Category Archives: MLP Market Post
Nov 22nd, 2015
MLP Market Post
MLPs declined for the second straight week, but were actually more than 1% positive on the week heading into Friday’s 2.6% decline. In a week that saw the biggest gain in the S&P 500 in months and saw no change in the interest rate on the 10-year, its incredibly frustrating to see MLPs remain under intense selling pressure. It appears that hedge funds are specifically targeting positions of closed end funds, and shorting them to force leveraged selling like we saw at the end of September. Retail fund flows are not there, for whatever reason (tax loss selling is the chorus you hear most often), to provide support and keep hedge funds from targeting the sector.
Time Has Passed
A fellow PM friend of mine asked me at the end of the week: are there any positives we can take away from this week, any reason to feel optimistic?
It’s a great question, and in the medium term, there is plenty to feel positive about with regards to MLPs and their ability to sustain distributions and develop assets. In the short term, however, as in this week, this month and the rest of this year, the main positive to emerge from this week is that we are one week closer to the end of the year and tax loss selling, one week closer to the oil market balancing, one week closer to the positive medium term catalysts. Also, we cleared another $1bn or so worth of equity from the sector’s backlog.
On the other hand, we just finished another week of low commodity prices impacting existing operations, and we are one week closer to volume declines, one week closer to potential bankruptcies among producer customers, and one week closer to interest rate hikes. And in the next week, I don’t expect much will have changed on any of the above counts, except that an additional week will have passed, but at least during that week we will have hopefully enjoyed a peaceful, non-OPEC impacted Thanksgiving break.
Winners & Losers
SUN was the big winner this week as the market reacted positively to the dropdown acquisition from ETP. USDP closed a previously announced acquisition this week and benefited from insider buying while news among the other top and bottom performers was light.
Among the YTD performers, USAC jumped ahead of SRLP displacing it from the top five while AZUR joins the bottom five replacing SXCP. Notably, only 3 MLPs have double digit total returns this year, while on the other end, the bottom 5 are all down more than 80%.
Overall, GPs performed in-line with LPs this week although performance was quite varied across the group. WMB and ETE rallied in the wake of the ET analyst day while SEMG clawed back some of last week’s losses.
News of the (MLP) World
It was a very active week of news for MLPs, with resolution on some key issues (SUN equity overhang, ETP funding needs, DJ Basin pipeline project consolidation), while the MPLX / MWE saga continues and the IPO market remains closed. Expect the next 7 days to be significantly less active for MLP investor relations teams.
- Noble Midstream (NBLX) postponed IPO, citing adverse market conditions (press release)
- Valero Energy (VLP) priced offering of 4.25mm units at $46.25/unit, raising $196.3mm in gross proceeds (press release)
- Bought deal, priced at 7.0% discount to prior closing price
- VLP opened well below offer price (down 3.8% from offer price or 10.6% from prior close at the low), but rallied late in the day to close down just 0.3% from offer price (-7.4% from prior close)
- Sunoco LP (SUN) announced private placement of $750mm worth of units at $31.00/unit (press release)
- The units were purchased by private investors ($685.5mm) and by ETE ($64.5mm)
- Discount on the PIPE was 6.4% based on prior closing price
- The PIPE and the concurrently-announced drop down transaction were well-received by the market, SUN units traded up 5.5% on the day, or 12.8% from the PIPE price
M&A / Growth Projects
- Sunoco LP (SUN) announced acquisition of the remaining retail assets of Energy Transfer (ETP) for $2.226bn (press release)
- SUN will acquire the remaining 68.4% interest in Sunoco, LLC and 100% interest in the legacy Sunoco retail business
- Financed with $194mm worth of SUN units issued to ETP, $750mm in new units issued to private investors ($685.5mm) and ETE ($64.5mm), and borrowings
- Magellan Midstream (MMP) and NGL Energy (NGL) announced combination of competing DJ Basin pipeline projects (press release)
- MMP’s Saddlehorn Pipeline (owned 40% by MMP, 40% by PAA, 20% by Anadarko) and NGL’s Grand Mesa Pipeline will combine into a single joint interest pipeline
- The pipeline will have capacity of 340,000 bbls/d, with Saddlehorn retaining 190,000 bbls/d of capacity and Grand Mesa retaining 150,000 bbls/d
