Week Thoughts: Dealer Bust, MLPs Winning

The MLP Index finished the week roughly flat overall, but the equal weight version was up 1.0%.  The variance is attributable to several large cap MLPs dropping more than 1% for the week, including EPD, MMP and OKS.  Some of the more commodity sensitive smaller members balanced that weakness with commodity-driven gains, and WPZ traded up on the EPD M&A reports.

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Another huge week for oil prices didn’t transalte into major MLP gains, the converse of the latest trip down below $40/bbl, which didn’t drive major MLP losses.

Vegas Vibe

Out in Vegas at the Citi MLP conference, sentiment from investors and management teams reflected improvement in financial and operational conditions.  Lingering issues remain for some MLP balance sheets and equity markets aren’t wide open, but it doesn’t feel like dramatic negative news announcements are looming on a daily basis like early this year.  All of 2015, commodity and capital markets challenges made it seem like no matter what, the house won.  It was the equivalent of playing blackjack and drawing a few cards to get to a 17 or 19 against the dealer’s face card, only to have them turn over another face card for a 20.  None of the cards you drew mattered.

Off the bottom in February, the environment is the opposite, where the players have wide variance in the strength of their hand, but it doesn’t matter how good or bad the hands are, because the dealer is likely to bust and make it so everybody wins.  Conditions in the capital and commodity markets have made MLPs winners again, even if some of them aren’t great players (and some busted out early).

Powers

Perhaps it was fitting that a CEQP executive won the conference poker tournament.  CEQP represents the old poker saying about the potential for tournament comebacks about as well as any MLP: “All you need is a chip and a chair”.

It wasn’t all happy talk in Las Vegas.  Longer-term concerns pose challenges to MLPs seeking to develop new assets or grow volumes, including: increased regulatory challenges (from environmental challenges as well as a more aggressive FERC stance), heightened competition between midstream players, and high IDR payments on stagnant cash flows.

Reflections on August

Despite it being a generally quiet month for transactions, August has in recent years been a turning point for the sector, both for good and for bad. In August 2014, oil prices had already stalled out and begun the initial stages of decline in July, but MLPs put in a final push and put in a new high at the end of August mostly as  result of M&A activity, specifically KMI announcing the buy-in of its MLP subsidiaries.  Last August, PAA’s bearish conference call sparked a major selloff amid an ongoing oil price decline.

This August, commodity prices are on the mend, but the sector still has too many MLPs chasing too few projects and customers.  Raitonalization and/or consolidation still need to happen.  Merger announcements haven’t been met with much positivity.  But a large, well-capitalized MLP like EPD being willing to vouch for value in the marketplace might change all that and encourage consolidation, as opposed to more JVs.

Winners & Losers

Not much news this week, but there were some periphery transactions that drove stock price movements.  ENBL rallied hard on Friday after OGE disclosed that it exercised its ROFO for the GP and LP interest of ENBL owned by CNP, bringing in an unnamed third party. ENLK rallied after Concho announced a large acquisition of acreage in the Midland Basin that may accelerate development.  Beyond that, strong oil prices drove higher beta MLPs up.

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Year to Date Leaderboard

CNNX and RRMS moved up the leaderboard, SXCP fell toward the pack, and each of the top 5 is up 85%+.

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After a rally from CPLP, SHLX is at risk of being the worst performing MLP in the entire sector.

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General Partner Holding Companies

GPs outperformed MLPs again this week, typical of a strong oil week, as mentioned last week.  SEMG, which may be the most correlated to oil prices, rallied almost exactly the same amount as WTI to lead the way.  WMB made the top 5 with its M&A fueled rally Thursday.

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News of the (MLP) World

If last week was a series of clean-up trades, this week we had old transactions and transactions we’ve known were in the works for a while.  The approach made by EPD for WMB was over a month ago.  TEP’s been discussing accessing the bond market for months, and this week they did it.  The final day of the ROFO option period for OGE to make an offer on CNP’s stake in ENBL was this week, so news on that was not a surprise, either.

News-of-the-World

Financing

  • Tallgrass Energy (TEP) priced $400mm of 5.5% senior notes at par (press release)
    • Proceeds will be used to reduce borrowings on TEP’s senior secured credit facility
  • Teekay Offshore (TOO) filed equity distribution agreement to sell up to $100mm common units at the market (filing)

M&A / Growth

  • According to Reuters, Enterprise Products (EPD) approached Williams Companies (WMB) about a potential merger or acquisition (article)
    • According to the article, the value EPD proposed would represent very little premium today given the recovery in WMB share price
    • The article also suggests this approach occurred after the fallout at WMB’s board of directors, when several members resigned
    • Such a merger would create an even more lopsided Alerian MLP Index with EPD representing more than 30% instead of its current ~20% weight
  • Energy Transfer (ETP), Sunoco Logistics (SXL) and Phillips 66 (PSX) announce binding supplement open season for Bakken Pipeline (press release)
  • OGE Energy (OGE) exercised their right of first offer (ROFO) with regards to Centerpoint’s (CNP) ownership of GP and LP interests in Enable Midstream (ENBL) (8-K Filing)
    • OGE is pursuing the purchase with an unnamed third party
    • If the proposal is accepted by CNP, the unnamed third party will likely become the owner of all ENBL interests owned by CNP
    • If the offer is rejected, CNP can shop the interests, but must get at least 105% of the offer made by OGE

Other

  • Activist investors Jana Partners and Corvex Management build stakes in Marathon Petroleum Corp (MPC), according to reports (thestreet.com)
    • No comment from either fund at this point, but speculation is that they are seeking to unlock value through the GP and LP interests in MPLX
    • This follows last week’s news that Carl Icahn was seeking to acquire small refinery operator Delek Holdings, and seems to indicate a desire to buy refinery assets at weak point in the cycle
Category MLP Market Post