Category Archives: MLP Market Post
Jan 28th, 2015
MLP Market Post
It’s time again for the MLP sector over-unders, in a post that has become an annual tradition. The post is coming out a bit late this year, and that means we have some early indications on many of the statistics, but there are plenty of unknowns in the sector to discuss.
The goal of this exercise is to discern the market’s expectation for certain statistics related to the MLP sector in 2015, and then to make a directional call on that number with some commentary. In other words, we set lines for MLP sector numbers and we enter our picks (see previous years: 2012, 2013, 2014). Then we come back next year and review how we did (last year I went 4 for 10). The concept was originally inspired by a recurring segment on the TV show “Pardon the Interruption” called Over Under.
Like we did last year, we hope that you will share your expectations for each item with us. It’s a fun way to speculate on expectations the market has for MLPs for the year, and to compare those expectations with ours and yours.
1. MLP IPOs
- Line: 12
- My Pick: Under
- 2014 Result: 18 (not counting NextEra Energy Partners, Landmark)
- 2013 Result: 19 (not counting CQH or PAGP)
The last three years, we have seen an average of 16 MLP IPOs per year. I expect fewer IPOs this year than last year. The MLP IPO backlog is higher today than it was a year ago, but the market is likely to be less receptive to MLP IPOs in 2015 compared with recent years. Already we have seen one MLP in the backlog forego the IPO process by acquiring a GP interest in an existing MLP as a way to access the MLP market. We will likely see other “dual-track” processes whereby a MLP sponsor files for an IPO and also runs a sell-side process simultaneously.
The backlog of MLPs that have filed for an IPO stands at 12, with another 4 companies that have publicly disclosed their intent to launch an MLP IPO, for a total of 16 companies. I believe a reasonable expectation, given the collapse of oil and recent MLP weakness, is that 25% of those filed or planned IPOs don’t get done. That takes the expectation for the year down to 12, and while the backlog could grow over the course of 2015, some names in the backlog might be removed as well, so 12 is probably a reasonable expectation for MLP IPOs in 2015.
Alerian MLP Index Returns vs. S&P 500
- Line: Pick ‘em
- My Pick: Over
- 2014 Result: -880 basis points
- 2013 Result: -482 basis points
- 2012 Result: -1050 basis points
Since the end of 2011, MLPs have underperformed the S&P 500 pretty dramatically. If you invested in the S&P 500 at the end of 2011, and compounded returns, you would have had 25% more by the end of 2014 than if you invested in the Alerian MLP Index. 3 years in a row is the longest losing streak MLPs have had since the late 1990s tech bubble. Early on in 2015, it looks like the S&P is on track to win another year.
I believe the streak will end this year, and MLPs will outperform. MLPs had a rough last 4 months of 2014, and by now the commodity price collapse is pretty well priced in for midstream MLPs. After a few upstream MLPs in the Alerian cut distributions, the index will rebalance itself away from upstream MLPs, reducing the index’s exposure to commodity prices. As oil prices stabilize, and start gathering upside momentum, MLPs should begin to price in a brighter tomorrow for energy stocks.
3. AMZ (cap-weighted) vs. AMZE (equal weight)
- Line: Pick ‘em
- My Pick: AMZE
- 2014 Result: AMZ +1078 basis points
- 2013 Result: AMZE +291 basis points
- 10 year average: AMZE +70 basis points, but AMZE only outperformed 4 out of 10 years
AMZ outperformed the AMZE by more than it ever has in 2014, driven by strength in large cap MLPs (KMP/EPB buyout helped that) and by massive losses in upstream MLPs. With all the turnover within the Alerian MLP Index constituents, the newer, high growth MLPs (like MPLX, PSXP, VLP recently added) have been replacing upstream MLPs. QRE was acquired, BBEP and LINE will need to come out of the index, and pending mergers (APL, WPZ, OILT) will add 3 more new names. Those high growth names will likely outperform. Also, consolidation within the sector favors the potential target MLPs as opposed to the mature, large cap MLPs.
