MLP Market Update

MLP Market Update
Commentary on Master Limited Partnerships

Published
Aug 30th, 2015

Category:
MLP Market Post

Week Thoughts: MLPs Ride Oil Squeeze Higher

MLPs plumbed new depths on Monday with a 3.8% decline, but then rallied Tuesday with the market and sustained the rally as oil prices spiked higher later in the week, finishing up 5.1% overall.  Oil prices settled above $45/bbl, a 12% increase over last Friday’s price.  MLPs outperformed the S&P 500 and way outperformed utilities as the oil price rally overwhelmed interest rate increases.  Short covering and limited trading volume probably contributed to the rally.  If the MLP sector can string together 2 positive weeks ahead of Labor Day, then the next challenge will be the first equity offering of the fall season.

Weekly MLP Review_8-28-15

MLPs were up more than 1% for 4 straight days to finish the week, gaining 9.2% in the process.  The Index has almost never had a 4-day run straight up like that.  The only other times were (1) immediately following the flash crash in May 2010, (2) April 2009 exiting the financial crisis, (3) late January 2009, and (4) early January 2009.  Basically to get that kind of a sustained rally over a 4 day period, MLPs have to have been severely oversold immediately prior to the rally.

1 percent streaks

This week didn’t crack the top 10 list of all-time best weeks for the index.  It was the 4th best week for the index in the last 5 years, but marginally lower than the rally from 2 weeks ago.

Pool’s Open

One of the last vestiges of my previous life in Austin are the email updates that I still somehow receive from the community association in charge of the pool in my former neighborhood.  This summer (a couple of times), I received news that there was a fecal release and the pool would be closed for cleaning for a few days. A few days later I get an email saying the pool is all cleaned up and opened again.  Kind of like the pool scene in the Movie Caddyshack when a Baby Ruth bar clears the pool.

Pool

“It’s no big deal”

A few weeks ago, an executive made a similarly unplanned release that when combined with oil price weakness made the MLP sector un-swimmable for a while.  Is the action this week the signal that all’s clear to jump back into the MLP, or another in a long line of head fakes?

Month End Preview

Barring a 4.7% rally on Monday, August is going to be another negative months in what has been the worst 12 month stretch in the history of the MLP sector, as measured by number of negative months.  We’ve had just 2 positive months out of the last 12.  Only one other time period had less than 4 positive months in a 12 month stretch (the 12 months ended 12/31/08).  Prior to this year, there had only been one instance ever of 4 straight negative months for MLPs, we’ve now had 2 in a year.  The carnage will stop at some point, as stronger MLPs continue to replace weaker upstream MLPs and as things stabilize.

Winners & Losers

In sympathy with the spike in oil prices, E&P MLPs were revived this week to dominate the top five, with each one up more than 30%.  There were no clear trends or company specific news among the names that made up the bottom five, other than their small size.

Top5Bottom5_8-28-15

Top5Bottom5_8-28-15_chart

USAC jumped ahead of CLMT as the top performer YTD while HEP moved into the top five replacing VLP.  Upstream MLPs continue to dominate the bottom five for the year despite this week’s rally.  However, MCEP did replace BBEP.

Top5Bottom5_8-28-15_ytd

Top5Bottom5_8-28-15_ytd_chart

General Partner Holding Companies

On average, GPs underperformed MLPs this week although there was no company specific news that drove share prices.  ATLS far outpaced other GPs this week recapturing some of last week’s significant weakness.

Top5Bottom5GPs_8-28-15

Top5Bottom5GPs_8-28-15_chart

News of the (MLP) World

Light news week, as you would typically expect this late in summer.  Don’t expect much next week, either, unless there is some M&A activity that comes out.  The stock-specific news with the biggest impact this week seemed to be insider buying transactions among MLP executives and board members in the following stocks: CAPL, EMES, BWP, WNRL, NS, WPT and EMES.  I probably missed a few others, but it was a significant trend this week that hopefully will continue, particularly around seemingly broken MLP stories.

