Category Archives: MLP Market Post

The MLP Index was down slightly less than stocks overall this week, but was out of synch with the broader stock market.  The Alerian MLP Index was down the first 2 days of the week, then up 3 days in a row to close out the week down 0.7%.  MLPs diverged from the S&P 500 after on Wednesday, when the S&P 500 was down 0.8% and MLPs were slightly higher.  The S&P 500 bounced back Thursday, while MLPs were again slightly higher, then Friday the S&P 500 dropped 0.6% while MLPs were up 0.5%.  The MLP Index is still 4.7% lower than its all-time high on May 22, while the S&P 500 closed the week 2.5% below its all-time high set on May 21.

MLPs appear to be gaining strength relative to the broader market, likely helped by oil price that continues to climb closer to $100/bbl. But that strength may dissipate with a fresh flurry of equity offerings next week.  We’ve now seen the 4%+ weekly drop cycle (that I talked about the last few weeks) play out, with a 4% drop 2 weeks ago, then a bounce back week, followed by another weekly drop.  The historical pattern breaks down after that,

This Friday, I published a report on the MLP correction.  The part that was missing from the report was how that correction looks relative to the broader equity market, not just relative to treasury yields.  The MLP Index reached its peak a day after the S&P 500, and hit its recent low on June 5th, the same days as the S&P 500.  The MLP correction may just be explained by broader equity sentiment applied to a sector with less liquidity that tends to react more sharply.  Click here to read the report, but below is a chart showing the up and down cycles of the MLP Index the last 4 years, including the 11 corrections of 5% or more the MLP Index has had since the beginning of 2010 (click to enlarge).

Winners & Losers

It was a wild week for a few MLPs.  Spectra’s big drop down plan jolted SEP’s unit price, which was up 12.9% this week to lead all MLPs.  USAC, GLP and EQM had strong bounce back weeks after recent weakness.  WPZ had a rough week, after an explosion at its Geismar plant killed 2 people and caused an unknown period of downtime for the Louisiana plant that represents 2.1% of U.S. ethylene capacity.  WPZ was down 4.6% this week, but the big loser in the accident (aside from those injured in the accident) was ethane, which dropped 11% this week.  A reduction in ethylene capacity means less demand for ethane as a feedstock, at a time when we are already in the midst of an ethane glut.

Other big losers this week were 3 upstream MLPs (LINE, EVEP, LRE), despite continued crude price strength.  LINE continues to gather detractors that don’t like its distributable cash flow calculation and accounting for puts.  Barron’s highlighted LINE again.  I don’t own LINE and don’t cover it on the research side of the house, so I won’t be taking a side, but I will say that the increased headline risk of LINE makes it hard to justify as a position in the conservative separate accounts we managed.  The train wreck that is LINE stock lately has been very interesting to watch, however, in particular the twitter war that erupted Friday between the Hedgeye team and Jim Cramer, who wrote on twitter that he has blocked everyone on the Hedgeye team, which as one Hedgeye analyst said is the twitter equivalent of taking his ball and going home.  Cramer also called the repeated negative commentary on LINE a “raid” and implied on twitter that the loud negative reports on LINE and ongoing negative twitter commentary by Hedgeye guys was potentially illegal manipulation (see below).  Not sure about that, but its good theater.

The 10b-5 clause of the ’34 Act specifically bans fomentation to manipulate stocks. But there might be a $LINE exception..

— Jim Cramer (@jimcramer) June 14, 2013

Another big loser this week, EVEP, is also a Hedgeye short call.  EVEP continues to drop from its once lofty price when the Utica excitement first began.  There was no news on EVEP and LRE this week and oil was up, so it appears the sell off in those names is a contagion of the LINE issues being applied to other closely followed upstream MLPs.

The 3 MLPs that issued equity this week (VNR – preferred, ARP, and XTEX) did not appear on the loser list this week, which is encouraging for other MLPs that may issue equity in the coming weeks.