4. General Partner Holding Company IPOs
- Line: 2
- My pick: over
- 2014 Result: 0
- 2013 Result: 1, but 3 if you count CEQP and OKE
- 2012 Result: 1
We had a streak of 4 straight years of 1 GP IPO per year (TRGP, KMI, WGP, PAGP) that ended in 2014. We had a lull this year, but after the IPO boom over the last 3 years, and the high growth rates of the newer MLPs spin-offs, there are several MLPs that are approaching the top tier of the IDRs. EQM’s sponsor has already announced plans for a GP IPO, and I expect others to follow. In addition, EXLP’s parent has plans to become a pure play GP in 2015.
5. MLP Consolidations / General Partner Sales
- Line: 7
- My Pick: over
- 2014 Result: 11 (ETP/SUSS, KMI/KMP/EPB, CST/CAPL, TLLP/QEPM, BBEP/QRE, EPD/OILT, NGLS/APL, WPZ/ACMP, NGL/TLP, Flint Hills/PDH, WLB/OXF)
- 2013 Result: 9
- 2012 Result: 2
This line was determined based on the average of the prior three years results, and I think reflects about where the market expectations are. Consolidations are tricky to predict, but with all the talk from KMI and PAA, chances are we see some MLP change of control fireworks in 2015. My best guess is between true consolidations and GP sales, we get around 5 such transactions.
A few years ago, in the 2013 lines post, I suggested that ETP buying RGP might be one of the consolidations we saw that year. Well, 2 full years later that deal finally happened. So, counting the Azure Midstream / Marlin Midstream deal, we are already at 2 consolidations this year so far.
6. MLP Distribution Cuts
- Line: 6
- My pick: over
- 2014 Result: 4
- 2013 Result: 1
- 2012 Result: 3
We’ve already had 4 distribution cuts in 2015 so far (LINE, BBEP, MCEP, NSLP), and other upstream MLP distributions have been called into question. With commodity prices depressed as they are, upstream MLPs are obviously feeling some pain, but there are likely some midstream MLPs that will contemplate distribution cuts as well.
7. MLPs Bought by Corporations (exiting MLP structure like Kinder)
- Line: None
- My pick: None
- 2014 Result: 1 or 2 depending on how you look at it (KMP/EPB/KMR)
- 2013 Result: 1 (PXD/PSE)
The last two years, we have seen 2 sponsors buy in their MLPs. The success of the KMI transaction and its trading performance following the acquisition is bound to spawn some copycats. WMB would seem the most logical choice, but there are many other MLPs sponsored by corporations that might determine at some point that their MLP plans are broken beyond repair.
Not counted in this statistic would be the buyout of an MLP by a sponsor that is also an MLP. We’ve seen that a few times over the last decade (EPD’s buyout of Duncan Energy Partners, PAA’s buyout of PAA Natural Gas). We may see that again with the likes of EEP (with MEP), NGL (with TLP), and the planned buyout of orphaned MLP QEPM by TLLP.
8. Equity Issuance in Marketed Offerings
- Line: $26.7bn (average of last two years)
- My Pick: under
- 2014 Result: $26.9bn
- 2013 Result: $26.5bn
With the commodity price challenges, tepid fund flows and lower trading volume of late, MLPs will be seeking unique ways to finance growth project that help them avoid issuing common equity in public offerings. MLPs will still raise substantial equity from the capital markets, but I don’t expect we’ll approach 2014 levels, especially with the rise of ATM issuance and without KMP in the MLP sector.
9. MLP Sub-Sector Returns
- My Pick: Gathering & Processing
In 2014, the best performing subsector within the Alerian MLP Index was the natural gas pipeline segment, which would have been a tough call early in 2014 after BWP’s distribution cut and EPB’s reduced distribution growth plans. But with EPB being bought out at a premium, and with strong returns from SEP, EQM, TEP and TCP, natural gas pipelines shined brightest in 2014. Oil and refined products pipeline MLPs came in second, based on our calculations. Worst performers that could potentially bounce back in 2015 include upstream MLPs and oilfield services MLPs.
There is quite a bit of uncertainty surrounding several subsectors that underperformed last year, including E&P, oilfield services, marine transportation, and gathering & processing. One of those subsectors will likely outperform the rest in 2015.
