Week Thoughts: Pull Lever to Fix Leverage, MLP Math in Action

In a week crowded with earnings, strategic announcements and macro, MLPs continued their recent slide.  The MLP Index was down 0.4% including distributions.  Oil prices were volatile, but crossed back above $40 definitively after Wednesday’s inventory report.  Friday’s strong jobs report pushed interest rates higher and pressured utilities.  MLPs were up Friday, but 15 bps increase for the 10-year rate this week was a headwind.

Weekly_8-5-16

2Q results were generally better than very low expectations, but this week’s theme was GP support, with different GPs pulling different levers.

There was also an interesting juxtaposition this week with these supportive transaction coinciding with earnings announcements of drop-down MLPs.  MLPs that enjoy consistently strong sponsor support and benefit from huge drop-down pools (VLP, SHLX, PSXP) seemed to have been largely ignored despite announcing consistent quarterly results.

On the other hand, three of the cheapest MLPs with sponsors that until this week had been either unwilling or unable to offer support (ETP, WPZ, EEP), stepped in to provide support that should make current distributions more sustainable.

The disparate price action is a clear sign that there are still MLPs in need of a distribution sustainability confidence boost and subsequent re-rating.  But given that it’s August and fresh capital into the sector is quickly soaked up by ATM issuance, the MLP sector is becoming a zero-sum game, where re-rating of cheap MLPs comes at the expense of still very viable growth MLPs.

If it continues, we’ll eventually have value convergence that causes the healthier MLPs may catch a bid to re-establish a valuation spread vs. the average MLP.  I just wouldn’t expect to see it during the annual late summer siesta in the MLP market.

Which form of sponsor support is the best for the MLP?

  • Waivers of incentive distribution rights (ETP) (48%)
  • Drop-down at a cheap multiple, funded with equity issued to sponsor (drop-down MLPs) (39%)
  • Commiting to re-investing capital into new units, with no IDR waivers (WPZ) (11%)
  • Bridge loan and vague commitment of equity support for large acquisition (EEP) (1%)

Total Voters: 147

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Winners & Losers

RIGP’s buy-in helped it lead all other MLPs, GLOP’s equity deal sank its unit price, and ETP led all big cap MLPs given the trifecta of announcements, including huge IDR waivers, project financing for DAPL and partial sale of DAPL.

Top5Bottom5_8-5-16

GLOP gave back all of last week’s gains and more going from top 5 to bottom 5 after its equity deal.  Fellow shipping MLP TGP went from bottom 5 to top 5 this week after surprising with better earnings.

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Year to Date Leaderboard

Not much has changed among the high flyers on the YTD leaderboard.  On the downside, despite strong results reported for each, the sponsor-supported growth MLPs VLP, SHLX and DKL remain stuck near the bottom of the sector.  SUN’s weak quarter and still challenged leverage/coverage helped drop it into the bottom 5.

Top5Bottom5_8-5-16_YTD

Top5Bottom5_8-5-16_YTD_chart

General Partner Holding Companies

GPs outperformed MLPs, and almost all of them were positive.  AROC was way out in front after earnings pointed to an improvement in the compression market quarter over quarter.  TEGP benefitted from strong TEP results.  WMB benefitted from units to be issued through the DRIP driving future cash flow, despite the near-term dividend cut announced.  ETE announced IDR waivers and its MLPs announced other initiatives to reduce capital needs, but ETE didn’t have quite the same pop we’ve seen with other similar announcements by other MLPs.  Not pictured below, TRGP (+10.8%) and KMI (+0.1%) were also both positive.

Top5Bottom5GPs_8-5-16

Top5Bottom5GPs_8-5-16_chart

News of the (MLP) World

So much news this week, I wouldn’t expect quite as much news flow over the next few weeks as we drift into the second week of August.  The DAPL JV taking on two new owners is the most extreme example of the increasingly tangled web of JVs developing as an alternative to outright consolidation in the sector.