Year to date, the same 3 upstream MLPs above are among the bottom five, led by EVEP’s 37.1% decline (including distributions).  On this list, the dichotomy between the winners and losers widened this week, as the strong performers got stronger and the weak got weaker.

MLPs are beating stocks handily this year, but as usual are not matching the returns of their parents (GP holdco’s).  This relationship is a bit like me playing basketball against my kids.  They may make some baskets, but it will be a long time before they can beat me, because of some critical structural advantages I have over them right now.

News of the (MLP) World

Very busy news week, with some nice surprises out of SEP and WES (a previously undisclosed option to JV with EPD on a contracted growth project), and with some not very nice surprises for WPZ and any MLP that was counting on ethane recovering at some point.

NRGY and NRGM will be in the spot light this week when they distribute the 56.4mm NRGM units it owns to its unitholders on Tuesday.  The transaction is not dilutive to NRGM and should not impact its operating results in any way, but NRGM may see some selling pressure this week as a result.  The transaction is step 1 in the 5 step process to consummate the CMLP GP and LP merger announced in May.

Equity

• Vanguard Natural Resources (VNR) prices offering of 2.2mm 7.875% Series A Cumulative Redeemable Perpetual Preferred Units at $25.00/unit, raising $55mm in gross proceeds (press release)
  • Only preferred issue in the MLP space I believe, will trade under ticker VNRAP [Update: my friends at V&E remind me of TOO's listed preferred issue, so VNR is #2, but they continue to push the MLP status quo within upstream MLP space - they were the first MLP to go to monthly distributions, right?]

• Enbridge Energy Partners (EEP) files S-1 for $500mm IPO of subsidiary MLP Midcoast Energy Partners, which will own 40% interest in EEP’s natural gas and NGL midstream business.  EEP to retain IDRs and G.P. interest (press release)
  • IDRs on top of IDRs has been done before, but is aggressive financial engineering, just like it was when PNG went public (PAA is the GP) and when ETP bought SXL’s GP

• Crosstex Energy (XTEX) prices public offering of 7.2mm common units at $20.33/unit, raising $146.4mm in gross proceeds (press release)
  • 7.2mm common unit offering, upsized from 6.0mm units initially offered
  • Gross proceeds of $146.4mm, net of which will be used to for growth projects (Cajun-Sibon) NGL pipeline extension
  • Overnight transaction, priced at 3.6% discount to prior close

• Atlas Resource (ARP) prices public offering of 13.0mm common units at $21.75, raising $282.8mm in gross proceeds (press release)
  • 13.0mm common unit offering, upsized from 12.25mm units initially offered
  • Gross proceeds of $282.8mm, net of which will be used to partially finance EP Energy acquisition
  • One day marketed offering, 5.6% file-to-price decline

Debt

• Summit Midstream (SMLP) prices public offering of $300mm of 7.5% senior notes due 2021 at par (press release)

M&A / Growth Projects

• Spectra Energy Corp. announces plan to drop-down all of its remaining US Transmission and Storage assets to SEP by year end 2013 (press release)
  • Transaction will lead to SEP raising its distribution increases from 1 cent per quarter from 0.75 cents per quarter
  • More details to come on SEP’s second quarter conference call on August 6

• Atlas Resource (ARP) announces acquisition of 466bcf of natural gas reserves from EP Energy for $733mm (press release)
  • ARP to acquire 466bcf of 100% natural gas reserves that are 93% proved developed from EP Energy E&P Company
  • Transaction expected to close in 3Q 2013, and is expected to be immediately accretive to distributable cash flow
  • Assets located in Raton (New Mexico) and Black Warrior (Alabama) basins
  • Asset Details:
    • Current net production on acquired assets of 119 mmcf/d
    • Annual decline rate of 8-10%
    • Production costs of approximately $0.90/mcf, ad valorem taxes of approximately 9%, transportation and gathering expense of approximately $0.35/mcf

• Kinder Morgan Energy (KMP) announces new business that will own, lease, acquire natural resource properties (press release)

