Category Archives: MLP Market Post
Jul 20th, 2014
MLP Market Post
MLPs drifted higher this week, with a slight pause on Thursday when the broad market sold off, sending the volatility index (VIX) up 32% from Wednesday to Thursday. For the week, the MLP Index finished up 0.9%, slightly ahead of the market (S&P 500 +0.5%), and well ahead of utilities, which were down slightly. Natural gas prices have declined substantially of late (hitting a seven month low this week) as the coolness of the summer is making natural gas storage levels refill faster than the market was expecting entering injection season. Balancing the decline in natural gas was a 2.2% increase in WTI crude oil futures price, probably the result of escalating tension between Russia and the rest of the world. The Hope of Lower Slope
Kinder Morgan announced second quarter results this week that failed to meet market expectations. On the conference call that followed the release, KMP announced new projects to be added to the ever-growing backlog of projects that stands at around $17bn. But KMP’s high cost of capital will consume large portions of the returns from those projects, unless KMP can do figure a way to reduce its cost of capital. I spent a lot of time in airports this week. So it’s no surprise that this KMP conundrum brings to mind a vivid and all too familiar airport image: the moving walkway.
Because MLPs pay out most (and sometimes more than all) of their cash flow, they must constantly replenish capital in order to move distribution growth forward. It’s like walking against the flow on one of those gigantic airport treadmills. For KMP and other mature MLPs with high IDR payments, the cost of capital burden is like adding an incline or upward grade to the walkway. Absent the incline, the same effort (high return projects) would result in a faster trip down the growth walkway. KMP would love to find some magical switch on the endless treadmill to reduce its incline. But KMI is standing in the adjacent lane being moved along with the belt’s flow. A reduction in the incline of KMP’s track will probably necessitate a decline in KMI’s growth rate, and that’s the rub. The great thing about the stock market is you can place a bet on whether or not KMP can find such a cost of capital reduction transaction. The alternative is for Kinder to accept its station as a mega-cap MLP, and keep plodding along at the high incline, executing mid-teens IRR projects that result in maybe 4-5% annual distribution growth with tight coverage and elevated leverage. There is no simple solution that immediately benefits all parties involved, otherwise we’d have seen it already. Winners & Losers Refined products logistics drop down MLPs dominated the bottom 5 this week, continuing weakness from last week (VLP and WNRL made the bottom 5 for the second straight week). The price action of the losers this week seems to have been driven by profit taking and valuation concerns, while the top 5 seem to have been driven by news. SDLP announced a drop down acquisition, HCLP announced a distribution, EXLP announced an acquisition, and BWP caught some favorable PR via Jim Cramer’s Mad Money.
There were no changes among the top 5 constituents this week, although HCLP reclaimed the number 2 spot,a nd the gap between number 1 (PSXP) and number 2 has narrowed considerably. The real action was among the bottom 5, which saw: (1) BWP edge closer to escaping the cellar, (2) EROC and CMLP move up a spot each, and (3) EXLP climb out of the bottom 5 entirely.
