The MLP Index was up again (6 weeks in a row now). This time, the S&P 500 beat the MLP Index. The Alerian is very close to its all time high reached back in May of 468.24. The Alerian MLP Total Return Index, however, made 4 new all-time highs this week, on each day after Monday. I point that out and chose the above title (a reference to the song in the Lego Movie that’s still in my head a week later) as a reminder of the general strength of the MLP space, despite the BWP distribution cut, which has left many to ask probing negative questions about who might be next.
It’s funny how quickly the conversation changes. It was just last week when analysts and investors were searching for which MLP might be the next NuStar (i.e. the next MLP to offer clear visibility to achieving 1.0x distribution coverage after several quarters below 1.0x). Some may even have wagered that it might be have been BWP. But this week, the MLP conversation has been about searching for which MLP might fail next. So, just a reminder, almost everything has been awesome for MLPs to start 2014.
Earnings for MLPs continued, with most reporting positive results relative to expectations. A major exception was BWP, but more on that later. Minor exceptions included NGL and MEP. US Treasury interest rates were a non-factor this week. Commodity prices continue to be constructive. Henry Hub natural gas spot prices reached more than $7.50/mmbtu early in the week, but settled at only $5.53. Front month futures, trended higher the whole week however, helped by a bullish natural gas storage report on Thursday. Propane spot prices fell 8.3%, but remain elevated due to the harsh winter, which continues to plague the nation and will continue to impact energy prices and the economy overall for a bit longer.
On Monday, Boardwalk Pipeline Partners (BWP) announced an 81% distribution cut from $0.53 to $0.10 per unit (a much larger cut than any analyst had predicted). The distribution cut was the first ever from an investment grade-rated MLP. I don’t remember a time when the MLP Index had a member down 46% in a single week, but that’s what happened with index member BWP this week. At the rebalance in December, BWP’s weight was 1.22%. In the equal weight MLP index, its weight is 2.5%, hence the under-performance of the equalweight MLP Index this week. I don’t expect to see any more investment grade MLPs cut their distributions this year, and I think the risk of distribution reduction fears spreading is also minimal, but I could see a smaller MLP make a distribution cut.
BWP’s slow train wreck the last few years and this week’s action reminded me of an exchange from a movie from the earlier, funnier portion of the Chevy Chase canon. In the movie “Fletch”, Chevy Chase plays the title character who is sort of investigating throughout the movie while constantly making up different cover personas to blend in to situations. At one point Fletch famously visits a doctor’s office under an assumed name (Mr. Babar) to pry about another patient.
The following exchange happens when the doctor grills Fletch about someone he mentioned to the doctor, which I believe to be apropos of this week in MLP land. BWP investors may feel a certain kinship with Fletch over what happens later in the scene (which you can watch here).
Doctor: You know, its a shame about Ed.
Fletch: Oh, it was. Yeah, it was really a shame. To go so suddenly like that.
Doctor: He was dying for years.
Fletch: Sure, but… the end was very… very sudden.
Doctor: He was in intensive care for 8 weeks!
Fletch: Yeah, but I mean the very end, when he actually died. That was extremely sudden.
I’m not saying BWP is dead (they do have 4x distribution coverage now!). But the way that the business and unit price has deteriorated, and then to still have such a surprising downdraft this week, it was both slow and sudden. Below is a look back at the last 12 months of trading for BWP.
Winners & Losers
There were some very wild moves this week, both positive and negative. BWP was clearly the biggest loser, down 44.5%, and NKA was dragged down as well. It must be frustrating for NKA management and investors to see their company’s market value melt away on no news specific to the company, apparently just because of the similarity of NKA’s natural gas storage assets and BWP’s. Weak 4Q results for both EEP and PVR contributed to their positions in the bottom 5. NMM issued equity, but didn’t make the bottom 5.
PSXP was the only news maker among the top 5 this week, announcing its very large first drop down acquisition. The rest of the top 5 appears to have traded up on the hope that their drop down dreams might come true as well (VLP, XTEX and SEP are all to varying degrees drop down stories).
