Week Thoughts: ETP/SUSS Engaged, MLPs Celebrate

MLPs were up sharply this week, beating the broad stock market on a price basis even with a bunch of ex-distribution dates.  MLP outperformance was most likely due to renewed enthusiasm for MLP consolidation and acquisition activity.  ETP announced the acquisition of SUSS on Monday morning, EPB followed with a bigger than expected drop down acquisition, and EQM kept it going with its biggest drop down to date.  A slight drop in the US 10 year yield may have helped MLPs this week, but probably not much given how utilities traded (-1.9%, most of that on Friday).

Oil and natural gas didn’t move much, and NGL prices were down.  Earnings results were strong, but probably not worthy of a broad-based MLP rally.  The conclusion we’re left with is that the rally was the result of this week’s M&A spike.

Weekly MLP Review_5-2-14

 

Seasonality Update

The MLP Index was up 4.3% for April, making it 10 straight positive Aprils in a row.  The 4.3% month was the best month for the index in more than a year (March 2013 was +5.4%).  Its close, but May has historically produced the worst median returns of any month (-0.4%) since 1996, edging out November (0.0%), and has been negative in each of the last 4 years.  Since 1996, November has actually been the best month for the S&P 500, while May has been slightly positive.

Monthly Returns_MLPs

Winners & Losers

SUSP led all MLPs this week with a 15.1% increase, basking in the afterglow of the news it would be joining the Energy Transfer family.  HEP has all of a sudden become a strong performer, with back to back weeks in the top 5, including a 9.2% increase this week on the back of solid earnings.  OILT results were lower than market expectations, but that was primarily due to the Houston Ship Channel being shut down for 20 days in the quarter.  The market shrugged off the miss and got excited about OILT’s participation in the EPD ethane export facility, among other potential growth projects.

ARLP had its quarterly reminder to the market that there is one coal MLP that can put up numbers.  ARLP’s earnings were strong and management announced a 2:1 unit split.  On the downside this week, no real trend.  BWP kicked off the week with earnings that were met with enthusiasm by the analyst community, but BWP was down on the week.

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Top5Bottom5_5-2-14_chart

 

For the year, APL climbed out of the bottom 5, replaced by LGCY.  TLLP and OILT popped back into the top five, replacing EQM and RNO.

Top5Bottom5_5-2-14_YTD

Top5Bottom5_5-2-14_YTD_chart

News of the (MLP) World

There was a ridiculous amount of news in the MLP world this week.  We saw 2 MLP IPOs launched, another one filed, the biggest equity offering so far this year, 2 mammoth drop downs, an MLP consolidation, a rail explosion, national media coverage of Cheniere’s CEO pay, and some movement on energy issues in Washington DC.  Oh, and 15 MLPs reported first quarter results, with another 30 next week.

M&A activity and MLP consolidations are generally positive for the sector, providing catalysts for stock prices and attractive speculative premiums to MLPs that might be next.  Activity also tends to create equity overhangs that can provide entry points to MLPs that investors have pined over but have avoided because of valuation.  It’s a very exciting time to be involved in the MLP sector, which continues to be relied upon to solve regional, national and even global energy bottlenecks.

News-of-the-World

Equity

  • GasLog Partners (GLOP) launches initial public offering of 8.4mm common units that would raise $168mm at the midpoint price at a 7.5% IPO yield (prospectus)
  • EQT Midstream (EQM) prices public offering of 10.75mm common units at $75.75/unit, raising $814.3mm in gross proceeds (press release)
    • Second largest MLP follow-on equity offering of all time (WPZ’s $1.2bn deal last year is biggest), which is incredible for what is still a smaller MLP
    • Offering upsized from 8.75mm units initially offered
    • Priced at 1.1% discount to closing price, unusual for a one day marketed deal, 1.7% file-to-price decline
    • Proceeds will be used to fund a portion of the Jupiter acquisition, announced this week
  • El Paso Pipeline (EPB) sells 6.8mm common units at $30.99/unit in a bought deal, raising $242.3mm in gross proceeds (filing)
    • 5.0% discount from prior closing price
  • PBF Logsitics (PBFX) launches IPO of 13.75mm common units (at 6.00% midpoint yield) to raise $275mm in gross proceeds (prospectus)
    • PBFX was formed by refinery company PBF Energy, which will retain GP interest, IDRs and a 56.7% L.P. interest
    • PBFX will have right of first offer on certain logistics assets owned by PBF Energy
    • Initial assets at PBFX include: crude oil rail unloading terminal at the Delaware City refinery and a crude oil truck unloading terminal at the Toledo refinery
      • Both on long-term fee-based contracts with PBF Energy
    • PBFX expects to generate $43.8mm in EBITDA over the next 12 months, with 1.15x distribution coverage
  • Westlake Chemical Partners (WLKP) files initial S-1 to sell up to $271.7mm in an MLP IPO (filing)
    • MLP formed by Westlake Chemical (WLK), a publicly-traded chemical company, which will retain the GP Interest and IDRs, along with some portion of the L.P. units
    • WLKP will own 10% of OpCo, a partnership between WLK and WLKP, which will own 3 ethlyene production facilities with 3.4bn pounds of ethylene capacity and a 200-mile ethylene pipeline
    • OpCo will have a 12-year contract with WLK for 95% of capacity at a fixed margin per pound of $0.10
    • WLKP will be a drop down story, and plans to buy an increasing share of OpCo over time

