Week Thoughts: MLPs Take a Knee

MLPs declined 1.1% this week, giving up last week’s minor gains.  MLP weakness was likely due to the nearly $1.4bn of equity issued, even though only $127mm was issued in a public offering. Oil prices broke back above $50/bbl and natural gas slipped back below $3.00/mmbtu. NGL prices outpaced both major commodities, and propane continues to standout, up nearly 30% on the year vs. negative price changes in oil and gas.  Oil prices above $50/bbl have generally been the dividing line between good and bad MLP performance, and if oil can hold $50, sentiment towards MLPs should improve.

If Equity Happens Without a Public Offering, Does it Still Count?

This Fall, I’ve given in to pleas for volunteers and have been coaching my first-grade son in what we nominally call soccer.  There are no goalies, just four players on a side and each game is 16 minutes long.  The goal of rec soccer at this level is to have fun, my goals as a coach is to minimize breakdowns (by the boys and myself) and to try to make sure all four players are engaged in the game, which gets very hard when the ice cream truck shows up.  At this point, I’d rate myself as a coach ahead of Rodney Dangerfield in “Ladybugs” and well behind Will Ferrell in “Kicking and Screaming”.

Oh, and we don’t keep official scores. But of course, each boy that’s paying any attention knows the score of each game they play and know whether they won or lost.

Which brings me back to MLPs.  Lately MLPs have been successfully tapping institutional capital directly on ATMs and through private placements at very skinny discounts.  The trend is positive for the individual MLPs that do the deals (SHLX, BPL and PSXP), but so far it hasn’t had a broad positive impact on the sector.

The reason is the institutions are funding these primary equity issuances with funds that might have come from or might have been otherwise invested in other MLP units.  We are still in a market where primary issuance is largely funded within a closed loop of available capital (i.e. selling MLP units to buy other units).  We are all keeping score.

Context for IPO this Week

Below is the chart of the last 20 MLP IPOs, including the one that priced this week.  Early on, it seems as though interest in OMP is fairly limited.  It was the highest yielding midstream MLP since Sprague Resources in 2013, and before that next MLP with a higher yield at IPO was Holly Energy in 2004.

Takeaways from the above chart:

  • MLP IPOs have been consistently strong performers relative to the MLP Index, with the last 20 MLP IPOs outperforming the index by an average of 4,000+ bps, almost irrespective of size and yield.
  • 5 of the last 20 MLP IPOs don’t trade any longer, reversing course quickly on their MLP strategies for various reasons.

Winners & Losers

DM continued its ascension this week, leading all MLPs higher on no news.  DM is now up 30.8% in the last month.  Clearly the market has gained confidence in the capital markets-reliant business plan DM plans to execute, but that confidence hasn’t spread into many other drop-down MLPs so far.  PSXP traded very well Friday (and quite well Thursday as well before the news broke…) on actual news that hit Friday morning.

WES made a rare appearance in the bottom 5, perhaps weaker on news that APC would be directing more of its excess capital to its shareholders and not to the development of assets that might benefit WES over time.  FGP and OCIR gave back some of last week’s gains.  On the year to date chart, NGL escaped the bottom of the sector, replaced by TOO.

General Partners and U.S. Midstream Corporations

GPs and midstream corps were roughly in-line with the MLP Index as a group, but only three of the group were positive.  AROC was up 5%+ for a second straight week, helped by recent oil price strength.  TEGP’s week to week volatility on no news is disconcerting, but TEGP went from best to second worst this week.

Canadian Midstream Corporations

Canadian midstream performance was unusually varied this week.  Upgrades sparked some rotation away from the big cap players and into year-to-date under-performers Keyera and Inter Pipeline.

News of the (MLP) World

It’s no surprise that capital markets activity is ramping up, but it’s been a positive surprise to see so many deals happening outside the traditional capital markets.  We got two additional off-market MLP equity issuance this week, a sign of the times.  The private deals are still going to large MLP money managers, so not totally off-market, but the deals are causing much less disruption for issuers.  The one public markets deal was the small Oasis Midstream IPO that highlighted weakness in the traditional avenues for MLP capital raising.  Also noteworthy were the private equity deals announced this week, signaling plenty of private capital available to those willing to develop midstream assets in the Permian.

