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Published
Nov 23rd, 2014

Category:
MLP Market Post

Week Thoughts: MLP Weighting Game On

MLPs had their best week since early August, outpacing the broader equity markets as energy commodity prices stabilized.  The Alerian MLP Index was up 3.4%.  U.S. domestic oil price finished the week with back to back positive trading sessions to close the week up 1.2%.

Expect volatile oil price trading next week ahead of OPEC’s 11/27 meeting, when some expect OPEC will announce production cuts to support pricing.  If WTI oil drifts up to $80, it should be a nice tailwind for MLPs.  But even if oil prices revert back into the producer comfort zone of $85/bbl+ in the next few weeks, this selloff has woken the market up to the fact that demand for oil globally has a limit.

Weekly MLP Review_11-21

The Kinder family of MLPs will go away next week.  It’s all over but the taxes now.  This week was a nice bookend to the KMI transaction, because it was the best week for MLPs since the week the KMI deal was announced.

Alerian removed KMP and EPB from the MLP indices as was largely expected, but Alerian didn’t take this opportunity to expand the number of stocks included in the index.  With more than 120 energy MLPs trading today, a hard cap of 50 seems outdated in some respects, but so does the Dow Jones Industrial Average.  Chances are if the cap wasn’t expanded beyond 50 with the ex-Kinder rebalance, it won’t be expanded any time soon.

If you enjoyed this week’s rebalancing act, more index changes are in the offing the next few months, as a byproduct of consolidation.  OILT was added this week, but once EPD acquires the remaining units, OILT will need to be replaced.  WPZ and APL will also need to be replaced in the coming months as their respective mergers close.  The special rebalancing events will continue to be short term stock price drivers for MLPs that get added or see their weights grow.  Between IPOs, consolidations and rebalances, the sector continues to be as dynamic as ever.

Winners & Losers

None of the biggest winners and losers announced any company specific new this week.  NGL was the biggest winner from the Alerian announcements this week, benefitting from a step up from the Alerian MLP Index into the more exclusive Alerian MLP Infrastructure Index, which includes only 25 stocks and is tracked by the biggest MLP ETF.  NKA continues to be very volatile, up 38.6% after falling 15% last week.  NKA is still down 51% so far this year and sports a 24% yield.  On the downside, shipping MLPs were hit hard by a downgrade early in the week, many of them recovered but HMLP and DLNG did not.

Top5Bottom5_11-21-14

Top5Bottom5_11-21-14_chart

With less than 30 trading days left in 2014, PSXP holds a narrow lead on the sector for year to date returns.  TCP popped into the top 5 this week, displacing DM, on improving sentiment for the long-dormant TCP drop-down story.

Top5Bottom5_11-21-14_YTD

Top5Bottom5_11-21-14_YTD_chart

News of the (MLP) World

Energy Transfer’s analyst day was the news focus early in the week.  ETP did not disappoint, announcing a new large scale growth project plus asset shuffling involving IDRs and the Bakken pipeline project.  ETP also filed a fresh ATM, joined by MWE and OKS who also filed ATMs.  No marketed equity offerings, no MLP IPO filings and no big M&A announced this week.  Expect limited equity offerings in the next week, followed by a flurry of activity after Thanksgiving.  Later in the week, the focus shifted to the fallout of the Alerian MLP Index changes as a result of the KMI consolidation transaction.

News-of-the-World

Equity

  • Energy Transfer (ETP) filed equity distribution agreement to sell up to $1.5bn of common units at the market (filing)
  • Oneok Partners (OKS) filed equity distribution agreement to sell up to $650mm of common units at the market (filing)
  • MarkWest Energy (MWE) filed equity distribution agreement to sell up to $1.5bn of common units at the market (filing)
    • MWE also included 4.0mm of units owned by Energy Minerals Group in the ATM, down from 20.0mm that were originally issued to EMG back in December 2011

Debt

  • Boardwalk Pipeline (BWP) prices $350mm of 4.95% senior notes due 2024 (press release)
    • BWP will use the proceeds to retire $250mm of 5.05% senior notes due in 2015