- Each interest owner will be responsible for their own commercial activities, including contract terms and tariffs
- Two pipelines in one, but Saddlehorn retains the right to expand the pipeline at its cost and retain any expanded capacity
- The pipeline will transport various grades of oil from the DJ Basin in Colorado to storage facilities in Cushing, Oklahoma
- MPLX announced revised terms for merger with MarkWest Energy (MWE) that includes an increase in the cash component of the merger (press release)
- MPLX raised the cash component of the merger to $6.20/MWE unit, up from $5.21/unit offer made 11/10, and from the original $3.37/unit announced in July
- The offer now includes $6.21/unit in cash and 1.09 MPLX unit per MWE unit, for total consideration of $51.74/MWE unit based on 11/16 MPLX price
- Former CEO John Fox continued to lobby for unitholders to vote against the deal, with multiple press releases (see here and here)
- Enterprise Products (EPD) announced additional long-term contracts for LPG export capacity (press release)
- EPD adds 125mm barrels of LPG over 7 year period, bringing total commitments to 90% of estimated operating capacity through 2019
- EnLink announced acquisition of remaining 50% interest in Deadwood natural gas processing facility from Apache for $40mm (press release)
- The Deadwood facility is located in Glasscock County in the Permian Basin in Texas, and has capacity of 58 mmcf/d
- Increases ENLK’s net processing capacity in the Permian Basin to 343 mmcf/d
Nov 15th, 2015
MLP Market Post
2015 continues to be a painful transition year for MLP investors that has seen the focus shift from growth to value, then to deep value. MLPs finished the week down 5.7%, dragged down by broad market weakness (S&P 500 -3.6%) and dropping oil prices (-7.9% this week). For the second time this quarter, MLPs had 7 straight negative trading days. But halfway through the 8th day (Friday), large cap MLPs had a big intra-day reversal to finish positive even with oil prices down more than 3%. The sector’s focus now shifts to the Energy Transfer analyst day and to a suddenly wide open equity capital market.
This week felt familiar, and not just because of the horrific terror attacks in France. It also felt familiar because it was the 9th week the MLP Index declined 5%+ since last August. That’s 9 out of 63 weeks total, or 14% of the weeks since MLPs peaked on 8/29/14. By comparison, there have been only 24 such 5% decline weeks out of 1,036 weeks of index data we have since 1996, or just 2% of the time.
Overall volatility has clearly been elevated recently and it may continue to be higher than historically going forward, given that there are more open ended MLP products allowing for fast entry and exit, and given that the U.S. is effectively the world’s swing producer. 5% weekly MLP Index moves in either direction have happened 19% of the time since the 8/29/14 peak, compared with 4% overall since 1996.
Volatility won’t be this extreme forever. As gray haired management teams and energy investors have pointed out this week, the oil business is cyclical. The cycles can be dramatic, but it’s important to remember that they are cycles that eventually self-correct through supply and demand adjustments.
While the energy market seems dire now at the bottom of the cycle, experienced market participants know that this is just another cycle (many have experienced more than 5 cycles over the last few decades). Eventually supply and demand will be in balance, leading to drilling expansion and infrastructure opportunities. Of course, MLPs will emerge from the wreckage wounded, but when the cycle tilts back upward, some MLPs will have set themselves up for even greater success in the next cycle.
It feels like the worst of the current cycle is over. The 2 month public MLP equity offering blackout has now ended, and the offerings this week traded much better than those in early September. Also, while the timing seems questionable, there is an IPO on the road. Finally, M&A activity is picking up in the upstream sector, where well-capitalized companies are seeing greater value in buying production than creating it through drilling. Expect to see MLP M&A to continue to backfill growth in 2016, which promises to be a transition year for growth capital projects.
Winners & Losers
It was another one of those weeks we’ve seen too many of in 2015. Cataloging the carnage, it was a very mixed bag at the top of the sector, including a few MLPs that tend to be down when oil prices drop (CELP, SDLP, MEMP). No traditional midstream MLPs made the top 5. MLPs that get whipped around more than SXE and AZUR do week to week, and this week they both dropped 20%+.
