MLPs continued to recover this week from the early October correction, with gains each day of the week except for Wednesday when the entire market sold off in the last few hours of trading. The Alerian MLP Index posted gains of 3.1%, despite declines in commodity prices (Oil -1.0% and natural gas -3.8%, both near 52-week lows). MLP performance was helped by strength in the broader U.S. stock market (S&P 500 +4.1%), and by positive distribution and earnings announcements.
MLPs were active in the capital markets this week, with $3.6bn of capital raised in debt and equity deals. MLPs were also actively deploying capital, with 1 consolidation transaction for $2.5bn and another 3 acquisition announcement for $690mm. Several prominent MLPs report 3rd quarter earnings next week, including Enterprise Products Partners, Williams Partners and NuStar Energy, which should drive stock price performance (absent further macro influences).
Winners & Losers
Many MLPs continued to recover from the correction that ended last week, and the winners this week seem to be a fairly random mix as a result. The bottom 5 this week, however, was more event-driven. SUSP priced an equity deal into a still recovering market early in the week and saw its units selloff during marketing. TLLP and QEPM were down on TLLP’s $2.5bn acquisition of QEPM’s parent and on TLLP’s large equity offering to pay for it. RNO was down on announcement that this quarter’s distribution would be 88% lower than its prior quarter, never a good sign.
There were no repeats on the bottom or top 5 this week, but HMLP did make the jump from bottom 5 to top 5.
Year to date, the bottom 5 MLPs now includes 4 MLPs that have announced distribution cuts in the last year, and QEPM, which is now trading 19% below its IPO price of $21.00 in August of 2013, despite growing its distribution a total of 20% in the 4 quarters since IPO. SUSP dropped out of the top 5, replaced by RRMS.
The market served up a few reminders related to the TLLP acquisition of QEP Field Services this week.
First, when an MLP has a strategy that the market is comfortable with, it can be painful when that MLP steps outside of that well-understood strategy, for whatever reason. This was the case for TLLP this week, which stepped outside of focus on crude and refined products logistics to acquire a natural gas gathering and processing company.
- A recent example of this is the pending merger between ACMP and WPZ. ACMP as a standalone MLP had a well understood organic growth strategy that was working. The WPZ merger changes the growth profile of ACMP and adds many other business lines beyond its core, fee-based gathering business. The TLLP acquisition this week doesn’t appear to have changed TLLP’s growth profile, but it’s definitely a shift in strategy that the market wasn’t prepared for.
- MLPs should have some level of self-awareness about their image in the eyes of the market. TLLP had cultivated an image over the years, and they went away from it with this acquisition. The deal may work out very well, but it will take time for the market to get comfortable with the new TLLP. I’ve met with management of some highly-regarded MLPs that have the cost of capital to buy many of the assets being shopped, but they refuse to do so because of how the market might react to a move away from its core focus. This may cause that MLP to miss out on some potentially very good acquisitions, so there is a tricky balance, but an MLP’s image clearly matters.
Second reminder: in big consolidation transactions, the GP typically wins. Tesoro Corp’s share price popped on TLLP’s acquisition, even as the MLP’s stock price dropped like a stone, because TSO expects to see its IDR cash flow from TLLP double on the back of the acquisition and the new units issued.
- A recent example is EPD’s acquisition of OILT’s GP for ~50x cash flow and offering no premium for the buyout of OILT L.P. units.
Third reminder: no drop down story is guaranteed. QEPM was a drop down story, and despite not trading at valuations like some of the other drop down MLPs, the market was counting on drop downs to sustain growth on its mature asset base. This TLLP acquisition nullifies those potential drop downs, and the market reacted negatively as a result. The bull case for QEPM prior to the sale of its GP was that some strategic or financial buyer would buy the GP with the hope of using the MLP as a vehicle for growth. TLLP has no use for QEPM and announced it would roll it into TLLP after the GP acquisition.
- This is similar (but on a much smaller scale) to several years ago when KMI came along and bought El Paso Corp and dramatically lowered the growth profile of EPB by directing much of El Paso’s pipeline assets towards KMP as opposed to EPB.
One bonus reminder not related to TLLP: the market does not like it when the distribution gets cut. RNO’s value was cut by 60%+ this week after announcing an 88% distribution cut. RNO has consistently struggled the last few years. In 2012, it cut its distribution back to its minimum quarterly distribution and stopped paying distributions on its subordinated units. But even with its struggles and a challenging coal market, investors still had been giving RNO some credit for paying its MQD.
News of the (MLP) World
Another name brand MLP IPO (the first by a major integrated oil company) is out in the market, and it is expected to garner quite a bit of attention. In addition, we had some M&A action beyond TLLP in the form of 2 anticipated drop-down transactions and a much smaller step-out acquisition by GEL. Also, a plethora of MLPs announced distributions and MWE raised 2014 EBITDA and DCF guidance ahead of earnings.