News-of-the-World

Financing

  • Williams Companies (WMB) announced DRIP and commitment to invest $1.7bn in retained cash from dividend cut into Williams Partners (WPZ) units to fuel overall enterprise growth (press release)
    • WPZ will institute DRIP program that will be available to all unitholders
    • Depending on success of DRIP and on asset sale proceeds, WPZ may use ATM to fund remaining equity needs through 2017
    • Use of equity proceeds to fund capital program of $5.0bn in 2016 and 2017
    • No IDR waivers included in the announcements, will WMB retaining large upside from future cash flow growth
  • Energy Transfer (ETP), Sunoco Logistics (SXL) and Phillips 66 (PSX) announce $2.5bn project financing facility for Dakota Access Pipeline and Energy Transfer Crude Oil Pipeline Projects (press release)
    • The facility is expected to provide substantially all of the remaining capital necessary to complete the projects
  • Energy Transfer Partners (ETP) disclosed $720mm of waivers for incentive distribution rights payments to sponsor ETE from 2Q 16 through 4Q 2017 in exchange for Class J units issued to ETE (filing)
    • ETE will receive 180 Class J Units over the course of 2016, 2017 and 2018, and each Class J unit is entitled to an allocation of $10mm of depreciation, amortization or depletion during the year issued, but not in any other year
  • GasLog Partners (GLOP) priced public offering of 2.75mm units at $19.50/unit, raising $53.6mm in gross proceeds (press release)
    • Overnight bought deal offering, priced at 7.1% discount to prior closing price, traded down in the next session an additional 1.6%
    • Tough day to launch a deal, after the worst day for MLPs in more than 3 months
  • TC Pipelines (TCP) filed equity distribution agreement to sell up to $400mm of common units at the market (filing)

M&A / Growth

  • EnLink Midstream (ENLK) announced strategic partnership with private equity firm Natural Gas Partners (NGP) to expand its midstream services in the Delaware Basin (press release)
    • ENLK contributed its Lobo System (acquired from Matador in October 2015) and committed $285mm of future capital to the joint venture in exchange for 50.1% interest, while NGP contributed an initial $115mm and $285mm of future capital in exchange for 49.9% ownership
    • The joint venture will develop Lobo II expansion project, which includes a 120 mmcf/d processing facility and gathering pipeline infrastructure
    • NGP’s robust producer relationships in the region (through portfolio companies) was cited as a strategic rationale for the transaction (in addition to the financial rationale)
    • ENLK has options to acquire NGP’s ownership interest starting in 2021
  • Enbridge Energy (EEP) announced acquisition (with MPC) of an effective 36.75% combined interest in the Bakken Pipeline Project for $2bn (press release)
    • Ownership roster of the pipeline project (that owns Dakota Access Pipeline and Energy Transfer Crude Oil Pipeline) is now EEP: 28%, PSX: 25%, ETP: 23%, SXL: 15%, MPC: 9%
    • The $4.8bn pipeline project is set to be online by the end of 2016
  • Plains All American (PAA) and Phillips 66 Partners (PSXP) form 50/50 joint venture to develop STACK Pipeline (press release)
    • PSXP to contribute $50mm (distributed to PAA), PAA to contribute an existing terminal
    • JV to spend $15mm to expand STACK Pipeline
  • TransCanada (TRP) proposed new project to develop refined products pipeline in Mexico with partners with two partners (press release)
    • Proposed $800mm project would include: (1) a 165-mile refined products pipeline with 100,000 bbls/d of capacity running parallel to TRP’s recently-awarded Tuxpan-Tula natural gas pipeline, (2) a marine terminal near Tuxpan, Veracruz, and (3) an inland storage hub in central Mexico
    • TRP will own 50% of the project, with 40% owned by Sierra Oil & Gas and 10% held by Grupo TMM
    • The project’s in-service date is subject to discussions with potential shippers
  • Transocean Partners (RIGP) announced buy-in by sponsor Transocean (RIG) in all-equity transaction (press release)
    • RIGP unitholders to receive 1.1427 RIG shares for each RIGP unit, implying a 15% premium to RIGP’s 7/29 unit price (but implies a 43% discount to IPO price)
    • This buy-in transaction was announced almost exactly 2 years after the pricing of its IPO at $22.00/unit on 7/30/14
  • Mid-Con Energy (MCEP) announced acquisition of oil & gas properties in the Permian Basin for $19.5mm (press release)
    • Assets are located in Nolan County, TX with 27 producing wells, 1.5 MMboe of reserves (99% oil and 57% PDP)
    • MCEP also announced preferred equity offering of $25mm to help fund the acquisition (press release)

Other

  • Distribution announcements:
    • CPPL: $0.1975, +5.3% qoq, +17.9% yoy
    • SEP: $0.66375, +1.9% qoq, +8.1% yoy
    • EVA: $0.525, +2.9% qoq, +27.3% yoy
    • Flat: BWP, RIGP
    • WMB: $0.20, -68.8% qoq

 

Category MLP Market Post