I believe gathering & processing MLPs are poised for a bounce back. As a group, they have shifted to a more fee-based model than they had in the last commodity collapse in 2008, and yet they have sold off rather dramatically the last few months. If they can show cash flow resilience throughout the year, it will help performance. Also, there may be significant M&A activity that drives returns for G&Ps.
10. 2015 Average WTI Spot Oil Price
- 2014 Average: $93.17
- 2013 Average: $97.98
- My pick: $55-$65/bbl
To this point, almost a month into 2015, the WTI spot oil price has averaged around $47/barrel. In order to average $70 per barrel for 2015, oil prices would need to average around $71.50/barrel every day for the remaining 235 or so trading days left in the year.
Jan 24th, 2015
MLP Market Post
MLPs continued the rally that began on 1/14/15 this week, finishing up 3 out of 4 days, even as oil prices dropped to fresh lows. For the week overall, the Alerian MLP Index (AMZ) increased 3.0% and the Alerian MLP Equal Weight Index (AMZE) increased 2.8%. In the 7 trading days since the 1/13/15 bottom, the AMZ has rallied 7.9%, while the AMZE has rallied 5.9%. MLPs are still down for the year, but have an outside shot at a positive January, which seemed very unlikely a few weeks ago.
The broader U.S. stock market was stronger this week, with the S&P 500 up 1.7%. Oil prices finished 6.7% lower this week, closing at a fresh 52-week low of $45.44. Oil dropped on a higher inventory build than expected on Thursday (plus a stronger dollar), and fell again Friday after the death of King Abdullah of Saudi Arabia. Natural gas erased last week’s 5.1% gain with a 5.1% decline.
Winners & Losers
Out of index, small-cap MLPs led the way this week taking the top 3 performance slots. High-growth drop down names rounded out the top 5, with both VLP and PSXP up 12.4%. On the downside, it was a mixed bag with recent IPO RMP down the most at 10.5% (and now down 13.5% since IPO). EVEP was the only upstream MLP in the bottom 5 this week despite two distribution cuts from other upstream MLPs.
EVEP was the only repeat offender on the bottom 5. In the top 5, follow through has been limited, with winners fluctuating wildly from week to week.
Upstream MLPs occupy 4 out of 5 worst performing MLP spots so far this year. 2 Smaller, out of index MLPs make up most of the top 5.
News of the (MLP) World
Kinder Morgan’s big news and earnings release captured all the attention this week. KMI will try to hold that attention at next week’s analyst day. Earnings releases of actual MLPs start this week with EPD, NS and a few others this week. The fire hose of earnings releases that’s coming in the next few weeks will be a welcome change from a few pretty quiet months in terms of company-specific data points. Some of the news won’t be pleasant, but at least it will help the market differentiate between which MLPs are in trouble and those that are not.
Debt and Equity
- No transactions this week. As expected, it’s been a very slow start for MLP capital markets in 2015.
M&A / Growth Projects
- Sunoco Logistics (SXL) announced successful open season for Delaware Basin oil pipeline extension project (press release)
- The project includes 125 miles of new pipeline with initial capacity to transport 100,000 bbls/d of oil from the Delaware Basin production area to Midland, Texas
- Pipeline will be in operation by the first half of 2016
- Kinder Morgan, Inc. (KMI) announced $3.0bn acquisition of Hiland Partners, a private energy company owned by billionaire Harold Hamm (press release)
- Hiland owns natural gas gathering and processing assets, oil gathering assets and the Double H oil pipeline in the Bakken Shale
- Some of these assets were part of a public MLP Hiland Partner that went public in 2005 and was bought back by Harold Hamm in 2009
- KMI expects the transaction to be modestly accretive to cash flow per share and expects the purchase price to represent a 10x multiple of 2018 EBITDA
- KMI will need some serious equity to permanently finance this acquisition and maintain its 5.5 debt/EBITDA
- Enterprise Products (EPD) announced it will move forward with Panola pipeline expansion after receiving customer commitments (press release)
- The Panola NGL pipeline expansion includes adding 60 miles of new pipeline, as well as pumps and other equipment to increase capacity on the system by 50,000 bbls/d
- The Panola NGL pipeline system originates near Carthage, Texas and extends to Mont Belvieu, Texas
- Expansion expected to be in-service by 1Q 2016 and to expand capacity
Jan 18th, 2015
MLP Market Post
What a week! The Alerian MLP Index dropped like a rock to start the week, closing Tuesday at a fresh 52-week low that was 6.0% lower than last Friday. On the back of stabilizing oil prices, MLPs traded better the rest of the week, including a 3.3% pop on Friday, to finish the week down just 1.4%. The Alerian MLP Equal Weight Index (AMZE) declined 3.0%, which highlights how midstream MLPs outperformed, a sign that some risk differentiation might be developing.
