MLP Week Thoughts: We are All Patriots

MLPs traded well this week, helped by firming crude oil prices, outperforming the broader stock market and utilities for the second straight week. The Alerian MLP Index (AMZ) increased 3.7% (including distributions) and the Alerian MLP Equal Weight Index (AMZE) was up 6.1%.  Strong price performance by upstream MLPs helped AMZE post positive performance.  The AMZE has now produced 12.9% total return in 17 days, while AMZ has produced 10.3% return.  The S&P 500 rebounded 3.0%, while utilities finished down 4.1%.  Oil prices finished 7.9% higher this week, making it two positive weeks in a row for oil prices.  Natural gas spot price continued to slide, down 4.1% to a new 52-week low.

Weekly MLP Review_2-6-15

MLP earnings season continues this week (and for a few more weeks after that) with several interesting MLPs to report, including NGLS, TLLP and BWP.

Patriot Parallels

MLPs are a bit like the New England Patriots.  More specifically, they are like the Patriots of Week 5 of this NFL season.  After more than a decade of sustained success, 5 Super Bowl appearances and 3 wins, the Patriots started the season 2-2.  The sports media began questioning the Patriots.  Was this the year they falter and Brady loses the ability to lead his team to victories?  Would Belichick ever be able to win a Super Bowl without cheating?

The Patriots responded, winning 9 games in a row, getting the top seed in the playoffs, and capping the season by winning the Super Bowl in dramatic fashion.  In doing so they became the youngest team to win a super bowl ever.  Only 2 current players were on the team the last time the Patriots won the Super Bowl.  This year’s outperformance was made possible by younger players like Edelman, Gronkowski and Malcolm Butler.

Patriots

MLPs have produced exceptional returns for investors for decades, providing income and growth, through good times and bad times.  But over the last 5 months, MLPs have struggled, and many are questioning their ability to continue to produce market beating returns going forward.

As earnings have been released and it has become clear that MLPs will continue to grow distributions in this environment, MLPs have begun to rally over the last few weeks.  Obviously oil prices rallying 16.2% in 7 days helps.  But after more than 60 MLP IPOs in 5 years, there are now more MLPs under 5 years old than over 5 years old, and the average age of all MLPs is around 6.6 years (3.6 years median).  The youth movement in MLPs positions the sector for revitalized growth.  Like the Patriots, the drivers of outperformance in the MLP sector going forward will be the younger players, MLPs that were not on the team the last time MLPs outperformed the S&P 500 (4 years ago!).

Winners & Losers

NKA suspending its distribution sent the stock down 58.8% this week. No other MLP was down double digits this week.  On the upside, there were many double digit performing MLPs this week, including the top five, which were all up more than 25% each, and for the second straight week they were mostly upstream MLPs.  LGCY and BBEP each made the top 5 for consecutive weeks.

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LINE has taken the lead among MLP returns for the year so far, joined by JPEP and NMM, two small cap MLPs that have had positive company-specific announcements in recent weeks.  On the downside, DPM recovered a bit, but remains the worst performing MLP this year among those with more than a $3bn market cap.

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Quite a bit of movement week over week for YTD return leaders and laggards.  NKA went from first to worst, EVEP bounced all the way from last place to out of the bottom 5.  Not a single member of the top 5 YTD as of last week, remains in the bottom 5.  Wild swings.

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News of the (MLP) World

The week was highlighted by the first MLP IPO of the year, Columbia Pipeline Partners (CPPL – Natural Gas Pipeline & Storage MLP), which was successful by any measure.  The offering was upsized, was priced $2/unit above the offering price range and traded up 16.5% on its first trading day.  In the end it was the second largest MLP IPO ever at $1.1bn.

Equity

  • Columbia Pipeline Partners (CPPL) priced initial public offering of 46.8mm common units at $23.00/unit, raising $1.1bn in gross proceeds (final prospectus)
    • Initial yield of 2.91%, based on a minimum quarterly distribution of $0.1675 ($0.67 annualized), which is the third lowest IPO yield ever for an MLP
    • Offering was upsized from initial offering of 40.0mm units
    • $1.1bn is the second largest MLP IPO ever
    • CPPL owns a 14.6% interest in the natural gas pipeline business assets of publicly-traded utility company NiSource
    • CPPL expects to be able to grow distributions more than 20% for the next 5 years based on $4.9bn of development projects it will be participating in as part of its 14.6% interest
  • Navios Maritime (NMM) priced public offering of 4.0mm common units at $52.4mm in gross proceeds (press release)
    • Offering was priced at a 4.5% discount to the prior closing price, and traded down another 1.1% from pricing the following day

Debt

  • Western Refining Logistics (WNRL) priced $300mm of 7.5% senior notes due 2023 at par (press release)

M&A / Growth Projects

  • EnLink Midstream (ENLK) announced $600mm acquisition of Permian Basin gathering & processing operator Coronado Midstream Holdings LLC (press release)
    • Coronado operates 3 natural gas processing plants and a 270-mile natural gas gathering pipeline system
    • Coronado was owned by a group of Permian producers that includes Diamondback Energy, Inc., Reliance Energy, Inc. and RSP Permian, Inc.
    • ENLK expects that acquisition to reflect a 7-8x EBITDA multiple over the next few years after ENLK spends an additional $400-$600mm to build out the system
  • Plains All American Pipeline (PAA) announced two new pipeline projects (press release)
    • PAA plans to build pipelines to transport oil and condensate from the Delaware Basin, and additional Permian Basin pipeline expansions
    • These pipeline expansions and additions are expected to be in-service at various points in late 2015 and early 2016
    • No cost estimates were announced, just part of the general plumbing necessary in the basins in which PAA operates and part of PAA’s $1.85bn 2015 capital budget
  • JP Energy Partners (JPEP) announced new oil gathering agreement in Midland Basin, and $36mm in capital spending in 2015 to support the agreement (press release)
    • 10-year fee-based gathering agreement with Discovery Natural Resources, LLC to construct and operate an extension of its Silver Dollar Pipeline gathering system
    • Project expected to be in-service by second half of 2015
Category MLP Market Post