Category Archives: MLP Market Post
Oct 26th, 2014
MLP Market Post
MLPs continued to recover this week from the early October correction, with gains each day of the week except for Wednesday when the entire market sold off in the last few hours of trading. The Alerian MLP Index posted gains of 3.1%, despite declines in commodity prices (Oil -1.0% and natural gas -3.8%, both near 52-week lows). MLP performance was helped by strength in the broader U.S. stock market (S&P 500 +4.1%), and by positive distribution and earnings announcements.
MLPs were active in the capital markets this week, with $3.6bn of capital raised in debt and equity deals. MLPs were also actively deploying capital, with 1 consolidation transaction for $2.5bn and another 3 acquisition announcement for $690mm. Several prominent MLPs report 3rd quarter earnings next week, including Enterprise Products Partners, Williams Partners and NuStar Energy, which should drive stock price performance (absent further macro influences).
Winners & Losers
Many MLPs continued to recover from the correction that ended last week, and the winners this week seem to be a fairly random mix as a result. The bottom 5 this week, however, was more event-driven. SUSP priced an equity deal into a still recovering market early in the week and saw its units selloff during marketing. TLLP and QEPM were down on TLLP’s $2.5bn acquisition of QEPM’s parent and on TLLP’s large equity offering to pay for it. RNO was down on announcement that this quarter’s distribution would be 88% lower than its prior quarter, never a good sign.
There were no repeats on the bottom or top 5 this week, but HMLP did make the jump from bottom 5 to top 5.
Year to date, the bottom 5 MLPs now includes 4 MLPs that have announced distribution cuts in the last year, and QEPM, which is now trading 19% below its IPO price of $21.00 in August of 2013, despite growing its distribution a total of 20% in the 4 quarters since IPO. SUSP dropped out of the top 5, replaced by RRMS.
The market served up a few reminders related to the TLLP acquisition of QEP Field Services this week.
First, when an MLP has a strategy that the market is comfortable with, it can be painful when that MLP steps outside of that well-understood strategy, for whatever reason. This was the case for TLLP this week, which stepped outside of focus on crude and refined products logistics to acquire a natural gas gathering and processing company.
- A recent example of this is the pending merger between ACMP and WPZ. ACMP as a standalone MLP had a well understood organic growth strategy that was working. The WPZ merger changes the growth profile of ACMP and adds many other business lines beyond its core, fee-based gathering business. The TLLP acquisition this week doesn’t appear to have changed TLLP’s growth profile, but it’s definitely a shift in strategy that the market wasn’t prepared for.
- MLPs should have some level of self-awareness about their image in the eyes of the market. TLLP had cultivated an image over the years, and they went away from it with this acquisition. The deal may work out very well, but it will take time for the market to get comfortable with the new TLLP. I’ve met with management of some highly-regarded MLPs that have the cost of capital to buy many of the assets being shopped, but they refuse to do so because of how the market might react to a move away from its core focus. This may cause that MLP to miss out on some potentially very good acquisitions, so there is a tricky balance, but an MLP’s image clearly matters.
Second reminder: in big consolidation transactions, the GP typically wins. Tesoro Corp’s share price popped on TLLP’s acquisition, even as the MLP’s stock price dropped like a stone, because TSO expects to see its IDR cash flow from TLLP double on the back of the acquisition and the new units issued.
- A recent example is EPD’s acquisition of OILT’s GP for ~50x cash flow and offering no premium for the buyout of OILT L.P. units.
Third reminder: no drop down story is guaranteed. QEPM was a drop down story, and despite not trading at valuations like some of the other drop down MLPs, the market was counting on drop downs to sustain growth on its mature asset base. This TLLP acquisition nullifies those potential drop downs, and the market reacted negatively as a result. The bull case for QEPM prior to the sale of its GP was that some strategic or financial buyer would buy the GP with the hope of using the MLP as a vehicle for growth. TLLP has no use for QEPM and announced it would roll it into TLLP after the GP acquisition.
- This is similar (but on a much smaller scale) to several years ago when KMI came along and bought El Paso Corp and dramatically lowered the growth profile of EPB by directing much of El Paso’s pipeline assets towards KMP as opposed to EPB.