News-of-the-World

Equity

  • Tesoro Logistics (TLLP) filed equity distribution agreement to sell up to $750mm in common units at-the-market (filing)
  • EQT Midstream (EQM) filed equity distribution agreement to sell up to $750mm in common units at-the-market (filing)

M&A / Growth Projects

  • Energy Transfer (ETE/ETP) is reportedly a bidder for Magnum Hunter’s Eureka Pipeline (Reuters)
    • Magnum Hunter Resources said in June that it expected to raise $600-700mm by selling its 45.5% stake in Eureka Hunter
    • Basically, if something is reportedly for sale, Energy Transfer is involved
    • The report also mentions that Magnum Hunter has reached out to Summit Midstream and Crestwood to gauge their interest in the pipeline

Other

  • CAPL announced 2.7% distribution increase and plans to announce future distributions in conjunction with quarterly results (press release)
  • Linn Energy (LINE) CFO Kolja Rockov resigned (press release)
    • Kolja is a former RBC banker who has been CFO of LINE since its IPO back in 2006, and was one of the more interesting characters in the MLP space during his tenure
    • MLP spectators will be sad to him leave, like Saturday Night Live writers will be sad to see Donald Trump leave the presidential campaign trail
  • Summit Midstream (SMLP) COO Rene Casadaban resigned (press release)

Published
Aug 27th, 2015

Category:
MLP Market Post

Oil Exports: Impact on MLPs

Heading towards the end of the week and news is turning positive. MLPs are gaining traction and oil prices are heading higher. In advance of the weekly post, I wanted to share a paper we recently published that discusses U.S. oil exports, particularly exploring the market potential for U.S. oil exports and the impact of oil exports on midstream MLPs in the event of a full lifting of the ban.

Read the Whitepaper Here

Discussion of the potential lifting of the oil export ban is increasing in Washington. A number of incremental steps appear to be moving the U.S. towards allowing more exports, including:

  • Approval of exports of processed condensate last year, although the limited global market for condensate makes it hard for this to have much impact on the U.S. oil supply picture
  • Reported approval of applications for oil swaps with Mexico (click here to read more on that)
  • The nuclear agreement with Iran that would see Iran oil sanctions lifted puts additional pressure to lift the self-imposed sanctions of the U.S. (its only fair, right?)

We expect to see incremental progress towards exports over time, beginning with swaps with Mexico, then exports to select countries with existing positive U.S. trade relations, and potentially wider exports thereafter.

In terms of infrastructure impact, it is challenging to think about what infrastructure might get built as a direct result of oil exports. There will be some need for additional storage along the gulf coast and additional dock capacity. There will be a need for more tankers to make the long trips overseas. The tricky part is estimating the impact of oil exports on pipeline and gathering & processing development to support production growth. There would probably be a pulling forward of pipeline and gathering infrastructure projects (expansions and newbuilds). In other words, pipelines would likely need to get built sooner in a full export scenario vs. the current regulatory environment, but it’s hard to quantify how much of that would be the direct result of oil exports.

We took a stab at it, and see it as a positive to infrastructure development backlog, but not as impactful as the LNG export opportunity or the re-plumbing of natural gas pipelines that has been resulting from the excess of Northeast gas supply in recent years.

Click here to read the paper, and I look forward to receiving any feedback on it via email.

Published
Aug 23rd, 2015

Category:
MLP Market Post

MLP Week Thoughts: Triage Fatigue

MLPs had another rough week, with the Alerian MLP Index falling 5.2%, erasing last week’s 5.2% bounce.  Smaller MLPs underperformed (equal weight Alerian -6.0%).  In addition to the continuation of oil (down 5.3% to fresh lows) and NGL routs, MLPs were not helped by very weak broader stock market action.  The S&P 500 dropped 5.8%, which means MLPs outperformed the S&P 500 for a second straight week.  Interest rates tightened on the fear trade, which helped utilities outperform.

Weekly MLP Review_8-21-15

With the Dow Jones Industrial Average entering its first correction (10% drawdown) since 2011, another risk has materialized for MLPs: a broad market selloff.  An ongoing broad market selloff, stoked by questions about global growth, will continue to challenge a commodity price recovery and therefore an MLP stock price recovery.  But after such a deep drawdown, MLPs could catch a relative bid as yield and price appreciation burns off of the broad market.

Relentless MLP Decline

The Institute of Medicine Committee on Optimizing Graduate Medical Trainee (Resident) Hours and Work Schedules to Improve Patient Safety recommends a 5-hour protected sleep interval for resident doctors following 16 continuous hours on call and recommends no more than 16 straight hours on call.

Triage Fatigue

Over the last 12 months, MLP managers have been in a near constant state of portfolio triage, with increasing intensity over the last few months.  No MLP has been safe enough or had enough liquidity to avoid volatility, and investors are forced to re-evaluate expectations on an almost daily basis based on changing producer activity and commodity prices.  There is no sign of MLP volatility slowing down at this point, but history says it will at some point, and the returns during the rest period after such triage have been very positive.

