bottom 5 declined this week.

Top5Bottom5_12-5-14_YTD

Top5Bottom5_12-5-14_YTD_chart

News of the (MLP) World

There were a few brave MLPs that issued equity this week.  Perhaps at some point before the end of the year, one of the 13 MLP IPOs that have filed will be brave enough to try to get an IPO done.  Since the Thanksgiving Massacre of last Friday and Monday, KMI and OKS have issued 2015 guidance, each was upbeat about their growth prospects even in a $65/barrel oil price (and <$0.60/gallon NGL price) world.

OKS is counting on significantly higher than $0.60/gallon NGL price to achieve its guidance, but even taken with a grain of salt, OKS guidance implies MLP businesses are strong enough to endure a slowdown in upstream activity in 2015.  Resilience and stability in the face of turmoil is what you would expect from MLPs, despite the market’s increasing focus on growth in recent years.

News-of-the-World

Equity

  • MPLX priced public offering of 3.0mm units at $66.68/unit, raising $200.0mm in gross proceeds (press release)
    • Overnight offering, priced at 4.0% discount to prior close
  • Global Partners (GLP) priced public offering of 3.56mm units at $40.24/unit, raising $143.3mm in gross proceeds (press release)
    • Overnight offering, priced at 3.9% discount to prior close

M&A / Growth Projects

  • PBF Logsitics (PBFX) announced $150mm drop-down acquisition (press release)
    • PBFX to acquire the Toledo Storage Facility, which consists of 3.9mm barrels of feedstock and product storage capacity at PBF Energy’s Toledo Refinery
    • Sponsor PBF will enter into a 10-year terminalling agreement with minimum volume commitments
    • PBFX expects $15.1mm of annual EBITDA (10.0x multiple)
    • PBFX will borrow $105mm, use $30mm of cash and issue $15mm of units to PBF to fund the transaction
  • Enbridge (ENB) announced evaluation of drop-down strategy, provided clarity on its plans with its Canadian income fund subsidiary, and increased payout ratio (press release)
  • Constitution Pipeline Company (41% owned by Williams Partners) received approval for construction of the Constitution Pipeline (press release)
    • Constitution is a 124-mile, 30-inch diameter pipeline designed to transport natural gas from supply areas in northeast Pennsylvania to interconnects with existing pipelines in Southern New York
    • Expected to be in-service by the winter of 2015
  • NGL Energy (NGL) disclosed purchase price of Grand Mesa pipeline stake (Form 8-K)
    • $310mm in cash is what NGL agreed to pay for the remaining 50% stake in the constructed Grand Mesa Pipeline, scheduled to be in-service in Q4 2016

Published
Nov 29th, 2014

Category:
MLP Market Post

MLP Week Thoughts: Winter is Coming

A day after OPEC rocked the global oil markets with inaction, the U.S. markets opened for 3.5 hours Friday, and energy stocks were crushed.  The Alerian MLP Index (AMZ) ended Friday down 5.2%, its worst day in more than 3 years.  For the week, MLPs gave back all the gains from last week times two, with the AMZ down 6.0% and the equal-weight version (AMZE) down a staggering 7.7%.

Weekly MLP Review_11-28

For the AMZ, it was the second worst week of the year.  But it was the worst week of the year (and the last 4.5 years) for the AMZE, as selling was more concentrated on upstream and services MLPs (that tend to be smaller) compared with midstream MLPs.  It is important to have perspective, however, and realize that the AMZ is 8% higher than its low in mid-October (including distributions), and as we have see in recent weeks, MLPs can swing violently to the upside as well.

WTI oil futures price was down around 14% this week, including heavy selling late into the afternoon Friday.  Oil settled below $66.00/bbl, which is literally off the charts low.  Producer published IRR sensitivity tables usually have a range of WTI price that goes from $70 to $100/bbl.  Natural gas fared better and remains above $4/mcf. NGL prices did not trade Friday, but expect propane and ethane to be down substantially Monday.