It’s been a risk-off year so far, with the broad market down 2%, interest rate on the 10-year are down to 1.82%, and utilities have picked up where they left off up and are up 3.3%. Oil was volatile all week, but rallied after hitting a new low Tuesday to finish the week slightly positive (U.S. oil spot price +0.7% week over week), breaking a streak of 6 straight declining weeks. Oil rallied 6.1% from Tuesday’s close to the end of the week. Natural gas was volatile as well, but finished up 5.1% for the week.
Winners & Losers
Oil stabilizing didn’t help upstream MLPs much this week. 4 of the bottom 5 were upstream MLPs. Only one of the top 5 this week was in the Alerian MLP Index (GEL). FISH popped 14% on the news that its GP was acquired and its growth rate would be accelerated.
Last week, midstream MLPs dominated the bottom five. Not so this week.
It’s still very early on, but a theme is emerging on the downside so far this year (upstream MLPs still weak). On the upside, the names are spread across subsectors, but they are all smaller, more thinly-traded MLPs.
News of the (MLP) World
There were encouraging signs for MLPs from the capital markets this week, as two non-investment grade MLPs successfully raised debt capital. Also, there were positive signs that strategic transaction opportunities for MLPs are beginning to emerge from the volatility. The Azure Midstream acquisition of Marlin Midstream’s GP is a sign of things to come. Azure was going to go public, but saw the opportunity to avoid the capital markets and get public quicker. There will be more transactions that would have otherwise been IPOs. Whether that’s producers shedding assets to MLPs when last year they would have gone IPO, or MLPs buying MLPs.
- Targa Resources (NGLS) priced $1.1bn of 5.0% senior notes due 2018 at par (press release)
- NGLS will use the proceeds from the offering to fund tender offers for bonds outstanding at Atlas Pipeline Partners (APL – gathering & processing MLP), in connection with and conditioned upon the proposed merger between NGLS and APL
- Offering was upsized from $800mm initially offered
- Positive indication of the ability for other MLPs to access the debt capital markets
- SunCoke Energy Partners (SXCP) priced $200mm of 7.375% senior notes due 2020 at 102% of par (press release)
- Proceeds from the offering will be used to partially finance the acquisition of a 75% interest in a cokemaking facility in Illinois owned by its sponsor
M&A / Growth Projects
- Marlin Midstream (FISH) announced the sale of its general partner and 90% of its incentive distribution rights to private company Azure Midstream Energy, LLC (press release)
- As part of the transaction, FISH will acquire Azure’s Legacy gathering system in East Texas and northern Louisiana for $162.5mm
- Azure will retain additional assets to sell down to FISH over time
- Azure (owned by private equity firm Energy Spectrum) had been planning an MLP IPO of these assets, but this is a short cut
- The Legacy acquisition and the future drop-down acquisitions combine to raise FISH’s distribution growth profile, and FISH’s stock price reflected that re-rating this week
- Bloomberg reports that three large MLPs were among the bidders for a large pool of midstream assets owned by Pioneer Natural Resources (Bloomberg)
- The assets are said to be worth as much as $3bn, and include natural gas and condensate infrastructure in the Eagle Ford Shale in South Texas
- The MLPs were Williams Partners (WPZ), Enterprise Products Partners (EPD) and Energy Transfer Partners (ETP)
- Enlink Midstream (ENLK) announced acquisition of oil logistics company for $100mm (press release)
- ENLK continues to execute its plan to use its investment grade balance sheet and debt capacity to make accretive acquisitions
- SunCoke Energy (SXCP) announced $245mm drop-down acquisition of interest in a cokemaking facility (press release)