Week Thoughts: MLPs Signal Strength, but Streak Stalls

MLPs declined this week for the first time since March.  Price action wasn’t too bad, however, given that oil and natural gas were both down more than 2%, the S&P 500 declined again, we had the biggest equity offering in more than a year, and Donald Trump became “presumptive nominee” Trump.

Weekly Review_5-6-16

MLPs are still up nearly 5% including distributions for the year.  The shallow decline this week is probably a result of encouraging results for gathering & processing MLPs that were generally better than expected and highlighted financial stability to endure until activity and margins return.

Oil prices were relatively stable this week despite all the upheaval in Canada with the wildfires and conflicting reports of the magnitude of supply disruptions.  This weekend’s reports of Saudi Arabia’s oil minister retiring or being replaced may cause some volatility next week.  Now that earnings season is largely complete, broader macro factors and oil prices will take the reins for MLPs for another few months.

Poll question recap

Last week, I asked what readers thought was the biggest cash flow opportunity for the midstream sector over the next 5 years.  Despite all the lip service paid over the last few months to the onshore NGL opportunity from a reduction in ethane rejection, you readers think the biggest opportunity is in export infrastructure (36%), followed by natural gas infrastructure (34%) and then a distant third is NGL infrastructure at just 14%.  It was encouraging to see that you all think there is more opportunity in building assets than buying them, as consolidation came in 4th (but still well ahead of crude oil infrastructure).

Start the Presses

The PSXP deal this week was the biggest public common unit offering for an MLP in the last year.  There have been bigger preferred offerings.  Interesting to see that the biggest deals have tended to perform better than smaller deals, which is probably correlation rather than causation, because the highest quality and in-demand MLPs have access to raising the most capital.

Biggest Deals

The more interesting equity breakdown is the table below of the last 10 MLP equity offerings.  What stands out is the last 7 MLPs that issued equity are trading above deal price.  Probably not an accident that the discounts have grown substantially wider with the last several deals as well.

Last 10 Deals

Winners & Losers

DPM led all MLPs higher this week on the back of strong 1Q results and more ethane recovery discussion by DPM and others.  CNNX was able to grab the sector’s attention this week when it reported strong volume growth coupled with healthy coverage and leverage metrics.  Likewise, WLKP and USDP reported results this week that were positively received.

Top5Bottom5_5-6-16

On the downside, DKL earnings grabbed someone’s attention Friday when its stock price received a 10% haircut on volume that was 1000%+ of average daily volume.  CCLP and CLMT reported weak earnings as well, while DM traded lower after earnings and the filing of a $150mm ATM program.  There were no repeats in the top or bottom 5 this week, which was refreshing.

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USDP joined the top 5 year to date, and CNNX returned to the top 5.

Top5Bottom5_5-6-16_YTD

MEP and MPLX each fell back a few spots within the bottom 5, while CPPL climbed a few spots despite trading lower this week.

Top5Bottom5_5-6-16_YTD_chart

General Partner Holding Companies

ETE hogged the headlines again, but OKE took the top spot following strong quarterly results.  Since 11/26/14, OKE’s stock price is down just 30.7%, while ETE, KMI, WMB, SEMG, ENLC, and TRGP are all down more than 60%.  SE is only down 20% over that time period, outperforming all other midstream corporations.

Top5Bottom5GPs_5-6-16

AROC dropped 25% after its subsidiary MLP halved distributions.  ENLC and SEMG had MLPs that posted stronger than expected results, but it wasn’t enough to sustain positive prices this week.  PAGP dropped even as PAA rallied on a smaller than expected guidance reduction.

Top5Bottom5GPs_5-6-16_chart

News of the (MLP) World

This week’s PSXP offering was the biggest MLP equity offering in more than a year, and the first MLP equity offering of more than $500mm since there were 3 such deals in March 2015.  Also of note, disclosure of ATM activity paints a more active equity issuance picture than public deals would imply.  ETP/SXL each raised $300mm on their programs this quarter.  Combined with EPD’s $1.6bn issuance and the Spectra family’s issuance that’s more than $3bn of ATM equity for just those 4 companies.  Also, others like DM and GEL talked about the potential for ATM issuance.  Outside of PSXP, transactions were limited this week with the focus squarely on earnings.

News-of-the-World

Financing

  • Phillips 66 Partners (PSXP) priced offering of 11.0mm units at $52.40/unit, raising $576.4mm in gross proceeds (press release)
    • Offering upsized from original offering of 7.5mm units
    • Bought deal, priced at 7.2% discount to prior closing price
    • Traded ok the next session, finishing up 1.1% from pricing, in-line with the MLP Index
  • SEMG announced sale of remaining L.P. units of NGL Energy on 4/27/16 for $60.5mm (press release)
    • SEMG owned 4.6mm units, and sold them at $13.00/unit
  • Dominion Midstream (DM) filed equity distribution agreement to sell up to $150mm worth of common units at-the-market (filing)

M&A / Growth

  • Phillips 66 Partners (PSXP) announced the acquisition of the Standish Pipeline and the remaining 75% interest in the Sweeny Fractionator One and Clemens Caverns storage facility from PSX for $775mm (press release)
    • PSXP expects the transaction to add $90mm in annual EBITDA, implying an 8.7x multiple including $13mm remaining growth spending at Clemens
    • EBITDA is supported by a 10-year fee-based contract with PSX that includes minimum volume commitments
    • PSXP acquired a 25% stake in the Sweeny complex in March at 9.7x EBITDA multiple
    • Partially financed with unit issuance described above
  • ETE management doesn’t see how the merger with WMB can even be put to a vote, and postures that if the deal were restructured as all stock, then it might make sense (New York Times discussed Friday)
    • Drop dead date of June 28 is the end of the road for the deal as currently structured

Distribution Announcements

There were more cuts this week.  It feels like we are close to the end of the cuts as MLPs either try to survive or try to reset things to transition to a lower payout, lower leverage model.

Distribution Announcements_5-6-16

Category MLP Market Post