One bonus reminder not related to TLLP: the market does not like it when the distribution gets cut. RNO’s value was cut by 60%+ this week after announcing an 88% distribution cut. RNO has consistently struggled the last few years. In 2012, it cut its distribution back to its minimum quarterly distribution and stopped paying distributions on its subordinated units. But even with its struggles and a challenging coal market, investors still had been giving RNO some credit for paying its MQD.
News of the (MLP) World
Another name brand MLP IPO (the first by a major integrated oil company) is out in the market, and it is expected to garner quite a bit of attention. In addition, we had some M&A action beyond TLLP in the form of 2 anticipated drop-down transactions and a much smaller step-out acquisition by GEL. Also, a plethora of MLPs announced distributions and MWE raised 2014 EBITDA and DCF guidance ahead of earnings.
- Shell Midstream (SHLX) launches IPO of 37.5mm units, which is expected to raise $750mm at the midpoint price of $20.00/unit (press release)
- Midpoint price represents a 3.25% yield, the lowest ever for an MLP IPO (lowest since DM earlier this month at 3.33%)
- Will be the largest offering size for an MLP IPO ever (larger than CVRR’s $690mm, including overallotment)
- With the 15% overallotment and a price at the high end of the range, SHLX would raise $905.6mm
- SHLX owned interests in 2 crude oil transportation pipelines and 2 refined products pipelines to start with, but expects to grow rapidly through drop-down acquisitions
- SHLX will have no debt and $100mm of cash on its balance sheet after the IPO
- Expected to price Tuesday afternoon, and begin trading Wednesday
- Tesoro Logistics (TLLP) prices public offering of 20.0mm units at $57.47/unit, raising $1.149 billion in gross proceeds, including $500mm purchased by Tesoro Corp (press release)
- Proceeds to be used to partially fund the QEP Field Services acquisition outlined below
- One day marketed offering, with a file-to-price decline of 14.3%
- TLLP units traded down another 3.4% the day after pricing
- Original offering was for 19.35mm unit offering with $350mm worth purchased by Tesoro Corp
- Tesoro Corp backstopped weak demand for the offering by adding another $150mm to its commitment
- MidCon Midstream Partners files initial S-1 for MLP IPO to raise up to $100mm in gross proceeds (filing)
- MidCon is an MLP formed by Sandridge Energy as a platform for its gathering & processing assets and its saltwater disposal well assets
- Susser Petroleum (SUSP) prices public offering of 8.0mm units at $46.25/unit, raising $370mm in gross proceeds (press release)
- One-day marketed offering, with a file-to-price decline of 7.1%
- Tesoro Logistics (TLLP) prices $1.3bn offering of senior notes, including $500mm worth of 5.50% senior notes due 2019 and $800mm worth of 6.25% senior notes due 2022 (press release)
- Targa Resources (NGLS) prices $800mm offering of 4.125% senior notes at par (press release)
M&A / Growth Projects
- Tesoro Logistics (TLLP) announced the acquisition of QEP Field Services (QEPFS) from QEP Resources for $2.5bn (press release)
- QEPFS operates natural gas gathering, processing and transportation assets in the Rocky Mountain region and in North Dakota
- QEPFS also holds a 58% L.P. interest and 100% of the incentive distribution rights of QEP Midstream Partners (QEPM), an MLP that went public in 2013
- The acquisition is immediately accretive to TLLP’s distributable cash flow per unit
- Phillips 66 Partners (PSXP) announced $340mm drop-down acquisition (press release)
- Assets include 2 rail unloading facilities and small oil pipeline
- As part of the acquisition, PSXP will enter into a 10-year terminal services contract with PSX for 100% of the capacity of the rail facilities
- 10x EBITDA multiple for rail facilities
- Genesis Energy (GEL) announced acquisition of an oil tanker for $157mm (press release)
- The tanker is a modern, double-hulled, Jones Act compliant tanker with 330,000 bbls of capacity
- Operated under long-term charter agreements into 2020 with high-quality counterparts
- EnLink Midstream Partners (ENLK) announced $193mm drop-down acquisition (press release)
- ENLK will acquire the E2 assets, which consist of condensate stabilization and natural gas compression assets in the Utica Shale
- $20-25mm in annual EBITDA expected, implying an 8.5x multiple
- E2 assets are supported by long-term, fee-based contract with Antero that includes MVCs
- MarkWest Energy Partners (MWE) announced increased guidance for 2014 EBITDA (+3.6%) and distributable cash flow (+6.2%) vs. prior guidance
- The raised guidance is a result of accelerating gas volumes from producer customers that is driving higher utilization of MWE’s natural gas processing and fractionation assets in the Marcellus Shale
- Kinder announced Nov 20th for special shareholder meeting to vote on proposed merger
- Still no word on what that means for the Alerian MLP Index, but under the existing guidelines, KMP and EPB will need to come out of the index.