M&A / Growth Projects

  • Lone Star NGL, a JV between Energy Transfer (ETP) and Regency Energy (RGP), announced plans to construct NGL pipeline from Permian Basin to Mont Belvieu (press release)
    • Lone Star will also convert its existing West Texas 12-inch NGL pipeline into crude oil/condensate service
    • All-in the pipeline and conversion are expected to cost $1.5-$1.8bn and are expected to be operational by 3Q 16 (pipeline) and 1Q 17 (conversion)
    • ETP owns 70% of Lone Star, RGP owns 30%
  • Energy Transfer (ETP) announced exchange with Energy Transfer Equity (ETE) of 40% interest in SXL’s IDRs for 30.8mm ETP units and 45% interest in its $5bn Bakken pipeline project (press release)
    • Transaction valued at $3.75bn
    • ETP will end up owning 75% of the Bakken pipeline project
    • ETE will own 90% of SXL’s IDR cash flow
    • ETP is expected to execute a similar transaction with SUN’s GP next year
    • Owning and being a seller of IDRs is a good position to be in, and ETP will be able to use those interests to fund growth projects
    • SXL will probably not participate in the Bakken pipeline project
  • Tallgrass Energy (TEP) and Hiland Crude, LLC announced joint open season for oil pipeline capacity from Montana and Wyoming receipt points to delivery points in Cushing, OK (press release)
    • Hiland will expand its Double H pipeline and Tallgrass will expand its Pony Express pipeline (33% owned by TEP) to accommodate shipper commitments they receive
    • Open season ends 12/12/14
  • Magellan Midstream (MMP) extends open season for Saddlehorn pipeline project (press release)
    • Open season will now close on 12/15/14, and will include 3 receipt points not included in original open season
  • Williams Partners (WPZ) announced FERC application to expand its Transco pipeline system (press release)
    • WPZ seeking to expand capacity in Alabama beginning in May 2017 and will add 1.13 dekatherms/day by 2021
    • Sabal Trail pipeline will lease 100% of the new capacity on a long-term basis
    • Part of the $4.5bn in planned capex related to the Transco pipeline system through 2017

Other

  • Alerian announced a number of changes this week:
    • OILT to replace QRE in the Alerian MLP Index (press release)
    • MMLP and VLP to replace KMP and EPB in the Alerian MLP Index (press release)
    • NGL and TCP to replace KMP and EPB in the Alerian MLP Infrastructure Index (press release)
  • Transcanada responds to activist hedge fund recommendations as “flawed” (press release)
    • Analyst day for TRP also happened this week, no change in the strategic drop-down plan
  • Exterran Holdings to spin off international business and become a pure play GP (press release)

Published
Nov 16th, 2014

Category:
MLP Market Post

Week Thoughts: MLP Neutrality

MLPs finished the week down 0.6%, saved from a worse print by a 1.3% positive move on Friday.  The equal weight MLP index lagged the cap-weighted version by 80 basis points, continuing the trend discussed here last week.  The MLP index remains 5.7% below its peak at the end of August, but 11.2% higher than its mid-October low.

But again, oil’s slippery slide was the big story.  The U.S. benchmark oil futures price was down another 3.5% this week, with futures closing the week just under $76.00/bbl, around 23% lower than the spot price at the end of 2013.  Natural gas gave back its gains from last week, and dragged ethane down with it, both were down more than 7%.  MLPs held up pretty well given oil’s continued decline, but they are stuck in neutral post-earnings.  The Energy Transfer family of MLPs is holding its highly-anticipated analyst day this week, which may provide some catalysts to get MLPs back in gear.

Weekly MLP Review_11-14

MLPs, Oil and Interest Rates

At the request of a reader, below is a 10 year chart of the MLP Index compared with the price of oil and the interest rate on 10-yr US treasuries.  Not sure there is much to glean from the chart below, particularly given how different the MLP sector is today as compared with even just a few years ago.  Over the long term, MLPs have been fairly consistently higher as interest rates bounced around and oil stagnated after an initial bounce coming out of the financial crisis.

MLPs Crude Interest Rates

Below is a chart that illustrates just how much the sector has changed.  It’s a histogram of the 121 MLPs based on how old they are.  While about 77% of the sector’s market cap is 5+ years old and the cap-weighted average age of all MLPs is 11.4 years, the median age of all MLPs is 3.6 years.  66 MLPs, more than half of the sector, has been public less than 5 years.  Growth rates of those newer MLPs are much higher and with all the drop downs, those newer MLPs will grow much larger in the coming years as the sector continues to evolve.