News of the (MLP) World
This week the market chatter was all about Kinder Morgan’s earnings release, which tends to happen each quarter because KMP is such a bellweather MLP and because it reports first. However, there were several interesting equity and M&A transactions announced by other MLPs as well. Institutional investors stepped up for a big private placement into AMID tied to an acquisition, akin to those 2006-2007 PIPE deals we used to see, but with a larger number of participants. There was also a big block trade from an institutional seller of NGL (not listed below) that moved NGL’s stock price on Thursday. Institutional capital will continue to drive growth in block trades, PIPEs and ATM transactions. Equity
- Teekay LNG (TGP) prices public offering of 2.8mm units at $45.05/unit, raising $126.1mm in gross proceeds (press release)
- Overnight offering, priced at 4.1% discount to prior close
- American Midstream (AMID) announces private placement of 7.6mm common units at $26.27/unit, raising $200mm in gross proceeds from institutional investors (press release, unit purchase agreement)
- Memorial Production (MEMP) prices $500mm of 6.875% senior notes due 2022 at 98.485%, to yield 7.0% to maturity (press release)
M&A / Growth Projects
- American Midstream (AMID) announces $115mm acquisition and distribution increase (press release)
- Onshore natural gas processing, offshore natural gas processing and transportation, and oil gathering assets acquired from DCP Midstream, LLC
- Assets complement AMID’s High Point system in Southeast Louisiana
- Price represents 8.5x next 12 months EBITDA, 6.5x 2015 EBITDA, according to management
- AMID plans to recommend 3-5% distribution increase in 4Q 2014 as a result of the acquisition
- Seadrill Partners (SDLP) announces acquisition of additional 28% interest in Seadrill Operating LP for $373mm (press release)
- SDLP will own 58% following this transaction
- Exterran Partners (EXLP) announces acquisition from MidCon Compression for $135mm (press release)
- Adds 110,000 horsepower, the majority of which is operating under 5-year contracts
- Transaction immediately accretive, and EXLP expects to increase distribution by $0.005/unit next quarter ($0.02 annualized)
- Acquisition expected to close in 3Q 2014
Jul 13th, 2014
MLP Market Post
Between the end of last week and the beginning of this week, the Alerian MLP Index had 4 straight negative trading days where it declined 3.0%. The index recovered 1.0% Wednesday to Friday, to finish the week down 0.6%, slightly ahead of the S&P 500. The Equal Weight MLP Index was down twice as much as the MLP Index, which means smaller MLPs on average underperformed this week.
Interest rates were down, perhaps helping the defensive trade of utilities to outperform. MLPs had the tailwind of lower rates and the headwind of dropping natural gas and oil prices. Heading into earnings season, investor focus should shift back to fundamentals (including commodity prices), and maybe that contributed to MLP underperformance relative to utilities.
The last time the index had 4+ days of declines was the 5 days in a row of declines from March 6 to 13th of this year, so it’s been a while, but it tends to happen at least every few months, even in very strong years for MLPs.
Pullbacks for MLPs have been rare the last several years, and it seems like the sector’s investor base has expanded substantially in between each new pullback, so it’s always interesting to see which MLPs outperform in a sell-off. Below is a chart of the bottom 10 and top 10 performers during the 4 day selloff.
It’s quite a mix in both columns, but of the top ten, I see them as skewing smaller in terms of trading liquidity and public float. Names like NGLS, OKS, EPB, and EEP in the bottom 10 column all have more trading volume and liquidity than any of the top 10 performing MLPs, with the possible exception of BWP. In an increasingly institutional market, when selling happens en masse, names that institutions can sell easily probably get sold first. Food for thought as you build your MLP portfolio.
My readers aren’t fazed by the recent very short pullback, and remain optimistic. 84% of all respondents to my poll question last week responded yes to the question: “Will the Alerian MLP Index make another new all-time high before the year is over?” Given that we sit just 2.1% away from the all-time high, a new high point is certainly possible this year, this quarter and this month even.
Winners & Losers:
VLP went from first last week to worst this week, dropping 7.5% to take the bottom spot. Other high flying sand MLP HCLP and drop-down growth stories GLOP and WNRL took a tumble this week as well, as it seemed the market was quick to sell winners. Buyers opted for higher-yielding MLPs like CMLP and NS, and less high flying drop-down growth stories ENLK and SUSP, all of which made the top 5 this week. Also, the market seemed to like GLP’s foray into Texas with its JV with KSU for a new terminal.
PSXP is still way out in front for the year, followed closely by 4 other high distribution growth MLPs. GLOP dropped out of the top 5, and HCLP dropped two spots, pushing TEP and EQM up the ranks, and making room for OILT to rejoin the top five. On the downside, EROC dropped to second worst performing MLP, and CMLP inched higher.
News of the (MLP) World
Another fairly quiet week of MLP news, as is to be expected heading into earnings season. The Kinder Morgan complex kicks it off on Wednesday. We got a few early distribution announcements this week, and those will pick up their frequency next week as well.