• Western Gas (WES) announces $285mm in new growth projects (press release)
  • Two projects: (1) a JV with EPD to own two fractionation trains at Mont Belvieu, TX and (2) new processing train at Lancaster plant in DJ Basin
  • These projects in addition to $575mm growth capex budget for 2013
  • WES exercised option to invest in and own 25% interest in JV with EPD
    • $120mm expected capital contribution in 2013 to JV
  • WES to build a second 300 mmcf/d processing train at Lancaster plant
    • $165mm capital investment, with 50% spent in 2013
    • 200 mmcf/d contracted with APC
    • Expected to be in service by 1Q 2015

This week’s employment release was better than expected, sending stocks higher, and saving MLPs them from a second straight weekly decline.  The MLP Index got back some of what it lost last week with a 1.4% gain, but is still 4.0% from its May 22 peak.  Just about all of its week over week gains happened Friday, when the index was up 1.4%.   Yield on 10-year treasuries, which closed last week at its 52-week high, dropped down to 2.075% Thursday before spiking again to just below last week’s close.   Crude was up 4.4% for the week, which helped propane end the week slightly higher than last week.  Natural gas was down 3.9% week over week, which probably contributed to ethane finishing the week below $0.26/gallon for the first time since late February.

With MLPs back to their winning ways, expect to see more capital markets activity (i.e. equity deals) in the coming week.  I think MLPs will again take their cues from the broader stock market this week, which hopefully will uncover buying opportunities like we saw Wednesday and Thursday of this week.   As mentioned last week, MLPs tend to bounce following a 4%+ down week, then drop big in the subsequent week.

I don’t have much else to say, being a bit distracted this weekend following my mother-in-law’s successful tumor removal surgery Friday in Houston.  She had a tumor the size of two fists in her thigh, but its out now and she is recovering well.  I need her to make a full recovery as soon as possible so she can resume baby sitting duties, especially now that school’s out for the summer.  The clip below sort of combines the tumor and childcare talk above…

I am working on improving the site and getting my old posts organized better.  We’ve indexed all the posts and will have in place an easier way to navigate to your favorite classic posts on MLPs.

Winners & Losers

We had a broad range of winners and losers this week.  Most of the MLPs below didn’t release any news this week, but the leader, LRE, provided an operational update on its second quarter production that helped it take the top spot after its 9.8% drop last week.  XTEX and GLP were both in the bottom five last week, and rode the market strength back up this week.  OXF, volatile as usual, was down 13.7% after being in the top 5 last week.  Also notable gainer this week (+12%) was Constellation Energy (CEP), which I don’t include in my Winners and Losers list because it trades below $3 and pays no distribution.  CEP is now up more than 76% YTD.  Pretty soon, I’ll stop keeping such close track of OXF, because it trades just above $3/unit and pays no distribution…

OXF reclaimed its bottom spot in terms of YTD returns.  LINE escaped the bottom five, replaced by OKS.  There are only 6 MLPs that have produced negative returns YTD.  SMLP and AMID remained the top two MLP performers.

MLPs are still out front of stocks for the year so far, behind just MLP GPs, which are up nearly 24%.  Variable distribution MLPs outperformed the MLP Index this week, helped by an 11.4% gain from EMES, which benefited from initiation research reports from various banks following their IPO quiet period.

News of the (MLP) World

There was little news this week outside of the SMLP offices.  SMLP announced two acquisitions simultaneously, its first drop down and first third party acquisitions.  These acquisitions came on the heels of upwardly revised guidance in mid-May, so its been quite a coming out party here in 2Q 2013.

There were no equity deals this week, just SEP’s announcement that they would be filing an ATM agreement.  There was some IPO news with Devon announcing plans to launch a midstream MLP IPO process with plans to file the initial registration statement in 3Q 2012 (Bloomberg).