MLP Age

 

Winners & Losers

QEPM reversed its recent downtrend this week and led all MLPs higher.  QEPM’s strong week was likely a read through from the slightly better deal EPD gave to OILT when the final merger terms were announced this week.  TLLP already announced their intention to take out the remaining units of QEPM at some point following the close of the acquisition of QEPM’s general partner.  If OILT and ACMP got improved deals on their mergers, perhaps QEPM investors will get a reasonable premium when its special committee negotiates its merger.

Speaking of OILT, it made the top 5 this week as well, based on the aforementioned agreement to merger terms with EPD.  TCP also had a strong week on the back of its GTN drop down announcement (see news section below).

On the downside, IPOs GLOP and RIGP, both 2014 IPOs with drop down stories and foreign parent companies, both made the list.  This comes on a week when fellow 2014 IPO Abengoa Yield, a yieldco with a drop down story and a foreign parent company, was down as much as 35.2% this week and closed 17% down week over week.  Questions about that company may have bled over into some of the foreign-backed MLPs.

Top5Bottom5_11-14-14

DM took a break from the top five this week for the first time since its IPO.  RNO made it 4 straight weeks in the bottom 5, down another 11.8%.

Top5Bottom5_11-14-14_chart

Year to date, OILT popped back into the top 5 this week, displacing EQM.  QEPM clawed out of the bottom five, while NKA and RNO sunk deeper.  Both leaders (PSXP and TEP) dropped this week, but maintained their substantial leads over the rest of the sector.

Top5Bottom5_11-14-14_YTD

Top5Bottom5_11-14-14_YTD_chart

News of the (MLP) World

No big M&A and a lot fewer earnings releases made this week feel downright peaceful.

Two more MLP IPOs did file initial registration statements this week (Smart Sand and Azure), bringing the total number of MLP IPOs on file to 13 (see table below for complete list), to go with 17 MLP IPOs so far this year (not counting Landmark Infrastructure, which falls in the non-energy MLP category.  One of those 17 MLP IPOs came this week, and it was not very well received, pricing at a near record yield, but in the wrong direction.

IPO Backlog_11-14

Equity

  • Mid-Con Energy (MCEP) priced public offering of 5.8mm units at $17.27/unit, raising $100.2mm in gross proceeds (press release)
    • Overnight offering, priced at 4.0% discount to prior close, and closed down 4.8% from pricing in the next session
  • Plains GP Holdings (PAGP) priced secondary offering of 60.0mm units at $25.00/unit, raising $1.5bn in gross proceeds for selling unitholder (press release)
    • Selling unitholder is a subsidiary of Occidental (NYSE: OXY)
    • 3 day marketed offering, with file-to-price decline of 7.4%
    • PAGP traded up 11.3% in the next session following pricing
    • Offering upsized from 55.0mm units
  • EnLink Midstream (ENLK) priced public offering of 10.5mm common units at $28.37/unit, raising $297.9mm in gross proceeds (press release)
    • Overnight offering, priced at 3.6% discount to prior close
  • Cheniere Energy Partners LP Holdings, LLC (CQH) priced public offering of 10.1mm shares at $23.25/share, raising $234.8mm in gross proceeds (press release)
    • Overnight offering, priced at 2.8% discount to prior close
  • Navios Maritime Midstream Partners (NAP) priced IPO of 8.1mm units at $15.00/unit (11.00% yield), raising $121.5mm in gross proceeds (filing)
    • NAP is a spinoff from Navios Maritime Acquisition (NYSE: NNA) that will own and operate crude oil tankers under long-term charter agreements
    • Priced well below the initial filing range
    • 0% yield was the worst for a non-variable distribution MLP in more than 2 years (since HCLP’s IPO in August 2014)
    • NAP opened at $13.20 and closed at $13.45, down 10.0% in its first session
  • Azure Midstream (AZUR) filed initial registration statement for MLP IPO to raise up to $175mm (filing)
    • AZUR will operate natural gas gathering and processing assets in North Louisiana and East Texas under long-term, fixed fee contracts with producers
    • Backed by PE-firms Energy Spectrum and Tenaska Capital Management
    • AZUR expects to have $37.0mm of EBITDA in 2015
  • Smart Sand Partners (SSLP) filed initial registration statement for MLP IPO to raise up to $100mm (filing)
    • SSLP produces Northern White frac sand from its sand mine and processing facility near Oakdale, Wisconsin
    • SSLP has contracted 96% of its production capacity under fixed price contracts with weighted average remaining contract life of 2.7 years
    • Has full IDRs up to 50% tier