When you start becoming a player in the world market for oil and gas, beyond just as an importer, as the U.S. has in the last few years, global news items start to play a larger role.  Those news items are not always in tune with the U.S. holiday calendar, a new phenomenon for MLP investors.  As shown in the chart below, the Friday after Thanksgiving is typically a low volume, low volatility affair (with the exception of 2008).

AMZ-PostThanksgiving

2014 was far and away the worst post-Thanksgiving day.  Certainly the action Friday has to be taken with a grain of salt.  On Monday, when the markets get back to functioning normally, expect to see more volatility in both directions.

Winter?

It was a brutal week all around in the energy complex, and some commodity-focused research analysts are calling for a very long period of prices that remain below $85/bbl.  In the book series (and now popular HBO show) Game of Thrones, there is a saying that a particular group is fond of repeating as a sort of provincial mantra: Winter is Coming.  The motto is both a warning and a reminder to remain constantly vigilant.  Its meaning can be heard in the echo of management teams like PAA’s that have incessantly talked of a time when it would be important to have a fortified business model and liquidity to spare.

Winter

Since oil prices last fell this sharply (2008), the U.S. energy sector has enjoyed a long and prosperous summer.  It appears that summer may be over.  The open question remains as to how long this winter will last.  Many MLPs are not anywhere close to being prepared for Winter.  Those MLPs that are able to demonstrate distribution growth and limited cash flow volatility amidst commodity chaos around them will separate themselves from weaker MLPs.

Winners & Losers

Varying degrees of perceived or actual oil price exposure and beta drove wide disparity in returns this week.  There was no company-specific news for any of the top and bottom 5 MLPs this week.  Among the few winners this week was recent IPO SHLX, which got a pop when analysts published their initiation reports on it.   Amazingly, all 5 of the bottom 5 were down 20%+ this week.  3 of the 5 were upstream MLPs, and another directly services production with sand (HCLP), so as you would expect with a big downdraft in oil prices.

Top5Bottom5_11-28-14

NKA led all MLPs up last week, and reversed course this week, exemplifying the sentiment flip flop we saw from week to week going from the best week of the year to the second worst week.

Top5Bottom5_11-28-14_chart

In terms of YTD returns, PSXP has been caught from behind by TEP for the top spot in the sector, while SHLX’s strong week pushed it into the top 5.  On the downside, BWP and NRP, each of which cut their distribution in 2014, are no longer in the bottom 5, pretty incredible given how drastic the selloffs were after the cuts were announced.

Top5Bottom5_11-28-14_YTD

Top5Bottom5_11-28-14_YTD_chart

News of the (MLP) World

No capital markets activity this week.  Expect some action next week, as MLPs try to access the capital markets in advance of what may be a challenging 2015.  It will be interesting to see how the next MLP IPO goes, because in the last period of turmoil in October, MLP IPOs still got done at record low yields and in record size.

M&A / Growth Projects

  • Crestwood Equity (CEQP) announced sale of Tres Palacios natural gas storage facility to joint venture of Crestwood Midstream (CMLP) and Brookfield Infrastructure Partners (press release)
    • Purchase price is $130mm
    • CMLP will own 50.01% of the JV, with Brookfield owning the remainder
    • Brookfield will enter into 5 year, fixed-fee contracts with Tres Palacios for 15 bcf of storage capacity (out of 38.4 bcf for the whole facility) and interruptible wheeling services that will add $16mm of revenue to Tres Palacios
    • Tres Palacios has been a drag of around $2.5mm per quarter for CEQP in recent quarters
  • Plains All American (PAA) announced plans to expand capacity on the Cactus Pipeline (press release)
    • PAA will expand the capacity from 250,000 bpd to 330,000 bpd
    • Expansion is expected to be in service by 4Q 2015
  • NGL Energy (NGL) acquires the remaining 50% interest in the Grand Mesa Pipeline, LLC from Rimrock Midstream for an undisclosed amount (press release)
    • NGL now owns 100% of the system, which is currently being developed with an expected in-service date of 4Q 2016
  • NGL Energy (NGL) acquires two salt water disposal wells in the Bakken Shale area for $34.6mm (press release)