- Memorial Production (MEMP) prices public offering of 8.6mm common units at $22.50/unit, raising $193.5mm in gross proceeds (press release)
- Overnight block trade, priced at 5.9% discount to prior close
- Summit Midstream (SMLP) prices public offering of $300mm of 5.5% senior notes due 2022 at par (press release)
M&A / Growth
- NGL Energy (NGL) announces offer to acquire outstanding units of TransMontaigne Partners (TLP) in transaction valued at $564mm (press release)
- NGL already owns 20% of TLP units as a result of the acquisition of TLP’s G.P. last month
- Offer is to exchange TLP units for NGL units on a 1:1 basis
- NGL Energy (NGL) announces development of 5 salt water disposal facilities in the Eagle Ford and Permian Basins (press release)
- New facilities include 6 recently completed disposal wells for combined cost of $83mm, located in the Eagle Ford shale and Permian Basin
- Facilities are expected to produce $16mm in annual EBITDA, implying a multiple of 5.2x, appropriate for quick payback, low barriers to entry assets like this
- Global Partners (GLP) and railroad operator Kansas City Southern announce plans to jointly develop a unit train terminal in Port Arthur, TX (press release)
- The waterborne terminal will serve initially as a destination for heavy crude from Western Canada utilizing 340,000 barrels of initial storage capacity
- Facility will have an initial capacity of 2 unit trains per day
- Teekay LNG Partners (TGP) announces acquisition of interests in 4 LNG carriers to be constructed and delivered between late 2017 and early 2019 (press release)
- Each vessel will have 174,000 cubic meters of LNG carrying capacity
- Interests acquired from BG Group
- Vessels will operate under 20-year contracts with a subsidiary of BG Group
- BridgeTex Pipeline, a JV between Magellan Midstream (MMP) and Occidental Petroleum Corp, announces supplemental open season for additional transportation commitments (press release)
Industry / Other
- Andrew Atterbury joins the board of Western Refining Logistics (WNRL) (press release)
- Former Inergy executive (with impeccable timing), and an mlpguy.com reader
- Crestwood Midstream (CMLP) has underground pipeline leak of an estimated 24,000 barrels of saltwater and condensate mix on a reservation in North Dakota (Fuel Fix)
- Spill apparently had gone undetected for several days
Jul 5th, 2014
MLP Market Post
MLPs had an up and down week. The Alerian MLP Index was up 1.1% Monday and Tuesday to a new all-time high, then down 1.4% Wednesday and Thursday to finish the short trading week down 0.3% overall. Positive jobs data pushed interest rates up in the back half of the week, putting pressure on all yield-based securities, particularly utilities (UTY was down 3.1% from Tuesday’s closing price). The broad equity market continued to march higher, with the S&P 500 up each day of the week, and finished up 1.2% since last Friday.
It’s hard to read much into the price action of 1.5 days of trading in the middle of the summer, particularly after an uninterrupted 4 month rise in MLP indices, but it’s not unreasonable to think that the falling rate tailwind could turn into the rising rate headwind the market thought it would be at the beginning of 2014.
This week could have been the turning point, or it could have been big MLP buyers taking the back half of the week off to beat the traffic to the Hamptons. Or maybe all the little MLP buyers were just too busy mourning the end of U.S. Soccer’s brief World Cup run, performing final stomach stretching exercises in preparation for the Nathan’s Hot Dog Eating Contest, or decorating those last few dozen American flag cupcakes. Maybe Monday everyone will get back to the profitable business of buying MLPs. Maybe.
What do you think?
June in the Books
We passed through another month early this week, the best month so far this year, with the Alerian MLP Index producing 5.9% total return. The positive June marks the 4th straight positive month for the index, during which time the MLP Index produced 15.8% total return. Also noteworthy, it was the 5th straight positive June for the index.
The second quarter produced 14.2% total return for the index, which was 5th best in the last 10 years (1Q 2013 was the best ever at 19.7%, the last quarter that produced double digit positive returns). Turning to July, last year was negative, but July has on average been the third best month of the year for the MLP Index (at +3.4%), behind January and April.