Debt

  • Sunoco Logistics (SXL) priced $1.0bn worth of senior notes (press release)
    • $200mm of 4.25% senior notes due 2024 sold at 101.772% of par
    • $800mm of 5.35% senior notes due 2045 sold at 99.331% of par

M&A / Growth Projects

  • Enterprise Products (EPD) and Oiltanking Partners (OILT) announce merger agreement (press release)
    • OILT unitholders will receive 1.3 EPD units for each OILT unit
    • Ratio implies a 5.6% premium to OILT unitholders based on 9/30 stock prices, one day prior to announcement of the merger, and a 10.4% premium to OILT unitholders based on 11/10 price
  • White Cliffs Pipeline, LLC (owned by RRMS, PAA, WES and Noble Energy, Inc.) announced plans to expand capacity on the pipeline from 150,000 bbls/d to 215,000 bbls/d by adding horsepower, modifying pumps and adding stations (press release)
  • TC PipeLines (TCP) announced plans to acquire remaining 30% interest in GTN from parent TransCanada (press release)
    • Gas Transmission Northwest LLC (GTN) is a 1,353 mile pipeline that transports natural gas under long-term contracts from the Westrn Canada Sedimentary Basin and the Rocky Mountains to Oregon and California
    • TRP highlighted that it expects to drop down $1bn of worth of assets to TCP annually going forward

Hamm History

  • Harold Hamm’s divorce settlement was announced to be approximately $1.0bn (Forbes)
    • Hamm is worth around $14bn today, but before he became King of the Bakken (and the SCOOP), he was the chairman of an MLP that almost 10 years ago priced one of the smallest MLP IPOs ever ($45mm) Hiland Partners
    • A short 19 months later, Hiland Holdings GP, LP (HPGP) priced its IPO. HPGP owned L.P. and G.P. Interests (and IDRs) in Hiland Partners (see deal gift pictured below)
    • It was (and for now, it still is) the quickest GP IPO post MLP IPO
    • In June 2009, Hiland Partners and HPGP announced that it would be taken private by Harold Hamm, Hiland at $7.75/unit and HPGP at $2.45/unit
    • Speculation is that at some point Hamm’s midstream business might go public again someday, and it may even continue to be called Hiland

HPGP

Published
Nov 9th, 2014

Category:
MLP Market Post

Week Thoughts: MLPs Working Big to Small

MLPs kept pace with the slight gains of the broad stock market this week, even as oil prices touched multi-year lows mid-week.  MLPs caught up with the market with big gains Friday, when the MLP Index was up 2.0%.  Year to date total return for the MLP Index ended the week at a nice round 15%.  Elections in the U.S. gave Republicans control of the House and Senate, which seems to have been interpreted as a positive sign for development of energy resources and energy infrastructure.

Weekly MLP Review_11-7

Natural gas prices climbed for the second straight week, and are now well above $4.00. As producers develop drilling plans for next year drilling plans, don’t expect a reversal of the oil rig count growth back to natural gas.  But natural gas price strength is welcome for MLPs, even if it narrows the global LNG arbitrage.

Index Inferences

Large cap MLPs continue to drive the MLP Index higher, as the spread between the price return of the cap-weighted MLP Index and the Equal Weight version is now 600 basis points.  For historical context, for the last 11 years, the most the MLP Index has ever outperformed its Equal Weight version by is 785 basis points in 2008.  See below for an annual breakdown.