Equity

• Spectra Energy Partners (SEP) announces plans to file an equity distribution agreement to sell up to $200mm at the market

Debt

• Buckeye Partners (BPL) prices $500mm of 4.15% senior notes due 2023 at 99.81% of par

M&A / Growth Projects

• JV partners Kinder Morgan Energy Partners (KMP) and TransMontaigne (TLP) announce a $54mm, 900,000-barrel expansion at the 185-acre Battleground Oil Specialty Terminal Company, LLC (BOSTCO) (press release)
  • Expansion includes six, 150,000-barrel, ultra sulphur diesel tanks, additional pipeline and deepwater vessel dock access, and high-speed loading at a rate of 30,000 barrels/hour
  • Expected to be in-service by 4Q 2014 following the start of commercial operations at the previously announced $485mm BOSTCO oil terminal in 3Q 2013

• Summit Midstream (SMLP) announces $250mm drop down acquisition of Bison Midstream, LLC in the Bakken Shale (press release)
  • Bison system consists of 300 miles of low-pressure and high-pressure gas gathering pipelines and six compressor stations
  • Minimum volume commitments from anchor shippers representing 80% of projected annual revenue
  • Was funded with $200mm of borrowings and $50mm of common units at $31.53/unit

• Summit Midstream (SMLP) announces $210mm acquisition of a high pressure natural gas gathering system located in the liquids-rich window of the Marcellus Shale play from Markwest Energy (MWE)
  • Assets, primarily located in Doddridge  County , WV, consists of over 40 miles of newly constructed gathering pipelines, two compressor stations with 21,000 horsepower of compression
  • Expected to close 6/30/13 to be funded with credit facility borrowings

• Inergy (NRGY) announces completion of Tres Palacios header pipeline extension (press release)

MLPs had their worst week of the year (MLP Index down 4.3%)  to cap their worst month of the year (-2.1%, first negative month).  Interest rates appear to have been the trigger (10-year treasury rate spiked 12 basis points on Tuesday, up to 2.16% by Friday’s close), but its my contention that many marginal MLP owners were waiting for a reason to sell, and took the rate spike as a signal to exit.  With MLP pooled vehicles and ETFs, it has never been easier for capital to flow into and out of the sector.  Longer term retail investors have ordinary income recapture and $0 basis issues, but hot money that got in late 2012 or that owns MLP exposure through an ETF, doesn’t have the same impediments to selling.

Most everything else was down for the week as well: S&P 500 was down 1.1%, all MLP-related commodities were down, REITs were down, utilities and bond funds were down.  If a sector or asset class has a yield, or depends on cheap financing, chances are it was down.

A Quick Update of MLP Index Total Return:

• This week: -4.3%
  • Last week: +1.0%
  • Week ended 5/17: -0.4%
  • Week ended 5/10: +2.5%
  • Week ended 5/3: -0.1%
• May: -2.1%
  • April: +0.9%
  • March: +5.4%
  • February: +0.9%
  • January: +12.6%
• 2Q So Far: -1.2%
  • 1Q 2013: +19.7%
  • 4Q 2012: -3.4%
  • 3Q 2012: +8.9%
  • 2Q 2011: -2.3%
• 2013 Year to Date: +18.4%
  • 2012: +4.8%
  • 2011: +13.9%
  • 2010: +35.9%
  • 2009: +76.4%

The Alerian MLP Index’s 4.32% decline this week was the worst week for the Alerian MLP Index since almost exactly a year ago.   Last year, the week ending 6/1/12 saw the MLP Index drop 4.33%.  Last year’s version came two weeks after the worst week of 2012 (-5.3%).  This year comes on the heels of all time highs.  Looking back at weekly data over the years, when MLPs correct, it often starts with a big weekly drop, then there is a pop the following week, then another weekly drop.  If that pattern repeats, this upcoming week may be the bounce week, that draws in some dip buyers, before we see the Index decline again the week after.

