Dec 15th, 2011
MLP Market Post
Will the Latest MLP IPO Break Trend or Break Issue?
The final MLP IPOs of the year should price tonight. Despite being wide open, the MLP IPO market has really limped to the finish line this year. There have been 12 MLP IPOs to price so far in 2011, including $MCEP, which priced last night at $18.00 per unit (10% below the midpoint of its filing range). The IPO yield on MCEP (10.6%) was the second highest MLP IPO yield of all time (not counting fertilizer MLPs with their variable distribution models). MCEP yield at IPO was the highest since $APL priced its IPO with a 12.9% yield in January 2000.
The table below highlights how each of the 12 MLP IPOs have performed so far. 4 out of 11 priced before this week have traded up, but the last 5 are all trading below issue price. It’s worth noting that we will likely know how the next IPO will trade going forward after the close tomorrow. Each of the 4 positive IPOs in 2011 have had sharply higher prices at the close of their first trading day, an average of 10.7%, compared with negative 1.1% for the negative IPOs. The range is very wide, with TLLP winning so far at +58.8%, compared with the biggest loser GSJK at -27.8. The overall average so far is 8.0%, so despite more negative IPOs than positive, the average gets helped by the 4 positive outliers.
MCEP closed up today 0.3%, but it opened below issue and only traded above $18 in the last few minutes of the day, so jury’s out on that one.
So, back to the question at hand, can we finish 2011 strong with a positive IPO? Probably not, based on the probability above (8 out of 12 broke issue) and fatigue (will be 6th IPO this quarter). NRGM has rock solid natural gas storage and transportation assets, but it is priced aggressively and carries aggressive terms (like immediate 50% incentive distributions rights on distribution increases). The midpoint yield on NRGM is 7.4%, which seems aggressive compared with PAA Natural Gas ($PNG) at 8.2% yield and $BWP at 7.7%.
I believe NRGM will perform poorly if it prices at the midpoint or higher, but if it gets priced right (8% yield or higher), I think it could trade well. There is so much fatigue with MLP IPOs, it will be very hard for NRGM to build momentum, but perhaps there are investors out there who have been waiting to get their chance to buy NRGY assets at 7.4% that they could have bought at 11%+ by buying NRGY the last few months. Either way, getting this IPO done will be good for NRGY, partiicularly if almost immediately NRGY gets to receive significant IDR cash flow.