Week Thoughts: World Caught Offside, MLPs Stay Onside

MLPs carried a streak of 7 straight positive days into Friday’s market-crushing Brexit debacle.  The MLP Index declined 3.3% Friday, but had banked enough gains earlier in the week to finish up 1.5% since last Friday.

Weekly_6-24-16

Oil prices recovered to more than $50/bbl by Thursday, which helped MLPs keep the momentum going from last week.  Also, news reports of the ETE/WMB non-merger court proceedings on Tuesday seemed to encourage buying in MLPs broadly, with big cap MLPs rallying along with the MLPs involved in the transaction.  Things were all trending in the right direction, it seemed like recent oil weakness really was all about currency, and currencies were going to revert once the Bremain vote was official…but things didn’t turn out like they were supposed to.  The whole world seemed to be on the wrong side of the trade (except George Soros), and it showed in Friday’s action.

Poll Questions: Clean-ish Slate

With the ETE/WMB merger cancellation a mere formality at this point (more detail in News section), the next logical question for each party (outside of further litigation) is: what now? The strategic directions of both have more questions than answers at this point, but both have options.

What happens to WMB now?

  • WMB buys in WPZ as it planned to do prior to the ETE merger (43%)
  • WMB cuts its dividend to support WPZ's credit rating, but maintains GP/LP structure (34%)
  • WMB executes asset sales that allow for sufficient de-leveraging at WPZ to avoid dividend cut (15%)
  • WMB merges with another company (8%)

Total Voters: 151

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What happens to ETE now?

  • ETE sells GP of SUN and other non-core assets, de-leveraging ETP sufficiently to avoid distribution cut (35%)
  • ETE cuts its distribution to support ETP’s credit rating, but maintains GP/LP structure (34%)
  • ETE buys in ETP (18%)
  • ETE goes on the M&A offensive, acquiring another MLP (13%)

Total Voters: 136

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Winners & Losers

No real trends among the winners this week. TOO led the way, followed by SMLP (maybe with help from its sponsor buying units), and TCP (whose sponsor will close the CPGX deal this week).  On the downside, ENBL was hurt by one of its major holders selling shares throughout the week, but other than that, no big obvious reasons for the underperformers.

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Top5Bottom5_6-24-16_chart

The MLP Index is up 12.5% year to date, and the YTD chart reflects serious mean-reversion action.  Major 2015 losers comprise the top 5 and a few major 2015 winners (DKL and SHLX) are among the bottom 5.

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Top5Bottom5_6-24-16_YTD_chart

General Partner Holding Companies

GPs as a group underperformed the MLP Index this week, with a wide range of performance among the group.  WMB went from first last week to worst this week.  TEGP was once again second worst.  SEMG and PAGP reversed last week’s weakness.  But the big winner and easily the most heavily-traded this week was ETE, which received affirmation on its tax opinion merger escape hatch.

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Top5Bottom5GPs_6-24-16_chart

News of the (MLP) World

No MLP equity deals this week.  Three acquisitions were announced, all by the SUN, which remains hell-bent on rolling up its industry, regardless of leverage or distribution concerns.  Also, despite a general lack of development opportunity across the sector, EPD continues to find ways to deploy capital, this time in the Delaware Basin.  EPD has placed an increasing interest on attracting that first barrel into the system that creates a multiplier effect across its asset base.

News-of-the-World

M&A / Growth

  • Enterprise Products (EPD) announced new processing plant in Delaware Basin with 300 mmbtu/d of capacity (press release)
    • As is customary, EPD did not disclosed the cost of this project, but does expect it to be in-service in the second quarter of 2018
  • Sunoco LP (SUN) announced three  acquisitions:
    • Acquisition of wholesale fuels business of Emerge Energy (EMES) for $178.5mm (press release)
    • Acquisition of “Rattlers” retail convenience stores and wholesale fuels business in Texas for an undisclosed sum (press release)
    • Acquisition of convenience store business in New York for $76.4mm (press release)
  • Columbia Pipeline Group (CPGX) shareholders approve merger with TransCanada Corp (press release)
    • Merger expected to close this week

Other

  • Williams Companies (Monday) and Energy Transfer Equity (Tuesday) each had their days in a Delaware court, then Friday the judge made a ruling in the case in favor of ETE (NY Times)
    • And then, WMB (press release) and ETE (press release) each issued press releases regarding the ruling
    • ETE will likely serve notice of termination for the transaction based on the lack of a tax opinion
    • WMB will likely appeal the decision
    • The situation going forward remains uncertain for both families of companies, although both ETE and WMB will be under pressure to cut payouts to support investment grade ratings of their respective subsidiary MLPs
Category MLP Market Post