I’m not expecting MLPs to bounce right back and make new index highs in the next few weeks.  I think it may be a while before we make a new high on the MLP Index.  Using weekly data, the longest time period between new all time highs in the Index was the time period from July 2007 to October 2010, or 168 weeks to be exact.  The longest we’ve had this year was 4 weeks in between fresh highs.  In 2011, there was a 34 week break between new highs, and in 2012 there was a 31 week break.  If the break we started last week persists for that long, we will have already seen the 2012 high point (all of these data points are for the price index, not including distributions)…

Or I could be wrong (which I have been several times already this year with regards to timing) and maybe we see MLPs bounce right back up to fresh highs, at which point you’ll probably see trampoline pictures here… I just don’t see what the catalyst would be.  Equity financing needs will continue will, and even if interest rates dropped back down, some of the shift away from income vehicles of all kinds seems to have begun, and its hard to stop that migration once it starts.  At some point value buyers come in and MLPs will eventually reach new highs.  I’m still holding waiting to deploy cash in client accounts for now.

I was looking for a hook for this week’s post, something about when you mess with a bull market you get the horns, or something about how the bull market in MLPs was just a bond bubble that dressed MLPs in a bull costume.  I don’t think these half-baked analogies have any merit, but I liked the pictures I came up with…

Winners & Losers

Not every MLP was down this week, actually 13 MLPs were up (76 of the ones we track were down).  HCLP was up 13.1% for the week to lead all MLPs after being in the top five last week.  HCLP seems to be back on track, up 56% since its December 18th bottom.  SXE was in the top 5 for the second straight week as well.  On the downside, MMLP led the losers.  Notable high flyer TLLP was down big as well, after leading the sector last week.  LRE was in the bottom 2 for the second straight week.  Notably, neither of the MLPs that issued equity this week were in the bottom five.

Looking at the year to date rankings, SMLP retains its top spot from last week.  BPL and TLLP were replaced in the top five by DKL and HCLP.  OXF, which has held the bottom spot in the sector for months now, was replaced at the bottom by EVEP, which was joined in the bottom five by new bottom five member LINE and existing member LRE.  Upstream MLPs, a bullish call of Guzman & Company research (me), are not doing great generally, but we don’t cover the three upstream MLPs in the bottom five, so there is that.

Looking at MLPs compared with broader securities, the S&P 500 is closing fast on the MLP Index, which has never underperformed the S&P 500 for consecutive years.  That may change this year if things continue as they did this month.  GPs are still well out in front of the MLP Index.

News of the (MLP) World

Equity

• Global Partners (GLP) files S-3 to sell up to $500mm in debt and equity securities

• Vanguard Natural Resources (VNR) prices offering of 7.0mm common units at $28.35/unit, raising $198.5mm in gross proceeds
  • Guzman & Company acted as a co-manager on the transaction

• Boardwalk Pipeline Partners (BWP) prices offering of 11.0mm common units at $30.12/unit, raising $331.3mm in gross proceeds

• Teekay Offshore (TOO) files equity distribution agreement to sell up $100mm of common units at the market

• Plains All American Pipeline (PAA) files updated equity distribution agreement to sell up to $750mm of common units at the market

Debt

• Cheniere Energy Partners (CQP) announces closing of $5.9bn of credit facilities to fund construction of Sabine Pass liquefaction trains 3 and 4, and is proceeding with construction

M&A / Growth Project

• Legacy Reserves (LGCY) announces acquisition of 668 boe oil reserves in the Permian Basin for $72mm from Resaca Exploitation, Inc.

• Teekay Offshore (TOO) announces acquisition of 50% interest in a floating production, storage and offloading unit from Teekay Corp for $204mm

• Markwest Utica EMG (JV between Markwest and Energy Minerals Group) announces plans to construct an additional (third) 200 mmcf/d gas processing facility at its Seneca processing complex in Ohio

• Boardwalk Pipeline (BWP) and Williams (WMB) announce key JV agreements related to proposed Bluegrass Pipeline and related fractionation, storage and export projects
  • Project includes construction of new NGL pipeline from producing areas in Ohio, West Virginia and Pennsylvania to an interconnect with BWP’s Texas Gas Transmission system in Kentucky
  • A portion of the Texas Gas system will be converted from natural gas to NGL service from Kentucky to Eunice, LA
  • JV will construct a new large scale fractionation plant and expanding NGL storage facilities in Louisiana and constructing new pipeline to connect these facilities to the Texas Gas system
  • Project expected to be in service in late 2015