Capital Markets

  • Oasis Midstream (OMP) priced IPO of 7.5mm units at $17.00/unit, raising $127.5mm in gross proceeds (press release)
    • Implied yield of 8.82% is among the highest for a midstream MLP IPO since 2002
    • Priced 15% below midpoint of the price range
    • Traded down 1.5% in its inaugural session
  • Phillips 66 Partners (PSXP) announced preferred and common equity private placements totaling $1.05bn, to help fund $2.4bn acquisition, discussed below (press release)
    • Investors in the private placement included Stonepeak Partners, First Reserve Corporation and Tortoise Capital Advisors
    • PSXP placed $750mm of Series A Perpetual Convertible Preferred Units that pay 5% coupon for three years, then pay greater of 5% or the distribution the units would receive if converted to common units
      • Priced at $54.27/unit, a premium of 14.0% to common units issued in the private placement
    • PSXP placed $300mm of common units at $47.59, a discount of 1.9% to prior day’s closing price
  • Buckeye Partners (BPL) announced $210mm worth of equity issued through a privately negotiated block trade under its ATM distribution program at a 1% discount (press release)
    • BPL expects the offering will eliminate the need for additional equity offerings through mid-2018
  • Debt Offerings:
    • Energy Transfer (ETP) $2.25bn of senior notes (press release), including:
      • $750mm of 4.00% notes due 2027 at 99.216% of par
      • $1.50bn of 5.40% notes due 2047 at 99.806% of par
    • Holly Energy (HEP) priced $100mm add on to existing 6.00% notes due 2024 at 103.25% of par (press release)

Growth Projects / M&A

  • Phillips 66 Partners (PSXP) announced acquisitions from sponsor Phillips 66 (PSX) totaling $2.4bn (press release)
    • Assets include 25% interest in Bakken Pipeline joint ventures (Dakota Access Pipeline) and 100% of Merey Sweeny, the owner of coke processing units at the PSX Sweeny Refinery
    • $2.4bn purchase price includes $725mm in assumed debt
    • Purchase price reflects 8.9x EBITDA multiple, based on $270mm of expected 2018 EBITDA
    • For the Merey Sweeny acquisition, PSXP entered into a 15-year tolling agreement that includes base throughput and minimum volume commitment from PSX
    • PSX funded the cash portion of the transaction with debt, the $1.05bn raised in common and preferred unit issuance noted above, and $240mm of units issued to PSX
    • PSXP management noted that it expects to achieve its 2018 EBITDA growth targets without the need for marketed equity offerings, but does expect to selectively use its at-the-market equity facility
  • Valero Energy (VLO) and Plains All American (PAA) mutually agreed to terminate the $290mm acquisition of two California terminals owned by PAA (press release)
    • Although the FTC did not pursue any regulatory action, the Attorney General for California filed suit seeking to block the transaction
    • Despite the court denying the AG’s motion, PAA and VLO each decided to avoid the uncertainty and expenses a lengthy trial would create
  • Oryx Midstream, a private player in the Permian, announced the construction of a 400,000 bpd Delaware-to-Midland crude oil transportation pipeline (press release)
    • The line is expandable based on shipper needs and is expected to be in-service by the end of 2018
    • The 220-mile pipe will service WPX Energy and other producers
    • Oryx is backed by Quantum Energy, Post Oak Energy Capital, and Wells Fargo Energy Capital with a total of $640mm of equity commitments
  • Two other private, Permian midstream transactions were also announced
    • Tall Oak III has announced intention to build a Delaware Basin gathering system (press release)
      • Tall Oak III was formed by EnCap Flatrock Midstream with a $200mm commitment a few months ago
    • Global Infrastructure Partners committed to invest up to $250mm in Caprock Midstream, an Energy Spectrum-backed private company targeting the Delaware Basin (press release)
  • MPLX completed a successful binding open season for the expansion of the Wood River-to-Patoka pipeline (press release)
  • Sprague Resources (SRLP) announced the acquisition of Coen Energy, Coen Transport, and assets consisting of four bulk plants and underlying real estate (press release)
    • Transaction is expected to contribute an additional $7-8mm of adjusted EBITDA annually

Other

  • Energy Transfer Partners (ETP) announced FERC has approved ETP’s request to resume horizontal directional drilling (HDD) along Rover (press release)
    • FERC approved nine HDD locations, including Captina Creek HDD which will allow the full Phase 1 portion of Rover to be placed into service by the end of 2017 when completed
    • ETP expects to place the full project into service by the end of Q1 2018
Category MLP Market Post