MLP HINDSight
Commentary on investing
in Master Limited Partnerships from Hinds Howard

Published
May 17th, 2012

Category:
MLP Basics, MLP Market Post

comments: 3

Column: MLPs Hitting the ATM

I wrote a post over at equities.com that gives a brief rundown on an emerging MLP equity trend: at-the-market (ATM) equity offerings.  since the beginning of 2009, MLPs have raised $5.6 billion in equity using ATMs.  Only 10 MLP issuers have used this method to issue equity, and by my count there have been only 17 deals, but the pace and size of the deals is increasing.

ATMs are great for issuers, the cost in terms of gross spread and price disruptions is much smaller for ATMs than for regular overnight follow on deals.  I think they will become very popular, even though the big investment banks might not like them because fees tend to be lower for ATMs.  In fact, I even know of a firm that does ATMs, in case you were curious…

Click here to read the rest

Update: You Are Here

While I’m here, might as well recount the brutal last few weeks for the market and MLPs.  As it stands right now, despite oil dropping to near $90 per barrel, MLPs are outperforming the broader S&P 500 since the selloff began.  The S&P 500 closed on May 1 at 1405.8.  It’s been free fallin since, losing value in 9 of the last 11 trading days and dropping a total of 5.8% (5.6% counting dividends) to 1324.8.  MLPs have done only slightly better, registering negative changes on 10 of the 11 trading days since May 1 and losing a total of 5.5% of value, but only -4.7% including distributions.

Year to date, stocks are still leading MLPs, with total return for the MLP Index roughly flat at -0.33% compared with +6.2% for the S&P 500, but the gap is narrowing.  A chart of year to date price change is below, as you can see, MLPs are moving in lockstep with the S&P 500 since around April 1st.

We’re on track for another brutal day for all things risk today.  As was the case last year heading into the NAPTP MLP Conference, MLPs are in the midst of a correction with the conference next week.  The difference is that last year, MLPs were down more drastically and sooner than the broader market.  I am guessing I’ll hear lots of “buying opportunity” and “throwing the baby out with the bathwater” talk from MLP management teams and research analysts.  Historically, almost any time the MLP Index has dipped substantially has been a good buying opportunity, so that sort of attitude is probably appropriate.  The key is to recognize the risk of a correction before it happens and to have cash available or to have some short protection on to insulate your portfolio from dips.

Disclosure: The information in this article is not meant to be financial advice, I am not your financial advisor and I am posting my comments for informational purposes only.

  • wj

    Hinds,
    As an active investor in various oil and gas MLP’s I value your insight. I understand the need  to frequently raise new capital to facilitate growth to compensate for their distribution outflows.  I am good with that, provided that the expected return on new capital exceeds its cost. But I remain troubled by the lack of transparency and and lack of effort to communicate their plan and expectations with unit holders.  For example, I own OKS and on Feb 27 they issued a 424B3 registration that says:

    “We are offering
    7,000,000 common units representing limited partner interests to be sold
    in this offering. We will receive all of the net
    proceeds from the sale of such common units. Concurrently with this
    offering, we will also be
     selling 7,000,000 of our common units to
    ONEOK, Inc. in a private placement at a price per common unit equal to
    the public offering price, less the
    underwriting discounts and commissions.”

    Then they followed up with a 424B5 registration on Feb 29:

    “We are offering
    8,000,000 common units representing limited partner interests to be sold
    in this offering. We will receive all of the net
    proceeds from the sale of such common units. Concurrently with this
    offering, we will also be selling 8,000,000 of our common units to
    ONEOK, Inc. in a private placement at a price per common unit equal to

    the public offering price, less the
    underwriting discounts and commissions.”

    Does this mean that they are trying to sell 15MM new units and  raise another $900 MM and why are they concurrently selling an equivalent amount of common units to the General Partner?

    So far, your blog is the only place I have found that attempts to clarify and shed some light on the highly complex financial maneuvers between the General Partners and the Limited Partners. Any comment here?  –wj

  • http://www.mlpguy.com/ Hinds Howard

    WJ -
    Thanks for the comment, that OKS deal was very unusual.  OKS did in fact raise $474.2 in gross proceeds ($459.8) from the public offering, and then raised $459.8 million in proceeds (no bank fees involved, so OKE bought at the net price of the offering, a 3.0% discount).  OKE must have thought OKS stock was going to provide it with a better return than deploying that capital within OKE, and had an extra $459.8mm sitting around. 

    The original 7mm offering was oversubscribed and so OKS decided to increase its public offering to 8mm, hence the different numbers on different days.  Here is the press release that has the description of what happened.

    Separately, the GP of an MLP always has the option during an equity offering to contribute the requisite amount of capital to maintain its 2% ownership stake and not have it diluted down as a result of the new equity.  So, in the press release, you will read the $19.4 million of additional capital OKE contributed to maintain its 2% stake.

    Hope that answer helps, let me know if anything is unclear.

  • Stephen

    wj-
    A general and perhaps already obvious answer to your second question:

    GP’s may intentionally own a certain percent of LP units.  To maintain an existing 50% GP ownership of LP units, an MLP would issue one unit to the GP for every external unit issued. 

    At a glance, this does not appear to be the case with ONEOK, although I admit I am unfamiliar with their ownership structure.

    What I would like to know — if Hinds ever responds to these posts — is what factors influence maintaining different levels of LP ownership?  Using an example MLP would be especially helpful.

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