- Notable Distribution Increases:
- EMES (+17%)
- WGP (+7.4%)
- QEPM (+7.1%)
- DLNG (+6.8%)
- TRGP (+6.2%)
- ETE (+5.8%)
- EQM (+5.8%)
- PSXP (+5%)
- SXL (+4.8%)
- MPLX (+4.4%)
- MMP (+4.3%)
- SMLP (+3.8%)
- WES (+3.8%)
- NGL (+3.4%)
- OKE (+2.6%)
- ENBL (+2.5%)
- SCXP (+2.4%)
- GLP (+2.4%)
- NGLS (+2.2%)
- ETP (+2.1%)
- OKS (+2.0%)
- ENLK (+1.4%)
- WPZ (+1.3%)
- MWE (+1.1%)
Oct 19th, 2014
MLP Market Post
After last week’s slaughter, MLPs dropped further to start the week, but snapped back Wednesday and Thursday. MLPs were flat Friday and finished up 2.0% overall this week, well ahead of the S&P 500 and utilities. The turnaround mid-week was extraordinary, reminiscent of a few years ago during the debt ceiling issue or during the global financial crisis.
After the snap back and a calm Friday, it’s tempting to say MLPs are back on their upward sloping track, but volatility like we saw the last few weeks created some big losers and some big winners, which may lead to more choppy MLP trading as we head into seasonal weakness from ex-dates in November and potential tax loss selling in December.
Year to date the equal weight index (+2.8%) has significantly underperformed the market cap-weighted Alerian MLP Index (+7.2%), which is probably the result of weakness in upstream MLPs and KMP/EPB outperformance since August related to their buyout. All the MLP indices are ahead of the S&P 500 for the week, and for the year so far, and they are all under-performing the UTY utility index (+12.7%).
The interest rate on the US 10-year dropped 8 bps this week and finished Friday at 2.20%, but at one point Wednesday it dipped below 2% for the first time since June 2013, even with the end of QE looming. Rates were going in the other direction around this time last year, and finished the year above 3%, but so far global (and European in particular) growth has pushed money into US bonds and sent rates lower this year. WTI crude oil futures dipped below $80 this week, but seemed to find a bottom and ended the week back above $83/bbl. Larger than expected natural gas inventory injections, along with general commodity malaise, helped to push natural gas and lighter NGLs down this week as well.
Recent Sector Volatility
It was indiscriminate selling on Monday and Tuesday, and indiscriminate buying Wednesday and Thursday. Driving some of that action was probably some forced unwinding of total return swaps and hedge funds needing to get out at any price. Also contributing were negative fund flows out of open-end funds, which saw 4 straight days of negative outflows, ending Tuesday. To fund redemptions, open-end funds have to sell whatever they can the day after the redemptions come through.
MLPs declined 5.0% on Monday, which was the 15th worst single day decline ever for the MLP index. It was the worst day in an 8 day streak that saw the index decline 13.0%, making it one of the worst streaks we have seen in MLP land in terms of the number of consecutive down days and the depth of the selloff. The good news is that MLPs have been extremely resilient after corrections in years past.
Speaking of resilient: out of the 4734 trading days of data we have on the Alerian MLP Index, there have only been 17 days of 4%+ performance. This week, two such days happened back-to-back. The list of all such days is in the below table. Two other times the MLP Index was up 4%+ on back-to-back days, both in October of 2008. Each of those times the index was down on the third day. This week, day three was slightly positive.
Below is a chart of the last 30 days of the Alerian MLP Index (click to enlarge). There are some stock specific charts that look much wilder, but this one is pretty wild for a whole sector. As shown below, the Index is down 7.5% in the last 30 days, including some substantial downdrafts and spikes along the way.