There were quite a few changes on the year to date chart this week! BWP was the biggest mover, obviously, but it was already in the bottom 5 last week. So it just dropped 4 spots (but it will probably retain the bottom spot for a while). NKA, on the other hand, was in the top 5 for the year as of last Friday, and now its 3rd worst. Four of the top 5 are new this week (XTEX, WPT, SXCP and PSXP), while CELP maintains its overall lead.
EPB was down 2.6% on the day BWP announced its distribution cut. EPB has similarly struggling natural gas pipeline and storage assets as BWP. On Wednesday, however, it was made public that EPB CEO (also CEO of KMI and KMP) Richard Kinder stepped up and bought 100,000 units of EPB on the open market (worth around $3.0mm at the time of purchase) (report here). EPB rallied 4.4% on Wednesday once the word spread. Mr. Kinder now owns 128,000 units directly in EPB, according to Factset. It is worth noting that while $4.0mm is a substantial amount to invest, Mr. Kinder’s holdings in his other companies are far larger. Kinder’s ownership in each of the public companies he leads:
- EPB: 128,000 units ($4.0mm market value)
- KMP: 334,000 ($26.6mm market value)
- KMI: 242,701,000 shares ($8.2 billion, or 2,000x+ his stake in EPB)
The focus this upcoming week and the two weeks after that will be earnings season. It should be an exciting week with WPZ, MWE, XTEX, APL, OKS, CMLP, LINE and others reporting fourth quarter results.
News of the (MLP) World
The equity markets remain quiet, but we did have a small equity offering this week. M&A seems to be picking up. Expect M&A activity to continue, even if its just from the drop-down MLPs that went public the last few years, like it was this week.
There was a timely upbeat MLP roundtable discussion piece in Barron’s this week (the link is here, but you may have to be a subscriber). The discussion delves more into the specifics of MLPs than I’ve seen before out of Barron’s roundtables on MLPs, and that may be a function of some of the most acclaimed current themes in the space require some working knowledge of NGLs and IDRs, two acronyms that are a challenge to explain to the uninitiated. The article has more than 11 MLP and GP recommendations within it, and we’ll see if some of the less followed of those mentioned see any bounce.
- Navios Maritime Partners (NMM) prices public offering of 5.5mm units at $17.30/unit, raising $95.2mm in gross proceeds (press release)
- Overnight offering, priced at 4.58% discount to prior close, and closed up 0.4% from pricing the next trading session
M&A / Growth Projects
- Phillips 66 Partners (PSXP) announces first post-IPO acquisition from sponsor, Phillips 66 for $700mm (press release)
- Assets include the 1) Gold Product Pipeline System: a 681 mile 132Mbpd refined products pipeline system, four terminals with 172Mbpd throughput capacity and 4.3MMbbls storage capacity, and 2) two newly constructed propylene storage spheres in Medford, OK with total working capacity of 70,000bbls scheduled to commence operations on March 1
- Transaction will be funded with $400mm of cash on hand, $140mm of new units issued to Phillips 66, and a 5-year $160mm note payable to Phillips 66
- The assets are expected to contribute $65-70mm EBITDA implying a 10.4x EBITDA multiple
- Expected to close March 1, 2014
- Delek Logistics (DKL) announces drop down acquisition of El Dorado storage tanks and product terminal (press release)
- DKL to acquire storage and terminal assets from its sponsor Delek Holdings (DK) for $95.2mm
- Supported by minimum volume commitments and annual inflation escalators
- EBITDA expected to be $10.1mm, implying a purchase price multiple of 9.5x EBITDA
- Atlas Resource (ARP) to acquire Appalchian Basin, PDP natural gas properties for $107mm (press release)
- 70 Bcfe of 100% natural gas, 100% proved developed reserves
- 22 mmcfe/d current net production from 400+ active wells
- Implied R/P ratio of around 9 years
- 10-12% expected annual decline rate
- BWP announces quarterly distribution of $0.10, -81% quarter over quarter (press release)
- 2nd distribution cut in the MLP space this year (after NRP)
- Both BWP and NRP are in the Alerian MLP Index, and both will need to be removed from the index, because based on the criteria for inclusion, distribution reductions in the prior 4 quarters disqualifies an MLP for inclusion