Equal Weight vs. AMZ

Overall, the Equal Weight version on average outperformed the cap-weighted version by more than 300 basis points.  Interestingly, the MLP Index has outperformed its Equal Weight counterpart just 5 times out of 11, and each time it was in a year when both indexes had produced less than 15% returns.  With the Alerian Index up exactly 15% this year, to keep consistent with history, smaller MLPs need to catch up by year end, or MLPs will be flat into year end.

To be clear, the constituents of each index are exactly the same, all that is different are the size of the individual MLP weights.  In the Equal Weight version, every MLP is a 2% weight.  In the cap weighted version, the largest MLP EPD is a 15.9% weight.

Winners & Losers

Antero Midstream’s debut this week was less stellar than recent IPOs, but still good enough to outpace all other MLPs this week.  Pricing the IPO 25% higher than the midpoint of the filing range took some of the juice out of the potential pop.  DM made it 3 straight weeks in the top 5, up another 10.7%, perhaps helped by AM’s IPO highlighting relative value for DM.  RNO made it to the bottom 5 again this week, down another 7.5%.  Three upstream MLPs made the bottom 5 (MEMP, EROC, LRE), with MEMP’s performance taking the bottom spot for the entire sector after MEMP posted results way below expectations on production and operating expenses.  MEMP also guided to $55m less EBITDA in 2014 compared with previous guidance.

Top5Bottom5_11-7-14

Top5Bottom5_11-7-14_chart

Year to date, DM has in just three weeks managed to produce the 4th best return of all MLPs at 57.3%.  MPLX continued its ascent this week, moving ahead of EQM into 3rd place.

Top5Bottom5_11-7-14_YTD

 

Top5Bottom5_11-7-14_YTD_chart

News of the (MLP) World

MLP earnings season is almost over, and earnings releases this week were accompanied by some very large growth project announcements and updates, along with a few sizeable acquisitions.  MLP IPO season is in full swing, with another IPO priced last week, two IPOs on the road and two more IPOs filed.  After this week, there will have been 18 MLP IPOs in 2014 with no signs of slowing down.

Equity

  • Antero Midstream (AM) priced IPO of 37.5mm units at $25.00/unit, raising $1.0bn in gross proceeds (press release)
    • AM opened at $30.50, and closed at $28.03, up 12.1% in its first session
    • Offering upsized from initial 37.5mm units during the marketing period
    • IPO yield of 2.7% ranks as the lowest ever for an MLP

Lowest Yields

  • AM’s IPO size of $1.0bn ranks as the largest IPO ever for an MLP

Largest MLP IPOs

  • Plains GP Holdings (PAGP) launched secondary offering of 55.0mm units with proceeds going to selling unitholder (press release)
    • Selling unitholder is a subsidiary of Occidental (NYSE: OXY)
    • Offering is being marketed over three days and is expected to price on Monday afternoon
    • Based on its current price, the offering could raise $1.4bn in gross proceeds to OXY
  • Navios Maritime Midstream Partners (NAP) launched IPO of 8.1mm units with midpoint IPO yield of 8.25%, expected to raise $162mm at the midpoint (filing)
    • NAP is a spinoff from Navios Maritime Acquisition (NYSE: NNA) that will own and operate crude oil tankers under long-term charter agreements
    • NAP’s initial assets consist of 4 oil tankers with an average remaining contract term of 7.7 years, and NAP will have the option to buy 7 additional tankers from its parent
    • NAP is selling a 42.5% stake in the IPO
    • NAP will have net debt of $106mm post-IPO, and expects to generate $34.6mm in distributable cash flow over the next 12 months
  • Rice Midstream Partners (RMP) filed initial registration statement to raise up to $425mm in an MLP IPO (filing)
    • RMP is a spinoff of midstream assets developed by Rice Energy (NYSE: RICE), a publicly-traded producer that went public in early 2014
    • RMP has acreage dedications with RICE under a 15-year, fixed-fee contract for gathering & compression covering 55,000 acres of RICE’s acreage in Washington and Green Counties in the Marcellus Shale in southwestern Pennsylvania
    • RMP will retain a ROFO on RICE’s Ohio (Utica shale) gathering system and RICE’s freshwater distribution systems serving its Marcellus and Utica acreage
    • RMP will have no debt after the IPO, very similar to other Marcellus MLP spinoffs Antero Midstream and CONE Midstream
    • RMP is expected to have $55.7mm in EBITDA the next 12 months
    • CEO and CFO have a combined age of 62 years old
  • Terryville Mineral & Royalty Partners (TRVL) filed initial registration statement to raise up to $150mm in an MLP IPO (filing)
    • Formed by Memorial Resource Development (NYSE: MRD) to own and acquire royalty interests and mineral interests from MRD and third parties
    • TRVL will have a minimum quarterly distribution and IDRs up to 25%, which distinguishes it from another royalty interest MLP VNOM, which pays a variable distribution
  • Landmark Infrastructure Partners (LMRK) launched IPO of 3.0mm units to raise $60mm at midpoint of price of $20.00/unit, 5.75% yield (filing)
    • LMRK owns a portfolio of real property interests leased to companies engaged in wireless communications, outdoor advertising and renewable power generation
    • Portfolio includes 701 sites across 42 states, 99% of which are leased, 88% of which are leased to large, publicly-traded companies with national footprints
  • Sunoco Logistics (SXL) files equity distribution agreement to sell up to $1.0bn worth of common units at the market (filing)
  • EnLink Midstream (ENLK) files equity distribution agreement to sell up to $350mm worth of common units at the market (filing)