AZUR has had back to back 15%+ decline weeks, SXE was in the top 5 last week before taking two steps back this week. No other repeats week over week.
No real changes to the ugly picture below. SXCP dropped into the bottom 5 after a 27% decline this week.
General Partner Holding Companies
All GPs were down this week and the median of GPs underperformed the MLP Index dramatically. Pretty much the same as last week, only more than twice as bad. TRGP and SEMG have had it worst of all, both down double digit percentages each of the last two weeks. Natural gas pipeline corporations SE and CPGX were each in the top 5 both weeks, a reflection of the lack of commodity price exposure in their businesses (outside of SE’s stake in DCP Midstream).
News of the (MLP) World
EQM ended a nearly 2 month drought for MLP public equity offerings, the longest drought since late 2008 through early 2009. SHLX settled all quarterly business this week. And amidst a clear glut of MLPs in the market, an IPO for a brand new MLP launched.
- Noble Midstream (NBLX) launched public offering of 12.5mm common units in MLP IPO with a $20.00/unit midpoint price (6.25% implied yield), seeking to raise $250.0mm (filing)
- Noble Energy (NBL) is the sole sponsor and owner of the GP/IDRs
- NBL is co-sponsor of an MLP that went public just over a year ago, CONE Midstream (CNNX), which was very successful initially, before falling more than 50% in the last year
- Expected to price 11/19 after the market closes
- The initial assets consist of DJ Basin oil and gas gathering assets underpinned by 15 year fixed-fee contracts with cost-of-service redetermination and annual rate escalators
- The structure is similar to CNNX, with multiple integrated development companies that will eventually be dropped down
- NBLX has a ROFO on all North American midstream assets of NBL outside of the Marcellus joint venture with CONSOL
- EQT Midstream (EQM) priced a 5.65mm common unit offering at $71.80/unit, raising $405.7mm in gross proceeds (press release)
- Bought deal, priced at 5.76% discount to prior closing price
- EQM traded down from pricing by 0.4% in the next trading session, roughly in line with the MLP Index that day
- Proceeds to be used to finance ongoing growth capital expenditures
- This was the first public equity offering by an MLP since early September, the longest public offering drought since late 2008 through early 2009
- Shell Midstream (SHLX) priced 8.0mm common unit offering at $32.54/unit, raising $260.3mm in gross proceeds (press release)
- Overnight bought deal, priced at 3.0% discount to prior closing price
- SHLX traded very well in the next trading session, closing +2.3% from pricing on a day when the MLP Index declined 3.0%
- Proceeds to be used to partially finance the drop down announced this week
- SXL priced $1bn worth of senior notes (press release), including:
- $600mm of 4.40% senior notes due 2021 at 99.905% of par
- $400mm of 5.95% senior notes due 2025 at 99.735% of par
- Proceeds to be used to reduce credit facility borrowings
M&A / Growth Projects
- Tesoro Logistics (TLLP) announced acquisition of the Los Angeles Storage and Pipeline Assets from Tesoro Corporation for $500mm (press release)
- The assets include 97 liquids storage tanks with a combined capacity of 6.6mm barrels and a 50% interest in Line 88, a 16-mile pipeline that transports jet fueld from Tesoro’s LA refinery to the LA International Airport
- Assets are expected to generate $60mm in annual EBITDA (8.3x multiple)
- The assets are underpinned by a 10-year contract with Tesoro
- Funded with borrowings and $250mm worth of equity issued to Tesoro Corp
- Shell Midstream (SHLX) announced acquisition of Auger Pipeline System and Lockport Crude Terminal from Shell Pipeline Company for $390mm (press release)
- Purchase price represents 8.6x multiple of 2016 expected EBITDA
- MPLX announced revised terms for its merger with MWE, including a higher cash component of $5.21 per MWE unit (press release)
- The implied spread on the merger remains very wide, helped by repeated announcements by former CEO John Fox affirming and re-affirming his stance against the merger
- John Fox will host a conference call on 11/17 to discuss his views (press release)
- Summit Midstream (SMLP) confirmed earlier report that its sponsor, private equity firm Energy Capital Partners, is evaluating strategic alternatives for its general partner (press release)