Winners & Losers

SXE (GP equity commitment, dropdown/distribution clarity) and CNXC (no news) were the top performers this week bouncing back from last week’s inclusion in the bottom five.  MPLX and MWE rallied after filing the merger proxy and HEP rounded out the top five on no news.  The bottom five was once again dominated by E&P MLPs which continue to be under pressure with lower oil prices.  NMM also made the bottom five on no company news although lower oil prices and sponsor earnings this week may have pressured NMM.

Top5Bottom5_8-21-15

Top5Bottom5_8-21-15_chart

The one place where there hasn’t been much volatility the last few weeks has been the YTD winners and losers chart.  Again this week, no changes to the constituents, but the order slightly changed.

Top5Bottom5_8-21-15_ytd

Top5Bottom5_8-21-15_ytd_chart

General Partner Holding Companies

EQGP and AHGP were the only positive performing GPs for the week which is interesting given one is a natural gas levered GP and the other a coal levered GP.  ATLS went from first-to-worst giving up all gains from last week.  TRGP was downgraded adding to pressure while weakness in other GPs was market related with little company specific news.

Top5Bottom5GPs_8-21-15

Top5Bottom5GPs_8-21-15_chart

News of the (MLP) World

Another MLP sponsor stepped up to support its small-cap MLP this week, with a very positive stock price reaction.  More of both of those (the support and the price reaction) would be welcome.

Also, the deal proxy for MPLX’s merger with MWE was released this week, which highlighted the challenges MWE expected to face as a standalone entity and the risk to its longer-term outlook following deeper and longer than expected NGL price declines.  The other bidders have been identified as SXL and KMI, and there was some discussion by those bidders with regards to the veracity of some of the proxy notes, but it seems like a steep uphill battle for another bidder to win the deal with such a large breakup fee.

News-of-the-World

Equity

  • Southcross Energy (SXE) announced $175mm sponsor equity commitment and updates to growth outlook (press release)
    • SXE sponsors Charlesbank Capital, EIG Global Energy and Tailwater Capital provided a $175mm equity commitment to SXE to enhance liquidity and support anticipated growth initiatives
    • $125mm is committed to Southcross Holdings, SXE’s immediate parent company, to enhance inventory of drop-down assets available to SXE
    • $50mm is committed to SXE to be used to support Eagle Ford shale growth opportunities
    • SXE expects distribution coverage of 1.0x or greater on common units for remainder of 2015 and all of 2016 without any increase in processed volumes
    • SXE’s stock price reacted very positively to the announcement, popping 27.7% on the day the transaction was announced, before falling 10.9% over the next 2 days

M&A / Growth Projects

  • Dominion Midstream (DM) announced $286mm acquisition of interests in Iroquois Gas Transmission System from National Grid and New Jersey Resources (press release)
    • Purchase price funded with 8.6mm common units issued to the seller
    • DM will acquire 25.9% interest in the pipeline system
    • Purchase price represents 9.8x multiple of 2015 EBITDA
    • The 416-mile natural gas pipeline system transports gas from the Canada-U.S. border in upstate New York down through Connecticut and to the Bronx and Long Island
  • Antero Resources Corp (AR) announced $275mm development of 60,000 bbl/d wastewater treatment facility in West Virginia (press release)
    • The facility is expected to generate $55-65mm in annual EBITDA at full utilization three years following in-service date in 2017
    • The facility is subject to Antero Midstream (AM) option to purchase the business, so this enhances the drop down pool for AM
  • Energy Transfer (ETE and ETP) announced that its Lake Charles LNG export project has received FERC’s Final Environmental Impact Statement (press release)
    • The FEIS starts a 90-day review period during which final FERC authorization is expected to be issued
    • Lake Charles LNG project is on track for a mid-2016 final investment decision, which would start the construction phase for an in-service date of mid-2020
  • Sunoco LP (SUN) announced $57mm acquisition of a wholesale fuel distribution business serving the Northeastern U.S. (press release)
    • SUN also acquired 30 fee and leased properties, including company-owned, dealer-operated and consignment sites
    • The business currently distributes 55mm gallons per year
  • VTTI Energy (VTTI) announced that Vitol acquired the remaining 50% interest in its sponsor VTTI BV from MISC Berhad for $830mm (press release)
    • VTTI BV will continue to operate as an independent, standalone company under the leadership of Rob Njist, CEO of both VTTI an VTTI BV