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Category Archives: MLP Market Post
MLP Week Thoughts: Watch for Creeping Staleness
Before I get into this week’s news and thoughts, I want to take minute to reminisce on the last 365 for MLPs and the market. Last year, on April 28, 2011, the MLP Index closed at 390.0, its highest close for 2011. The next five trading days were down, chopping 6.6% off the index in the process. MLPs continued lower throughout the summer, bottoming at 315.9 in August, a full 19.0% below the 4/28/11 closing level. A remarkable fall and Christmas rally sent the MLP Index back above 390 on the first trading day of 2012. Will this May bring back the downside volatility? Probably not without a tax scare or an interest rate spike back above 3%, but its always good to remember that volatility happens, even if MLPs have proved quite stable year to date. The S&P 500 peaked in 2011 on April 29th at 1363.6, and had a similar slide after that, bottoming 19.4% lower at 1099.2. Stocks recovered slower than MLPs, but the S&P 500 finished 2011 14.4% higher at 1257.6, still 7.8% below its late April peak.
Back to this week’s more recent history. MLPs finished up 0.4% in a week that saw virtually every asset class rise. The S&P 500 finished above 1400 again after a 1.8% rise week over week. U.S. treasuries rose, sending the benchmark interest rate down to 1.93%. Gold and oil were up a bit, and natural gas futures jumped 13.5% all the way to $2.19, so still a long way to go back to most research analyst’s long term natural gas price decks (~$4.00 per mcf). MLPs continued their restrained volatility (see my earlier commentary on how few days in 1Q MLPs changed in price by more than 1% in a day, a near record); the 0.4% move trailed most stocks, including energy stocks (XLE, +2.7%) and utilities (+1.4%).
MLP earnings results were inline or positive, and NRGY took a major step towards fixing its problems (more on that below), so why the under-performance? My guess is that in these weeks when risk assets are rising, investors get more excited about other sectors and less interested in dividend stocks and MLPs. But even the Dow Jones U.S. Dividend 100 Index was up 1.0% last week. Maybe there is some investor saturation after the massive equity issuance levels for MLPs over the last 2 quarters. By investor saturation, I mean perhaps we are nearing the point where most everyone that knows about MLPs and likes them is already invested in them, and without a step change in institutional interest, MLPs may be range bound as a sector. Of course, there are always individual MLPs popping and dropping by large amounts, but this year those pops have been offset by drops of other MLPs, and larger cap MLPs that dominate the MLP indexes have mostly stagnated or sold off this year.
Maybe MLPs have just gone stale compared with other securities. According to Merriam Webster, the definition of stale is (1) tasteless or unpalatable from age, (2) tedious from familiarity, or (3) impaired in vigor or effectiveness. Sounds about right, but its usually times like this when everything is calm that the bottom drops out.
Earnings Recap
- LINE – beat analysts’ expectations
- Lower interest expense and capex than expected, higher production from acquisitions, good coverage
- 100% of current natural gas production hedged through 2017, that’s almost 6 years!!
- 100% of current oil production hedged through 2015
- Solid results out of Hogshooter wells, which are really expensive ($8-$10mm) by MLP standards, but apparently carry really high returns 100%+ IRRs
- GEL – inline or slightly better than analyst’s expectations
- Less than expected volumes from Gulf of Mexico pipeline
- APU – beat analysts’ expectations
- Benefited from lower wholesale propane costs with higher retail propane margins
- WPZ – beat analysts’ expectations
- Solid volumes for pipeline and gathering businesses
- NGL production was up 18% yoy, but margins were down 13% quarter over quarter
- TCP – below analysts’ expectations
- Weak volumes on Great Lakes system due to warm weather, high storage inventory
- NS – below analysts’ expectations
- Weak asphalt results
Long WPZ, no other positions in names mentioned above.