- Shell Midstream (SHLX) launches IPO of 37.5mm units, which is expected to raise $750mm at the midpoint price of $20.00/unit (press release)
- Midpoint price represents a 3.25% yield, the lowest ever for an MLP IPO (lowest since DM earlier this month at 3.33%)
- Will be the largest offering size for an MLP IPO ever (larger than CVRR’s $690mm, including overallotment)
- With the 15% overallotment and a price at the high end of the range, SHLX would raise $905.6mm
- SHLX owned interests in 2 crude oil transportation pipelines and 2 refined products pipelines to start with, but expects to grow rapidly through drop-down acquisitions
- SHLX will have no debt and $100mm of cash on its balance sheet after the IPO
- Expected to price Tuesday afternoon, and begin trading Wednesday
- Tesoro Logistics (TLLP) prices public offering of 20.0mm units at $57.47/unit, raising $1.149 billion in gross proceeds, including $500mm purchased by Tesoro Corp (press release)
- Proceeds to be used to partially fund the QEP Field Services acquisition outlined below
- One day marketed offering, with a file-to-price decline of 14.3%
- TLLP units traded down another 3.4% the day after pricing
- Original offering was for 19.35mm unit offering with $350mm worth purchased by Tesoro Corp
- Tesoro Corp backstopped weak demand for the offering by adding another $150mm to its commitment
- MidCon Midstream Partners files initial S-1 for MLP IPO to raise up to $100mm in gross proceeds (filing)
- MidCon is an MLP formed by Sandridge Energy as a platform for its gathering & processing assets and its saltwater disposal well assets
- Susser Petroleum (SUSP) prices public offering of 8.0mm units at $46.25/unit, raising $370mm in gross proceeds (press release)
- One-day marketed offering, with a file-to-price decline of 7.1%
- Tesoro Logistics (TLLP) prices $1.3bn offering of senior notes, including $500mm worth of 5.50% senior notes due 2019 and $800mm worth of 6.25% senior notes due 2022 (press release)
- Targa Resources (NGLS) prices $800mm offering of 4.125% senior notes at par (press release)
M&A / Growth Projects
- Tesoro Logistics (TLLP) announced the acquisition of QEP Field Services (QEPFS) from QEP Resources for $2.5bn (press release)
- QEPFS operates natural gas gathering, processing and transportation assets in the Rocky Mountain region and in North Dakota
- QEPFS also holds a 58% L.P. interest and 100% of the incentive distribution rights of QEP Midstream Partners (QEPM), an MLP that went public in 2013
- The acquisition is immediately accretive to TLLP’s distributable cash flow per unit
- Phillips 66 Partners (PSXP) announced $340mm drop-down acquisition (press release)
- Assets include 2 rail unloading facilities and small oil pipeline
- As part of the acquisition, PSXP will enter into a 10-year terminal services contract with PSX for 100% of the capacity of the rail facilities
- 10x EBITDA multiple for rail facilities
- Genesis Energy (GEL) announced acquisition of an oil tanker for $157mm (press release)
- The tanker is a modern, double-hulled, Jones Act compliant tanker with 330,000 bbls of capacity
- Operated under long-term charter agreements into 2020 with high-quality counterparts
- EnLink Midstream Partners (ENLK) announced $193mm drop-down acquisition (press release)
- ENLK will acquire the E2 assets, which consist of condensate stabilization and natural gas compression assets in the Utica Shale
- $20-25mm in annual EBITDA expected, implying an 8.5x multiple
- E2 assets are supported by long-term, fee-based contract with Antero that includes MVCs
- MarkWest Energy Partners (MWE) announced increased guidance for 2014 EBITDA (+3.6%) and distributable cash flow (+6.2%) vs. prior guidance
- The raised guidance is a result of accelerating gas volumes from producer customers that is driving higher utilization of MWE’s natural gas processing and fractionation assets in the Marcellus Shale
- Kinder announced Nov 20th for special shareholder meeting to vote on proposed merger
- Still no word on what that means for the Alerian MLP Index, but under the existing guidelines, KMP and EPB will need to come out of the index.
- Notable Distribution Increases:
- EMES (+17%)
- WGP (+7.4%)
- QEPM (+7.1%)
- DLNG (+6.8%)
- TRGP (+6.2%)
- ETE (+5.8%)
- EQM (+5.8%)
- PSXP (+5%)
- SXL (+4.8%)
- MPLX (+4.4%)
- MMP (+4.3%)
- SMLP (+3.8%)
- WES (+3.8%)
- NGL (+3.4%)
- OKE (+2.6%)
- ENBL (+2.5%)
- SCXP (+2.4%)
- GLP (+2.4%)
- NGLS (+2.2%)
- ETP (+2.1%)
- OKS (+2.0%)
- ENLK (+1.4%)
- WPZ (+1.3%)
- MWE (+1.1%)