Below is a chart of the Alerian MLP Index year to date. MLPs started an uptrend in late March, which faded in late July up until the announcement of the KMI/KMP/KMR/EPB deal that sent MLPs up to new all-time highs at the end of August, and it corrected from there. The bottom appears to be in, but a ways to go (another 8.4%) before we get back up the levels of late August.
Winners & Losers
Dominion Midstream was up 32.5% over its first 3 days of trading, and was by far the best performing MLP this week. Other small-cap, services and upstream MLPs CELP, HCLP and EROC made the top 5 as part of the bounce back in those subsectors. Recent IPO VTTI rebounded 14.2% this week, and is actually the best performing MLP in the sector since the end of September (+3.9%), not counting DM. On the downside, recent IPOs JPEP and HMLP performed the worst this week.
For the year so far, SUSP returns to the top 5 this week. On the downside, JPEP is already down 21.5% since its October 1 IPO and is now 4th worst for the year. MCEP joins the bottom 5 for the first time this year, while VNR and CMLP moved out of the bottom 5.
News of the (MLP) World
The capital markets story of the week was DM’s ability to price its IPO at the high end of the range and the strong after-market trading it saw. No MLP IPO has ever priced in an environment as bad as the market environment faced this week. During the financial crisis, there were no MLP IPOs from May 2008 until April 2010. I don’t want to overstate its impact, but the DM IPO seemed to reassure the market of the demand from institutions for high-growth MLP IPOs. The resilience of this offering will keep the IPO pipeline going (at least for name brand, high growth MLPs) for those in the queue like Shell Midstream, Antero Midstream and Hess Midstream.
The M&A story of the week was Targa announcing the acquisition of Atlas (ex-upstream). Over the summer, Targa played the role of the target when ETE was in discussions to buy it. This time, Targa plays consolidator. Targa gets assets that fit with its current footprint, highlighted by APL’s strong footprint and processing plant pipeline in the Permian basin. MLPs continue to find value in buying other MLPs, which should continue, and speculation on who might be next should continue as well.
- Dominion Midstream (DM) prices IPO at $21.00/unit, raising $367.5mm in gross proceeds (press release)
- IPO yield of 3.33%, lowest ever for an MLP (besting VLP and PSXP, which both priced at 3.70%)
- DM opened its first trading day Wednesday at $22.50, and closed at $26.41 (+25.8%)
- Memorial Production (MEMP) files S-3 to sell up to $250mm worth of common units (filing)
- Ocean Rig Partners LP (ORLP) files initial prospectus for an MLP IPO to raise up to $305mm (filing)
- Vanguard Natural Resources (VNR) announces $10mm common unit buyback program (press release)
- Buybacks are very rare in the MLP space, but do happen from time to time (NRGY and ETE come to mind as other that have employed buybacks in the past)
- The buyback was announced in a press release that touted VNR’s commodity price hedging program, distribution coverage sensitivities and other points to defend its unit price after it fell 24% over 30 days
M&A / Growth Projects
- Targa Resources Partners (NGLS) announces acquisition of Atlas Pipeline (APL), Targa Resources Corp (TRGP) announces acquisition of Atlas Energy, L.P. (ATLS), after ATLS spins out upstream MLP interests (press release)
- APL to be acquired in a unit-for-unit exchange, plus assumption of debt, for total value of $5.8bn
- ATLS to be acquired for stock and cash, following spin-off of holdings not associated with APL. Transaction value of $1.9bn.