M&A / Growth Projects

  • Plains All American (PAA) announced the $1.075bn acquisition of 50% interest in BridgeTex crude oil pipeline from Occidental Petroleum (press release)
    • PAA will acquire 50% interest in the 300,000 bbl/d pipeline which recently began service and transports oil from the Permian basin to the Texas Gulf Coast
    • PAA paying around 10x EBITDA, and PAA expects 1.5% accretion from the acquisition
  • Sunoco Logistics (SXL) announced $2.5bn Mariner East 2 Pipeline (press release)
    • The pipeline will transport 275,000 bbl/d of NGLs produced in the Marcellus and Utica shale to SXL’s Marcus Hook terminal in eastern Pennsylvania for export and local demand
  • Kinder Morgan Energy (KMP) announced the proposed Palmetto Project received sufficient committed volumes to proceed with the project (press release)
    • The 167,000 bbl/d pipeline will transport refined products across the southeastern U.S.
    • Anticipated to cost $1bn, supported by 5-10 year contracts
  • Enterprise Product (EPD) and Plains All-American (PAA) announce expansion of the Eagle Ford Joint Venture Pipeline system and plans to build a new terminal (press release)
    • EPD and PAA will construct a new condensate gathering system and expand storage capacity at the JV’s Three Rivers terminal
    • JV will also build a new terminal on the Corpus Christi ship channel which will connect to the Three Rivers terminal by a newly constructed pipeline
  • Seadrill Partners (SDLP) announced the acquisition of the West Vela drillship from sponsor Seadrill Limited (press release)
    • SDLP will acquire 51% interest in the West Vela at a cost of $433mm including the assumption of debt
  • Energy Transfer (ETP) announced plans to construct two new natural gas processing plants and associated gathering systems in the Eagle Ford shale and East Texas (press release)
    • ETP will build two 200mmcf/d processing plants
    • ETP will also construct the 200mmcf/d Volunteer Pipeline which will connect the East Texas plant to an ETP gas gathering system
  • Markwest Energy (MWE) announced plans to expand natural gas processing and fractionation capacity in the Utica shale (press release)
    • MWE, as part of the Markwest Utica EMG joint venture will construct an additional 200MMcf/d processing plant which will increase the JV’s total processing capacity to 1.5bcf/d
    • The JV also announced plans to construct a new 60,000 bbl/d fractionator in the Utica shale bringing total fractionation capacity to 274,000 bbl/d in the Marcellus and Utica shales
  • Plains All-American (PAA) announced plans to construct a new crude oil pipeline from Oklahoma to East Texas (press release)
    • Total capacity of the pipeline will be 150,000 bbl/d and is supported by long-term commitments
  • Sprague Resources (SRLP) announced acquisition of Castle Oil for $56mm (press release)
    • Castle Oil assets include the Port Morris terminal and its associated wholesale, commercial and retail fuel distribution business
    • The Port Morris terminal is the largest deepwater petroleum products terminal in New York City, with total storage capacity of 907,000 barrels