MLPs alternated up and down days all week, but finished with a positive Friday that helped the MLP Index finish the week up 0.6% including distributions. The best day was Wednesday, when MLPs rallied 1.5% on oil price strength following the latest U.S. inventory data points.
MLPs still have quite a bit of catching up to do relative to utilities and the S&P 500 on YTD returns. If oil can break above $50/bbl in the aftermath of OPEC’s May 25th meeting, and if volumes ramp in the second half of the year, MLPs could be setting up for a strong close to the year. It would help if FERC had a quorum at some point in the next few months, but not critical.
Still Wetting the Bed
Let’s get right into an uncomfortable topic: wetting the bed. Having trained three little ones to use the bathroom fairly successfully, it’s a topic I’m familiar with. Once the training process is over, you remove the safeguards that were necessary during training. You remove the plastic mattress cover, toss the remaining pull-up diapers, and invest in some colorful big boy underpants. And tension generally subsides around the house.
Every once in a while, for whatever reason (like too much Pepsi), there’s an accident. When that happens, it’s a mini crisis: you strip the mattress, clean and dry everything, air out the mattress outside possibly. Its annoying, but by the next night (after you’ve re-made the bed), tensions ease and things are back to normal. We don’t pull out the rubber sheets and pull-ups.
Bringing it back to MLP land, investing in MLPs required significant safeguards from late 2014 to early 2016. Safeguards akin to what its like when potty training a child.
But with rebounding oil prices, tensions in the MLP sector eased, helped by a number of positive strategic announcements by MLPs and their sponsors. Drilling activity returned, growth capital projects backed by fee-based contracts returned, so did equity offerings (including IPOs). The path to recovery and ongoing growth for MLPs is becoming more visible.
Then the last few weeks, several MLPs wet the bed (in some cases soaked it) with their earnings. But, we don’t need to double down on pull-up diapers. it doesn’t spell doom for the MLP sector as a whole or the recovery of the sector that remains underway. And while it was again a bad day to own MLPs on the day Plains All American (PAA) reported results again, the sector recovered to finish the week positive overall.
Speaking of PAA, owning PAA into earnings has not been fun for investors the last two years. In a few cases (8/5/15 in particular) PAA weakness seemed to spark a broader selloff across the sector.
Since 5/5/15, the MLP Index has produced negative 20% total return. The 9 days above account for more than 50% (-10.5%) of the negative returns over that time. In other words, if you avoided owning MLPs on the days PAA reported over the last 9 quarters, you would have outperformed the MLP Index by more than 1000 basis points. PAA’s transportation strong transportation results and upbeat commentary didn’t help much this week, but by 3Q and 4Q when volumes turn inflect, the above earnings reaction trend may revert to some semblance of the good old days when PAA had a lengthy streak of beating guidance.
Winners & Losers
GLP’s better than expected results helped it lead the sector higher this week. BSM had good results and caught a positive mention at the Sohn Conference. VTTI received a slightly better price from its sponsor and traded up on the news. ETP gained some traction despite the latest stall on the Rover Pipeline. Weak results from PAA and EEP landed them among the losers for the week, familiar territory for EEP.
TOO made it two straight weeks in the bottom 5. NRP volatility continues, bouncing from top 5 to bottom 5 this week.
NBLX slipped a bit this week, but retains the YTD lead. WNRL and SUN joined the top 5, replacing shipping MLPs GLOP and TGP. Not much changed among the bottom 5, but EEP did reclaim its spot at the bottom of the return table for the year so far.
General Partners and Midstream Corporations
GPs and midstream corporation returns were varied this week, but median returns for the group beat the MLP sector. ETE and LNG popped, PAGP dropped. The BC election and KMI’s IPO plan did not turn out to be positive catalysts for KMI. Uncertainty surrounding the BC election impact on Trans Mountain and around how the pending IPO will be received North of the border may have hurt KMI.
News of the (MLP) World
Kinder’s Canadian spin-off was the biggest news in a light week for transactions. WMB’s analyst day wasn’t accompanied by any transaction announcements. There weren’t any equity offerings, but we did get re-loaded ATM programs and a fresh MLP IPO filing. Also, VTTI unitholders got sweetened takeout terms for their buy-in.
- Kinder Morgan Canada (KML-TSX) launched IPO of 79.5-92.1mm shares with a range of C$19-21/share, seeking to raise C$1.75bn in gross proceeds (Rueters)
- KMI also disclosed that it is no longer pursuing a JV partner for its Canadian operations
- When KMI announced the roll-up of its MLPs in 2013, many cynics were quick to say we’d probably see KMI return with a fresh MLP at some point to re-start the IDR cycle
- With evolution of the MLP investor base since then, it seems unlikely KMI would choose to re-enter the MLP structure it helped put on the map
- Instead, KMI is tapping into a Canadian investor base that’s been very supportive of its midstream companies through the downturn
- Canadian midstream companies didn’t fall as much in 2015 as U.S. midstream operators and they fully recovered those losses in 2016, all without the dividend cuts or credit downgrades that scorned U.S. retail investors
- Oasis Midstream (OMP) filed initial registration statement for an MLP IPO to raise up to $100mm (filing)
- OMP is an MLP formed by Williston Basin producer Oasis Petroleum (OAS) to own and operate its midstream assets (including water handling assets) and to develop additional midstream assets to support OAS production over time
- Two ATM programs were renewed and a shelf was filed:
- Tallgrass Energy (TEP) priced offering of $350mm of 5.50% senior notes due 2024 at par (press release)
- Offering upsized from initial offering of $200mm
Growth Projects / M&A
- VTTI BV announced revised terms for acquisition of remaining outstanding units of VTTI Energy Partners (VTTI), including price of $19.50/unit (press release)
- New offer is $0.75 higher than the original offer of $18.75/unit made on 3/2 and represents a 6% premium from unaffected price of $18.40
- The merger is expected to close in Q3 of 2017
- Enviva Partners (EVA) announced acquisition of Enviva Port of Wilmington LLC for $130mm (press release)
- Navios Maritime partners announced separate acquisitions of a 14-vessel container fleet and one Capsize vessel (press releases)