- The alternatives under consideration include: (1) a sale of Summit Investments, (2) a GP IPO, (3) accelerating drop-down sales to SMLP, and (4) a unit repurchase program
- A sale seems to be the preferred alternative, but at this point ECP is committed to ensuring that SMLP does not become an orphan MLP
- At the same time, ECP has not contractually protected SMLP from becoming an orphan MLP with a ROFO on the Utica assets
- Kinder Morgan (KMI) announced plans to form Mexican gas marketing company in a joint venture with TrailStone (press release)
- TransCanada (TRP) announced that it was awarded a project to develop the Tuxpan-Tula Pipeline in Mexico (press release)
- Pipeline is supported by a 25-year natural gas transportation contract with the Comision Federal de Electricidad (CFE)
- TRP expects to spend $500mm to develop the pipeline, with an in-service date of late 2017
- Azure Midstream (AZUR) announced resignation of CFO, effective immediately (press release)
Nov 8th, 2015
MLP Market Post
MLPs finished the first week of November with a total return of -1.1%. And with just 8 more weeks and 37 trading days remaining in 2015, the MLP Total Return Index has declined 24.8%. Generally solid MLP earnings helped MLPs follow-through on last week’s rally early in the week, until Wednesday when MLP prices gave way to lower oil prices and more uneven earnings announcements the rest of the week. Distribution ex-dates seemed to play some role in MLP weakness this week, as investors hung on for one final juicy distribution before selling. MLPs underperformed the broader stock market (S&P 500 +1.0%), but outperformed utilities (-3.9%), which were crushed by higher interest rates following the blowout jobs report.
On the bright side, PAA’s negative tone and lower guidance had much less impact on the sector than it did last quarter. MLP expectations and prices appear to have priced in a lower 2016 outlook, and a lower for longer commodity price environment. Earnings season was mixed, and stock price reactions seemed to reflect relief over the last two weeks.
The market is beginning to price in more optimism, or at least a willingness to get paid a high yield to wait. Distribution growth in 2016 will be down from the last 5 years, but that doesn’t spell doom for MLP prices. Let’s not forget that 2009 was the lowest distribution growth year of the 21st century for MLPs, but it was also the best year for MLP prices. The combination of high yield and price appreciation produced 77% total return in 2009.
At this point, there are still plenty of MLP skeptics out there. The MLP bear case bullet points have become so ingrained over the last year and a half that investors seem to ignore any upside risk to MLPs at this point, which is generally a bullish sign. It’s like in the movie Major League, when the Cleveland Indians go on a winning streak and the grounds crew still doesn’t buy in, saying essentially, “they still suck”.
MLPs have reached a “show-me” stage, where investors are unwilling to give much benefit of the doubt on the future. To make another Ohio sports reference, not many sports fans are willing to bet that the Bengals undefeated record so far portends any positive outcome in the NFL playoffs given how badly the fan base has been burned after past regular season success.
This week’s non-earnings news saw a continuation of two trends in particular that seem to be gaining traction. One is private placements of equity, like RMP’s $175mm deal announced this week. While the capital markets are closed for public equity offerings to retail investors (last deal was early September), institutional investors seem willing to step in (at a discount) to support accretive acquisitions for early stage MLPs like AM and RMP, and occasionally for mature, low coverage MLPs that are financing regular growth capex (like OKS).
As highlighted here in recent weeks, MLPs have alternatives to the public markets, and it may not be a terrible thing if the bar is raised for which MLPs have access to equity capital. Some financing discretion in the market can help avoid marginal MLPs financing marginal infrastructure.
The other trend, MLP buy-ins, are as unpopular as ever with retail owners of MLPs. TRGP announced an agreement to “pull a Kinder” and buy in its MLP. Owners of NGLS will get a reduction in income (like we saw with ACMP/WPZ and MPLX/MWE) and a big tax bill (like we saw with KMI/KMP/EPB). The math and governance works, so expect that trend to continue under the right circumstances. But the market has certainly not rewarded such transactions.