Winners & Losers
Drop-down growth MLPs popped this week, led by VLP’s 10.9% increase in 3.5 days, followed by TEP and RRMS. TEP’s large distribution increase announcement probably helped its land it among the top performers.
FGP, the MLP with the longest running distribution stream without a single distribution raise (nearly 20 years), was down the most this week. FGP is the most bond-like of all MLPs because of its flat distribution expectation, so it’s a good barometer of the impact of interest rate movements on MLPs. EEP and BWP retraced some of their big gains from last week, while RRMS landed among the top 5 for consecutive weeks.
For the year so far, TEP returned to the top 5 this week, and LGP returned to the bottom 5 this week, but no changes among the top or bottom 4.
News of the (MLP) World
I normally don’t list out when deals close, because it can be confusing as to what’s been announced and what hasn’t, and it is typically the announcement of the deal that moves stock prices around. But this week seemed like a nice quiet week for MLPs to clean up their previously-announced deals and get them all closed, so it’s worth noting them all together. The following deals closed this week:
- RGP acquisition of EROC’s midstream business
- NGL acquisition of TLP’s GP
- WMB acquisition of ACMP’s GP
- MEMP acquisition
- QEPM drop down acquisition
- TLLP drop down acquisition
- VLP drop down acquisition
- Western Gas Equity (WGP) prices public secondary offering of 5.0mm units at $60.19/unit, raising $301.0mm in gross proceeds for selling unitholder (press release)
- Units sold by parent Anadarko Petroleum Corp (APC)
- APC has a multi-year goal of selling ownership interest down but to 20% from 88.7% after the offering
- APC’s current holdings worth $11.7bn, would need to sell $9.1bn to get to 20% at current prices, which would take 9+ years if APC sold $1.0bn a year
- Overnight offering, priced at 4.0% discount to prior close, and units traded up 1.0% from pricing to close in the next trading session
- Hoegh LNG Partners (HMLP) files initial registration statement for MLP IPO of up to $150mm (filing)
- HMLP was formed by Hoegh LNG Holdings (Oslo Bors symbol: HLNG)
- Initial assets include interests in 3 floating regasification unit (FSRU) vessels operating under long-term time charters with average remaining contract life of 17 years
- HMLP will have the right to purchase additional vessels from Hoegh over time
- Next 12 months EBITDA projected to be $69.2mm,with $38.2mm of cash available for distribution
- Full incentive distribution rights with maximum tier of 50%
M&A / Growth
- Linn Energy (LINE) announces $2.3bn acquisition of properties from Devon Energy (press release)
- Assets include 900,000 acres, with proved reserves estimated to be 1.3-1.5 Tcfe (75% PDP) with current production of 275 mmcfe/d (80% natural gas) and with ~14% annual decline rates
- Properties located in the Rockies, Mid-Continent, East Texas, North Louisiana and South Texas
- To fund the acquisition, LINE plans to sells its properties in the Granite Wash and Cleveland plays, which carry production declines much higher than the assets to be acquired
- Cheniere Energy (LNG) announces new contracts with Woodside and Pertamina to supply LNG from planned Corpus Christi LNG facility
Other / Industry
- Tallgrass Energy (TEP) announces $0.38/unit distribution, a 16.9% increase quarter over quarter (press release)
- $0.22 annualized increase (TEP had announced at least a $0.20 annualized increase at the time of its recent drop-down acquisition)
- Texas oil production above 3mm barrels/d, making its production close to that of Iraq (Fuel Fix)
- Includes a chart showing how incredible the growth out of Texas and North Dakota has been relative to overall North American production
- North Dakota may require production curtailments if the amount of flared gas exceeds the state’s gas capture target (Oil & Gas Journal)
- No exceptions for wells that are connected to gas gathering systems with insufficient capacity
- Cheniere Energy (LNG) decides not to ask shareholders to approve another 30mm shares (worth around $2.2bn) to executives, with questions about last year’s 25mm shares remaining outstanding (Fuel Fix)
- Two Democratic Senators write a letter calling for a more extensive review of the private rulings issued last week regarding stabilized condensate run through a distillation tower (Fuel Fix)