- TRGP expects 35% dividend growth in 2015, NGLS expects 11-13% distribution growth in 2015, both up from current annual growth pace
- American Midstream (AMID) announces acquisition of Costar Midstream for $470mm (press release)
- Costar Midstream, a portfolio company of private equity firm Energy Spectrum, is an onshore gathering & processing company
- Acquisition funded with 6.9mm AMID units and $272mm in cash
- AMID calculates the EBITDA multiple for the acquisition to be 10.5x ($44.8mm implied EBITDA)
- AMID expects to spend $70mm to $80mm over the next 12-18 months to complete growth projects that will drive the all-in multiple of the acquired assets down to 8.0x
- AMID expects to be able to raise its quarterly distribution 3-5% for 1Q 2015, and 8-10% annually thereafter
- Kinder Morgan Energy (KMP) announces $240mm expansion at Pasadena and Galena Park terminals (press release)
- Includes construction of 2.1mm barrels of storage between the two terminals, and a new ship dock capable of handling ocean going vessels
- Sunoco Logistics (SXL) announces binding open season for Delaware Basin Extension project (press release)
- Mid-Con Energy (MCEP) announces $120mm acquisition (press release)
- Westmoreland Coal announces acquisition of the GP of Oxofrd Resource Partners (OXF), announces asset contributions and restructuring transactions (press release)
- GP interest and subordinated units and warrants of OXF acquired for $30mm
- OXF to change its name to Westmoreland LP
- Westmoreland intends to contribute assets to OXF after a series of restructuring transactions that include a 12-1 reverse split of common units, a reset of the minimum quarterly distribution and IDR tiers, and the reinstating of a $0.20/unit quarterly distribution (post reverse split)
- NuStar Energy (NS) announced a JV agreement with a Pemex subsidiary (PMI) to develop pipeline infrastructure to transport propane and refined products from the Gulf Coast US into northern Mexico (press release)
- FISH (+1.4%), HCLP (+8.7%), KNOP (+12.9%), OILT (+4.8%), OCIR (+5.0%), KMI (+2.3%), KMP (+0.7%) all announced distribution increases
Oct 12th, 2014
MLP Market Post
As noted and discussed in my Friday post, the Alerian MLP Index was down 7.0% this week, and the Alerian MLP Equal Weight Index was down 7.7%, which is explained mostly by smaller-weighted upstream MLPs vastly underperforming, and mega-weighted KMP outperforming.
The interesting thing to note about the Equal Weight Index is that after this week’s decline, it is very close to flat for the year (not counting distributions), and is underperforming the S&P 500 by quite a bit. So, if you didn’t own KMP and you didn’t participate in any hot IPOs, and maybe had a few upstream MLP positions, your MLP portfolio is probably not having a very good year, which seems incredible given how just 6 weeks ago we were sitting at all-time highs.
Enough about MLPs, the real story of the week is commodity price weakness, and questions about where the demand will come from to soak up surplus oil given questions about global economic growth. WTI oil futures closed at $85.56/bbl, a 4.7% decline week over week. Natural gas, ethane and especially propane sold off sharply as well. Oil’s decline was just a continuation of the steady decline from the end of July when oil was above $105/bbl.
This week was a clear reminder that interest rates are second to fundamental commodity flows and prices in terms of impact on MLPs. The US 10 year rate was down 15 bps to 2.28%. Treasuries and U.S. utilities were two of the only places to hide out this week (the UTY index was up 1.1%).
Winners & Losers
Upstream MLPs were the clear losers this week (LGCY, QRE and MCEP all in the bottom 5). LGCY’s relationship with WPX (announced strategic changes to drilling focus this week) contributed to it having the biggest decline of all MLPs. Well, technically not all MLPs, because variable distribution MLP EMES was down 21.8%, and general partner holdco MLP ATLS was down 20.7%. CELP’s business is tied directly to upstream activities, which means it gets sold when energy and commodities get sold as well. SUSP seems to be the outlier among the bottom five, dropping 18.1% despite having a business that is driven by drop downs and not oil prices, but perhaps financing those drop downs gets more challenging in the current MLP environment.
On the upside, IPO USDP did ok, considering it was marketing against Dominion Midstream this week, and then it priced right into the worst MLP sell off in years. Non-US focused MLPs SDLP and GMLP did well. Lightly-traded small cap refined products MLP WPT beat everyone and was one of only 2 MLPs that went up in price this week.
Besides ATLS’s weakness, other GPs were pretty consistent in their under-performance: NSH (-14.3%), SEMG (-14.0%), CEQP (-12.6%), TRGP (-12.4%), ETE (-12.1%), ENLC (-11.1%), WMB (-10.2%), and OKE (-9.2%) were all down between 9-15%. WGP, KMI and PAGP, which all out-performed the MLP Index. The under-performing GPs included high-growth, popular GPs like SEMG, ETE, TRGP, and WMB, but also the limited growth GPs like CEQP and NSH. This is more evidence of widespread selling that (with a few minor exceptions) had little to do with outlooks for individual stocks.