M&A / Growth Projects

  • EQT Midstream (EQM) announces $1.18bn drop down acquisition of the Jupiter natural gas gathering system from EQT Corporation (press release)
    • EQM will also fund $182mm of expansion capex in 2014 and 2015 to add compression capacity
    • Jupiter gathers EQT’s Marcellus production and consists of ~35 miles of natural gas gathering pipeline and 21,300 horsepower of compression
      • Has 970 mmcf/d of pipeline capacity and six interconnects with EQM’s transmission and storage system
    • 10-year firm capacity reservation charges underpin the economics of the deal, but there is additional fee-based upside for volume above reservation commitments
    • EBITDA expected to be $110mm in 2014 and $132mm in 2015, implying all-in 2015 EBITDA multiple of 10.3x, just based on the capacity reservation charges
  • Energy Transfer (ETP) announces acquisition of Susser Holdings, GP of Susser Petroleum Partners (SUSP), for $1.8bn and announces plans to drop down ETP’s retail gas station business into SUSP over time (press release)
    • Implied premium of 40.7% to prior day closing price of Susser
    • ETP also plans to propose an exchange of the G.P. interest and IDRs of SUSP to ETP’s G.P. Energy Transfer Equity (ETE), but until that point, ETE has agreed to forego $35mm in annual IDR payments from ETP
    • Deal is a shrewd way to monetize the retail business of ETP at an attractive price while retaining upside through the IDRs of SUSP
    • Adds a 4th MLP to the Energy Transfer family, with a 5th MLP (LNG facility) to be filed later this year, and makes the most complex org chart in the MLP space incrementally more complex
  • El Paso Pipeline (EPB) announces drop-down acquisition of natural gas pipeline assets from Kinder Morgan, Inc for $2bn (press release)
    • KMI had previously announced its intent to drop these final natural gas pipeline assets into EPB in 2014, but the market seemed to think the drop downs would be executed through more than one deal
  • Lehigh Gas Partners (LGP) announces acquisition of Virginia-based Petroleum Marketers, Inc. for $61mm (press release)
    • Acquisition includes 85 convenience stores and a refined products and motor fuels distribution business
    • LGP is executing its convenience store rollup strategy, reminiscent of back in the early 2000s when Inergy was gobbling up small propane operators
  • Genesis Energy (GEL) announces open season for new 70-mile crude oil pipeline interconnecting the Express Pipeline in Casper, WY to GEL’s Pronghorn unit train loading facility in Douglas, WY (press release)
  • Boardwalk Pipeline (BWP) and Williams (WMB) both announce in their earnings releases that the Bluegrass NGL pipeline project would not move forward at the current time due to a lack of customer commitments (press release)
  • Ferrellgas (FGP) announces $124.7mm acquisition of Sable Environmental, a fluid logistics provider in the Eagle Ford Shale (press release)
    • The sleepy propane distributor (has not raised its distribution since its mid-1990s IPO) is also establishing a midstream division and is talking about growth

Other

  • Alliance Resource (ARLP) announces 2:1 unit split, effective June 16th, for unitholders of record on May 30th (press release)

Industry

  • A train carrying 14 crude oil cars derailed, causing an explosion when 3-4 of those cars breached, and leaking some oil into the nearby river.  This time it happened in Virginia, much closer to home for those in a position to impose legislation to curb rail accidents. (New York Daily News)
  • Keystone XL Pipeline approval may be put to a vote in the Senate within weeks, in a measure brought by Senate democrat Harry Reid, in what this article describes a political calculation by the Democrat leader…and on it goes (Wall Street Journal)
  • Bi-partisan work getting done on legislation in the House of Representatives that would propose a 90-day decision deadline on the Energy Department’s process for approving LNG exports to non-FTC nations (Fuel Fix)
  • An ongoing environmental impact study by the state of Washington delays Tesoro’s Port of Vancouver crude oil rail terminal, and increases cost estimates from $100mm to $150-$190mm (Fuel Fix)
  • “Skip” McGee, head of American operations for Barclays and former head of investment banking (and before that energy investment banking) at Lehman Brothers, is leaving the firm (Dealbook)
    • Skip advised on some very large M&A deals in the energy space, including the restructuring that saved Williams Companies from Bankruptcy in the early 2000s, the sale of Kerr McGee to Anadarko for $18bn, and the sale of XTO Energy to Exxon for $41bn
    • He is a legend and hero of many a Houston junior banker
  • Cheniere CEO Charif Souki grabbed headlines, and at one point mid-week he garnered a 4 box segment on CNBC where there was general consensus that he got paid too much this year and that the CEO compensation system is broken.  Forbes writer Christopher Helman seems to think Souki is worth every penny of the $142mm he was paid in 2013 (Forbes)
Category MLP Market Post