Week Thoughts: Falling Tide Sinks MLPs

MLPs were down less than the broader stock market this week, logging an outperforming week for the first time in a while.  The Alerian MLP Index was down 1.1% this week, but the equal weight indexes performed better, which implies that the larger cap MLPs fared worse than the smaller ones.  For the Alerian MLP Index, it was the first time it produced back-to-back weeks of 1.0%+ declines since the first and second weeks of LAST December, which I thought was pretty interesting.

Weekly MLP Review_12-13-13

The S&P 500 was down 1.6% week over week, interest rates were flat, and oil was down a bit.  Natural gas (+6.5% this week) remains the story of late, and its helping to raise the price of the lighter NGLs as well.  Natural gas prices reached levels this week not seen since late May.  Most people I’ve spoken with believe massive natural gas production can be turned on almost like a faucet to smother any uptick in demand, and this point of view was confirmed at the conference this week.

Winners & losers

VLP was the big winner, up 22.6% in its debut week, including a 21.7% pop on its first trading day.  VLP is not Valero’s first MLP.  Back in April 2001, Valero LP (VLI) priced its IPO at a 9.8% IPO yield and a $24.50/unit price.  VLI had a healthy 14.3% IPO pop in its 2001 debut.  Valero eventually took its GP stake public and sold out of that Valero MLP iteration, which went on to change its name to NuStar Energy (NS).  Since VLI’s IPO there have been 97 MLP IPOs and a ton of yield compression. Below is an updated chart of the bottom 10 MLP IPO yields of all time, 6 of which have occurred in the last 14 months.

IPO Yields_VLP

Also below is the list of the top 10 IPO first day pops of all time in the MLP space, of which 4 occurred in the last 18 months.  Among the recent IPOs, VLP joins MPLX and PSXP on both lists.  There is a clear formula:  name brand refinery launching pipeline / logistics MLP with a well-crafted drop down story = premium yield and at IPO and beyond.  There aren’t too many such stories left that could spin out an MLP, so we’ll have to find a new trend in 2014.

IPO Pops

Alerian announced changes to a few of its indices on Friday, but no changes to the Alerian MLP or Alerian MLP Equal Weight Indices.  The change that seemed to impact trading was CMLP being added to the Alerian MLP Infrastructure Index, replacing TLLP.  CMLP was up 6.5% and TLLP was down 1.7% on Friday after the announcement (although TLLP had been down as much as 3.8% in early trading).  That put CMLP in the top 5 for the week.  Other winners GSJK and ARP may have traded up with natural gas price strength, although that didn’t help EROC and EVEP, both of which are directly impacted by higher natural gas prices, and both of which were down.

Top5Bottom5_12-13-13

In publicly-traded MLP general partner holding company trading, CEQP was up 7.6% this week on what appears to be positive buzz from the Wells Fargo MLP conference (it didn’t spike as high on Friday as CMLP).  WGP went the other way, down 6.3% this week, and particularly weak Friday after it was reported that APC could be liable for much more than analysts were expecting in the Tronox litigation.

Looking at year to date returns, HCLP’s recent strength has moved it up to nearly 150% total return for the year.  EROC was in the bottom five weekly chart above for the second straight week, and it continues to edge closer to the bottom for the year, although EVEP (-5.2% this week) did its part to try to hold on to the bottom spot.

Top5Bottom5_12-13-13_YTD

News of the (MLP) World

The IPO year finished with a bang with two oversubscribed IPOs, one that traded much more exuberantly than the other.  There was a collection of growth projects announced (all from one MLP), one sizeable upstream MLP acquisition and two smallish acquisitions.  News flow was noticeably lighter this week.  Look for that to continue through the holidays.

News-of-the-World

Equity

  • Valero Energy Partners (VLP) prices IPO of 15.0mm common unit at $23.00/unit, raising $345mm in gross proceeds (press release)
    • Very hot IPO: priced $2.00 above the price range ($19-$21), opened at $28.25 and closed its debut at $28.00, a 21.7% gain
    • IPO yield was 3.7%, matching the lowest ever MLP IPO yield from earlier this year (PSXP), and closed its first day at a yield of 3.0%
    • VLP is expected to grow distributions at a rate near the top of the sector primarily via drop down acquisitions
  • Cheniere Energy Partners LP Holdings, LLC (CQH) prices IPO of 36.0mm common shares at $20.00/unit, raising $720mm in gross proceeds (press release)
    • Offering upsized from $600mm (30.0mm shares)
    • CQH has elected to be treated as a corporation for tax purposes
    • CQH opened at $19.60, and closed down 3.9% from IPO price to $19.22 in its debut
  • American Midstream (AMID) prices public follow-on offering of 2.4mm unit at $22.47/unit, raising $54.0mm in gross proceeds (press release)
    • One day marketed offering, with file-to-price decline of 6.0%
    • AMID traded down another 2.0% in the next trading session

Debt

  • Tesoro Logistics (TLLP) prices $250mm of 5.875% senior notes due 2020 at 102.25% (press release)
    • Add-on to existing notes issued 9/14/12

M&A / Growth Projects

  • BreitBurn Energy (BBEP) announces acquisition of additional oil and natural gas properties in the Permian Basin for $282mm from CrownRock, L.P. (press release)
    • Purchase price will be funded with borrowings on BBEP’s credit facility
    • BBEP’s third acquisition from CrownRock
    • Asset details:
      • Average daily production of 2,900 Boe/d (60% oil)
      • Reserve life of 15 years based on proved reserves of 16.6 MMBoe
      • 93 producing wells and over 300 potential drilling locations
  • Calumet Specialty Products (CLMT) announces acquisition of Bel-Ray Company, Inc., a manufacturer and global distributor of high-performance lubricants for an undisclosed price (press release)
  • Plains All American Pipeline (PAA) announces four organic growth projects in the Permian Basin for an aggregate investment of $400mm to $500mm (press release)
    • Projects are expected to be completed in stages throughout 2014 and 2015
    • The projects include construction of three new large diameter pipelines that will increase PAA’s takeaway capacity in support of production in the Delaware and South Midland Basins and support gathering systems PAA is constructing in the Avalon, Bone Springs and South Spraberry developments
  • Bluegrass Pipeline, LLC (JV between WMB and BWP) announces that it will extend its binding open season by a month to 1/17/14 (originally it was scheduled to end 12/16/13) (press release)
    • “The extension is in response to requests of interested shippers who would like additional time to evaluate the pipeline project”
    • In other words, shippers want to wait and see what other options might become more solidified in the next 4 weeks
  • American Midstream (AMID) announces acquisition of Blackwater Midstream from ArcLight Capital Partners (AMID’s sponsor) for $60mm (press release)
    • Blackwater is a developer and operator of terminal storage facilities
    • Purchase price will be in the form of cash and $3mm worth of equity issued to seller
    • Blackwater generated annualized EBITDA, based on 3Q numbers, of approximately $7.7mm (implying a 7.8x multiple)
    • AMID management will recommend a distribution increase to its board for 1Q 2014 (payable in May)
    • Cash flows are generated with fee-based contracts, most of which are take-or-pay lease contracts
    • Assets include three operating terminal sites located in Westwego LA, Brunswick GA, and Salisbury MD with combined storage capacity of 1.3mm bbls
Category MLP Market Post