The year-to-date chart looks a bit different this week. SUSP and RRMS fell out of the top five, replaced by EQM and SRLP. CMLP joined the bottom 5, while VNR joined the bottom 5 for the first time this year, after falling 24.5% since mid-September.
While not top of mind during this week’s meltdown, at some point in the next few months, we will learn the fate of KMP and KMI in the eyes of the MLP indices that Alerian manages. For now, Alerian has been understandably quiet on the issue, especially given how much capital tracks their indices.
The Alerian MLP Index is not capped, so keeping KMI in the index would make it a very large position, and around 35% of the index comprised of just 2 names (EPD and KMP), based on our calculations. There is at least one research analyst that believes Alerian might stage a staggered exit for KMP over more than one quarter if it does come out. Also, KMI could stay in one MLP index (like AMZI) while exiting the original index. A couple of questions / issues come to mind.
- If they changed the rules to allow KMI to be in the index, wouldn’t they need to allow in ETE and companies like Columbia Pipeline Group (the spin off from NiSource) as well?
- Why is the most-followed index in the industry capped at 50 names? It would be great if Alerian used this as an opportunity to change course and become more inclusive going forward.
- Keeping KMI in any index is problematic if KMI starts to acquire assets outside of traditional MLP assets. KMI will not be obligated to own MLP qualifying assets.
It will be very interesting to see how it plays out, because there are certainly large dedicated MLP managers that would prefer KMI stay in the index.
News of the (MLP) World
- USD Partners (USDP) prices IPO at $17.00/unit, below the filing range (press release)
- IPO yield of 6.76%, highest since GLOP in May of this year
- USDP opened its first trading day Thursday at $15.80, and closed at $16.00 (-5.9%)
- Natural Resource Partners (NRP) prices public offering of 8.5mm units at $12.02/unit, raising $102.2mm in gross proceeds (press release)
- One day marketed offering, with a file-to-price decline of 6.8%
- Dominion Midstream Partners (DM) launches MLP IPO to raise $350mm at a midpoint yield of 3.5% (filing)
- Midpoint price already represents a record low MLP IPO yield, very confidently priced
- Still on track to price Tuesday
- Breitburn Energy (BBEP) prices public offering of 14.0mm units at $18.64/unit, raising $261mm in gross proceeds (press release)
- Overnight offering, priced at 3.9% discount to prior close
- Navios Maritime Midstream Partners files initial prospectus for an MLP IPO to raise up to $100 (filing)
- Markwest Energy (MWE) files S-3 to raise up to $1.5bn worth of common units (filing)
M&A / Growth Projects
- Targa Resource Partners (NGLS) announces plans to construct Delaware Basin and Williston Basin natural gas processing plants (press release)
- Delaware Basin plant (in-service by 1Q 2016): 300 MMcf/d processing plant, a header pipeline originating at the new plant and extending into the southern portion of the play
- Williston Basin (YE 2015 in-service): A 200 MMcf/d processing plant in McKenzie County
- No indications on the economics or expected construction costs, but based on other plants, the combined cost of these plants should be at least $500mm
- Global Partners (GLP) announces acquisition of Warren Equities for $383mm (press release)
- Warren sells ~500mm gallons of fuel annually through 520 retail locations, and operates 147 Xtra Mart convenience stores
- This transaction is the latest in what has become the most active asset acquisition corner of the MLP space
- GLP expects the acquisition to produce $50-60mm of EBITDA in its second full year of operations (7x multiple)
- NGL Energy (NGL) announces successful open season for recently announced Grand Mesa crude oil pipeline from DJ Basin in Colorado to Cushing (press release)
- Grand Mesa pipeline is being developed jointly by NGL and Rimrock Midstream, LLC
- Pipeline should be in-service by 2016 and will include 550 miles of new pipeline, 1,500,000 barrels of operational storage, and multiple truck injection points
- Natural Resource Partners (NRP) announces $340mm acquisition of non-operated working interests in Bakken oil & gas properties (press release)
- NRP acquiring 5,700 net acres from Kaiser-Francis Oil Company
- Expected to generate $58-60mm in EBITDA in 2015, implying a 5.8x multiple
- EPD, PAA, GEL kicked off distribution announcement season with increases that were in line with recent quarterly raises
- Oiltanking (OILT) announces new CEO from EPD’s deep management bench (press release)