Week Thoughts: MLPs Float Higher, Without Aid of Oil

MLPs rallied exactly 1.3% for a second straight week.  MLPs are now up in 5 out of the last 7 weeks and have gained 6.5% in those 7 weeks.  The unusual thing about this week’s rally, however, is that it happened despite a substantial drop in oil prices.  MLPs underperformed oil prices in the march from the mid-$40s to the low-$50s, so it’s nice to see the breakdown in correlation work in favor of MLPs this week.  Having said that, it’s not pleasant for MLP investors to see oil back below $50 (and natural gas below $3) again to close out the week.

Blackstone showed up in the MLP sector again this week, buying into another in-flight pipeline project, although this one was integrated with a recently acquired portfolio company (Eagle Claw).  For most of the year, the big deals have been dominated by Blackstone.  This week, Global Infrastructure Partners, another PE firm with a history of big deals in the MLP sector (like Access Midstream and Hess Midstream) showed up.

These private equity firms remind me of a certain politician that went to Puerto Rico this week and was tossing paper towels around to crowds seeking aid.  MLPs are gaining some traction, it appears, and if MLPs do eventually sustain a recovery, capital provided along the way by these firms will have helped.  Or the assets acquired will re-emerge in the form of very large MLP IPOs in the future.

Poll Question Recap – Petty Things

The Alerian MLP Index is now capped at 10% per position, and smaller MLPs have artificially high weights (i.e. weights bigger than their weight in the universe), which is necessary to keep one stock from dominating the index.

I asked a question last week if you readers felt Alerian did enough to fix its index, which didn’t reflect how institutions manage portfolios and wasn’t as useful as a benchmark as it had been.  Certainly, with a broad base of index watchers and users, Alerian was not going to please everyone with whatever changes it made.

The answer to my poll seems to indicate that Alerian pleased fewer than 1 in 4 people, while the other 75%+ thought more could have been done to include more stocks that would reflect more of the investable universe.

None of this may matter to individual MLP investors, but being able to have a single, definitive historical return stream of the MLP sector is important for attempting to get comfortable with future return streams from a subset of the MLP universe.

In any event, the market digested the change surprisingly quickly, such that it was basically a non-event this week.

Winners & Losers

Among the top and bottom 5, just AMID had news this week, announcing a drop-down.  Just general oscillations with no discernable themes among the winners & losers, outside of some names that were top 5 this week after being bottom 5 last week.

CCLP made it made it two weeks in a row in the top 5, helping it rise one spot on the YTD leaderboard.  GLOP joined the top 5 for the year overall, displacing PBFX.  We still have only 3 MLPs that have 25%+ returns year to date (not counting those that have been acquired, like OKS, VTTI, PTXP, etc.

General Partners & Midstream Corporations

Median performance among GPs and corporations underperformed MLPs this week, and the return range was tighter.  ETE led the way with 3.1% gains.

LNG’s strong week helped push it up into second place for the year in this group.  EQGP still leads the way and extended its lead this week.

Canadian Midstream

Canadian Midstream under-performed U.S. midstream this week.  KML was weak on a few potential road blocks pop up this week, including fish mats and potential further federal regulatory review for its Trans Mountain Expansion Project.  TRP announced official abandonment of its Energy East and Eastern Mainline projects, including an anticipated $1bn after-tax non-cash write off in 4Q, which did not surprise the market.

Last week’s winners Inter Pipeline and Pembina gave up gains this week.  KML jumped to the front of the group after I removed Veresen post-merger, and after Pembina fell back.

News of the (MLP) World

We got joint ventures and M&A this week, but maybe not the JVs and M&A we were hoping for.  The JVs are positive for the parties involved, but don’t reduce the number of competing planned pipeline projects, and don’t engender confidence that overbuilding will be avoided.  In other news, preferred equity continues to gain market share among MLP equity issuance, and there was a potential canary in the coal mine as it relates to natural gas pipeline contract roll-offs.

Capital Markets

  • Plains All American (PAA) priced 800,000 of its 6.125% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Units at $1,000/unit, raising $800mm in gross proceeds (press release)
    • After November 2022, distributions on the units will accumulate at LIBOR plus a spread of 4.11%
    • $800mm offering higher than guidance for $600mm preferred offering
  • Energy Transfer Equity (ETE) priced $1bn of 4.25% senior notes due 2023 at 99% of par (press release)
  • PBFX Logistics (PBFX) priced $175mm of 6.875% senior notes due 2023 at 102% of par (press release)
    • Offering upsized from original $150mm

Growth Projects / M&A

  • Targa Resources (TRGP) announced sale of a 25% interest in the $1.3bn, 300 MBpd Grand Prix NGL pipeline to Blackstone Energy Partners (press release)
    • Concurrently, TRGP and Blackstone portfolio company EagleClaw Midstream Ventures, executed long-term agreement for transportation and fractionation services
    • Positive strategic deal for TRGP, which gains a financial partner and third party volumes
  • Targa Resources (TRGP) announced it will join Kinder Morgan (KMI) and DCP Midstream (DCP) in JV to develop Coast Express natural gas pipeline from Permian Basin to the Texas Gulf Coast (press release)
    • KMI would build, operate, and own a 50% interest while DCP and TRGP would each hold a 25% equity interest in the pipeline
    • Pipeline is expected to have initial capacity of 1.92 Bcf/d, although cost estimates were not disclosed, so it remains unclear whether TRGP has more or less capex in 2018-2019 as a result of its announcements this week
  • Global Infrastructure Partners announced acquisition of Medallion Gathering and Processing for $1.825bn from Laredo Petroleum and the Energy Minerals Group (press release)
    • Medallion owns crude oil gathering and transportation systems in the Midland Basin consisting of a 780-mile pipeline
    • Short term positive for MLP sector, because market reaction would likely have been negative if an MLP announced a high-multiple acquisition that needed large equity financing up front
    • Longer-term implications less positive, as another well-funded private player has a platform in the Permian and will be competing with MLPs for volumes
  • American Midstream (AMID) announced drop-down of additional 15.5% interest in Delta House for $125.4mm from sponsor ArcLight Capital Partners for $125.4mm (press release)

Other

  • Boardwalk Pipeline (BWP) announced restructuring and extension of existing transportation agreements with Southwestern Energy (SWN) on Texas Gas’ Fayetteville and Greenville Laterals, pending FERC approval (press release)
  • TransCanada (TRP-CA) announced it is terminating its proposed Energy East Pipeline and Eastern Mainline projects (press release)
Category MLP Market Post