The TRGP buy-in also re-raises existential questions about the traditional MLP structure with IDRs that are probably worth exploring further in a week that wasn’t saturated with 50 MLP earnings releases. The MLP structure’s flow-through tax status should afford it a higher multiple than a corporation, all else being equal. But the sector may need to re-think the IDR construct in order to attract more institutional investment going forward, especially as the life cycle for an MLP grows shorter and IDR thresholds get surpassed more quickly.
Winners & Losers
Blowout 3Q results and increased 2015 guidance reminded the market that CNNX exists, driving a 30.7% re-rating this week. RMP’s 3Q results and the low multiple drop down (see below) helped it gain nearly 10% on the week. SXE made it two weeks in a row in the top 5 on what appears to be a stable outlook.
Weak results and lower outlooks sent PAA and RRMS lower this week. NGL reports next week, but seemed to be dragged down by results from TEP, PAA and RRMS that highlighted increased competition and challenged pipeline utilization for oil pipelines out of the DJ Basin. NMM was the worst performing MLP after announcing a distribution cut.
Year to date winners and losers are listed below. Not many changes, although SRLP popped into the top 5, displacing MMLP.
News of the (MLP) World
- Rice Midstream (RMP) announced private placement of 13.4mm common units with institutional investors, raising $175mm in gross proceeds (press release)
- Proceeds will be used to partially fund the $200mm drop down acquisition announced this week
M&A / Growth Projects
- Targa Resources Corp (TRGP) announced agreement to acquire all outstanding units of Targa Resources Partners (NGLS) in an all equity $6.7bn buy-in (press release)
- NGLS unitholders to receive 0.62 TRGP shares per NGLS unit, a ratio that implied an 18% premium to pre-announcement price, but linkage to TRGP and TRGP’s price decline eliminated most of that premium
- Coverage erosion was key driver of the transaction: Management cited 0.9x coverage for NGLS through 2018 in a rising commodity price environment case and sub 0.8x distribution coverage in a lower for longer case
- No taxes for TRGP for an extended period of time, which is where the extra coverage comes from, along with the reduced payout to NGLS and elimination of IDRs
- Transaction would result in a stealth distribution cut and tax hit for acquired MLP owners, similar to other recent MLP mergers
- Breakup fee is less than $100mm, unitholder approval votes to occur in 1Q2016
- Another 2.7% weight in the Alerian Index going away
- Western Refining Logistics (WNRL) announced $180mm acquisition of TexNewMex pipeline from sponsor Western Refining, Inc. (WNR) (press release)
- Pipeline is supported by a 10-year contract with WNR that includes minimum volume commitments
- The acquired assets are expected to generate $18.75mm in EBITDA (9.7x multiple)
- The acquisition was financed with a combination of cash and equity issued to WNR
- Rice Midstream (RMP) announced acquisition of water services business from Rice Energy, Inc. (press release)
- Purchase price of $200mm represents 5.0-5.7x 2016 EBITDA
- RMP also agreed to a $25mm payment to Rice if Rice obtains an additional 5 mm gallons/d of connected water sources by December 2017
- The acquired assets include Rice’s Pennsylvania and Ohio fresh water distribution systems, supported by a 15-year water services agreement with Rice
- Genesis Energy (GEL) announced $350mm of new growth projects to support ExxonMobil’s Baytown, TX refinery and producers in Wyoming (press release)
- TransCanada (TRP) announced sale of 49.9% interest in PNGTS to subsidiary MLP TC Pipelines (TCP) for $223mm (press release)
- Asset is expected to generate $23mm EBITDA in 2016 (9.7x multiple)
- Acquisition to be funded with cash on hand and borrowings on credit facility
- The Portland Natural Gas pipeline that runs from the Quebec border and extends 295 miles into the U.S. northeast
Distributions / Other
- Distribution announcements
- SUN +7.5%
- SEMG +7.0%
- CPPL +3.0%
- Flat: EEP
- Reduced distributions: NMM
- White House formally rejects proposed Keystone XL pipeline