Week Thoughts: Simplixity Itself

MLPs started the year with 4 straight positive days and a 2.5% weekly gain.  MLPs have traded up in 13 of the last 15 trading days dating back to 12/14.  For the week, MLPs outperformed utilities and the S&P 500 despite flat oil prices and natural gas prices that were crushed.

weekly_1-6-17

The first week of last year was -7.9%, the worst first week ever for the MLP sector.  That 10% variance in first weeks year over year have expanded year over year total return for the MLP Index to 32.7%.  That trend should continue through early February (when MLPs bottomed in 2016), and if MLPs hold up, expect year over year returns to grow increasingly staggering.

Four days is an extremely small sample size, and we shouldn’t extrapolate too much from them… but, the first four days this year are a breath of fresh air after increasingly disappointing starts to the last 3 years.  Also, each time MLPs started out at least 2% positive in the first 4 days, the full year returns were 25%+.

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While 25% total return in 2017 might be pushing it in a rising interest rate environment, but it does feel like the switch that was flipped towards MLP positivity a few weeks back has staying power that might build on itself, in the opposite way that the vicious negative cycle fed on itself the first 6 weeks of last year.

Poll Question: What Stops the MLP Rally?

If we have indeed flipped the switch towards positivity, then at some point we need to start considering what might puncture that positivity. Last year, we were attuned to peaking MLP negativity (see Chesa-peaking Negativity from 2/14), but we haven’t yet reached close to peaking positivity.

Regardless, we’re interested in your thoughts of what stops MLPs from rattling off another couple of months of positive performance.

What Stops the MLP Rally?

  • External factors like Inflation, rising interest rates, tax reform or broad market correction (35%)
  • Commodity price weakness (29%)
  • 4Q earnings or 2017 guidance that returns focus to still challenged fundamentals (22%)
  • Avalanche of public equity offerings (11%)
  • Conversion of exotic equity instruments issued last few years impacting per-unit cash flow (3%)

Total Voters: 190

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Winners & Losers

Small cap, high beta MLPs dominated the top 5 in the first week of the year, with refinery logistics MLPs (DKL, PBFX) and compression MLPs (APLP, CCLP) well-represented.  DKL traded up on news that its sponsor finally agreed to acquire the rest of Alon.  PBFX 2017 guidance was well-received.

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I’m not sure what the catalyst was for the compression MLPs other than good vibrations around the sector, but for a second straight week, 2 out of the 3 compression MLPs made the top 5.  ENLK sharply underperformed ENLC this week, landing in the bottom 5, just ahead of DPM, which under-performed following the super drop down announced.

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General Partners and Midstream Corporations

GPs and midstream corporations outperformed this week after underperforming MLPs last week.  SEMG and PAGP were the only the ones to be negative this week.  OKE and WGP made it two straight weeks in the bottom 5, which EQGP and ENLC made it two in a row near the top of this smaller group.

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News of the (MLP) World

MLPs sponsors got busy cleaning up their structures, or at least announcing intentions to do so, this week.  Each of the first two trading days of the year brought a transformative transaction, one from MPLX and one from DPM, both aimed at “simplification”, but given the number of entities involved with each family of companies, neither was simple.

MPLX’s intends to eliminate its IDRs, but only after ramping up IDR cash flow and raising the cost to take out those IDRs.  DPM also ramped up its overall IDR payout by issuing $1.125bn of new units.  So, despite accelerating lip service paid to reducing IDR takes and simplifying structures, IDR owner incentives to hold off cashing them in for as long they can remain in place.

Growth Projects / M&A

  • Private company DCP Midstream, LLC (JV of SE and PSX) announced $3.85bn “simplification” dropdown of all remaining assets and debt to DCP Midstream Partners (DPM) (press release)
    • The $3.85bn transaction included the issuance of $1.125bn of DPM units and the assumption of $2.7bn net debt
    • The combination, which is already closed, will create the largest gathering and processing MLP with a pro-forma enterprise value of $11bn
    • PSX and SE will increase ownership in DPM to 38% and they have agreed to provide IDR givebacks up to $100mm annually through 2019, if required, to maintain 1.0x distribution coverage
    • DPM estimates $1.5-$2bn of potential growth projects over the next few years
    • Maybe one silver lining for the sector is a mature MLP willing to double down on the MLP structure as opposed to some of the recent corporate-entity takeouts (like KMI, TRGP)
  • Tallgrass Energy (TEP) announced $140mm drop down acquisition (press release)
    • TEP to acquire Tallgrass Terminals and Tallgrass NatGas Operator from sponsor Tallgrass Development
    • Tallgrass Terminals owns and operates terminal assets in Colorado and Oklahoma and acreage for future storage development in Oklahoma and Wyoming
    • NatGas is the operator of Rockies Express Pipeline (REX) in which it earns an annual fee equivalent to 1% of REX’s EBITDA
    • Purchase price represented 8.0x expected 2017 EBITDA from the acquired assets
  • Marathon Petroleum (MPC) announced it will significantly accelerate its dropdown of assets to MPLX in 2017, and THEN will take out its IDRs in exchange for units (press release)
    • MPC to drop down remaining MLP-qualifying assets in 2017/early 2018 ($1.4bn of annual EBITDA in total), financed with debt and units back to MPLC
    • Drop-down transactions expected to be at a 7-9x EBITDA multiples
    • IDR buyout expected to be priced at 15-20x cash flow (after the drop-downs)
    • MPC is also reviewing a tax-freespin off of Speedway (convenience store business) to MPC shareholders
  • Delek Holdings (DK) announced it will acquire remaining outstanding shares of Alon USA (ALJ) in all stock transaction (press release)
    • DK, parent of Delek Logisitics (DKL), will acquire the remaining 53% of Alon common stock it does not currently own at an enterprise value of $675mm
    • This long-anticipated transaction replenishes pool of MLP-qualifying assets for DK to drop into DKL
    • According to management, the transaction provides for additional commercial synergy opportunities for DKL
  • Global Partners (GLP) announced sale of its natural gas and electricity businesses to Sprague Resources for $17.3mm in cash (press release)

Capital Markets

  • KNOT Offshore (KNOP) priced public offering of 2.5mm units at $22.44/unit, raising $56.1mm in gross proceeds (press release)
    • Overnight offering, priced at 7.2% discount to prior closing price
  • Hi-Crush Partners (HCLP) filed equity distribution agreement to sell up to $50mm worth of common units at-the-market (filing)
    • HCLP suspended its distribution in late 2015, then executed 3 equity offerings in 2016
  • Boardwalk Pipeline (BWP) priced $500mm of 4.45% senior notes due 2027 (press release)

Other

  • Energy Transfer (ETP) confirms SXL CEO Mike Hennigan will (for now) continue to work with the combined SXL/ETP partnership post-merger in the role of President of Crude, NGL and Refined Products, reporting to ETE COO Mackie McCrea (filing)
    • Hennigan will remain in the Newtown Square, PA office
  • Williams Partners (WPZ) received Federal Energy Regulatory Commission’s (FERC) final Environmental Impact Statement (EIS) for the Atlantic Sunrise Project (press release)
    • WPZ expects to begin construction on the project’s mainline facilities in mid-2017 and is targeting full service by mid-2018
Category MLP Market Post