Upcoming Earnings
- Next Week: BWP, ARLP, PVR, HEP, EEP, EPD, OKS, CLMT, MMP, SXL, SPH, UAN, LGCY, NGLS, WES, BPL, SEP
- Week After: LRE, TLLP, CMLP, PAA, PNG, XTEX, CHKM, OILT, QRE, MEMP, RNF
News of the (MLP) World
No capital markets transactions this week, but aside from earnings releases above, there were a few news items of note.
- NRGY Announces Effective Distribution Cut Smokescreen with Sale of Propane Business Accompanying 46.8% Distribution Cut (press release)
- NRGY sells propane business for $1.8 billion, moving one more big step closer to transforming completely into a GP holding company with very lucrative IDRs
- After drop down of remaining midstream assets, transformation will be complete
- No word yet on when NRGM buys out the IDRs of NRGY in a merger akin to what NRGY did when it bought NRGP, but at some point those 50% flat IDRs are going to cut into NRGM’s cost of capital…and the financial engineering dance will continue
- NRGY unit price popped 20.4% on the week, still 52.5% lower year over year
- NRGY also announced 46.8% decrease in quarterly distribution. Distribution cut was expected, and the announced $0.375 distribution was above most analyst expectations, which mostly called for a 50% cut in distribution to $0.3525
- Analysts universally praised the sale and distribution strategy going forward, and there were several analyst upgrades
- The deal was sort of similar to the deal back in 2004 when NRGY purchased the propane assets of troubled MLP Star Gas. This time, SPH gets to play the savior role, and the number of MLPs operating retail propane assets has dwindled down to 3 majors (APU, SPH and FGP). This is quite a change from 1994-1996 when 8 propane MLPs went public in 2 years.
- Petrologistics (PDH) files Updated S-1 with Pricing (filing)
- This is going to be a very large IPO. Base deal calls for $700 million IPO (35.0 million units at $20.00 per unit midpoint). This would make it the largest MLP IPO ever (not counting KMI, which is a corporation), surpassing EPB’s $500 million IPO in 2007.
- PDH will not have a minimum quarterly distribution, instead PDH will vary its cash distributions with variances in its quarterly cash flow. The S-1 estimates that PDH will distribute $2.20 per unit, which would equate to an 11% yield at the midpoint IPO range.
- PDH will have $343.0 million in debt pro forma the IPO, and $47.3 million in cash, for enterprise value of $3.1 billion
- 8.3x EV / projected 2013 EBITDA at IPO
- 33.5 million units ($670 million) are being sold by its PE sponsors Lindsay Goldberg and York Capital (through a subsidiary Propylene Holdings)
- BBEP Announces $98 million Acquisition (press release)
- BBEP arrives fashionably late to the 2012 E&P MLP acquisition party
- 5.9 mmboe proved reserves in Wyoming
- 100% oil production of approximately 600 boe/d, 20+ year reserve life
MLP CEO Compensation Review
The final annual proxy statements were filed this week, so we now have compensation data for all MLPs. Stay tuned later this week for my annual review of MLP CEO compensation. A quick preview: the top 3 base salaries in the MLP space went to GLP’s Eric Slifka ($800,000), ATLS’s Edward Cohen ($750,000), and LINE’s Mark Ellis ($746,154). The top 3 highest in total compensation: ATLS’s Edward Cohen ($20.9 million), APL’s Eugene Dubay ($9.4 million), and LINE’s Mark Ellis ($9.0 million). As you can see, there is no correlation between market capitalization of a given MLP and its CEO’s compensation. GLP and APL/ATLS are not even in the Alerian MLP Index that includes the 50 largest MLPs (roughly 50, there are some companies with multiple Index constituents, like KMP/KMR and ETP/ETE). LINE compensation numbers make more sense. LINE is the 9th largest MLP and far and away the largest E&P MLP. Also, Mark Ellis is not a founder of LINE. MLP founder CEOs tend to have lower salaries and instead reap massive profits from GP and LP ownership (e.g. Rich Kinder’s famed $1 salary).
MLP Winners & Losers: Nat Gas & Inergy Bounce, Wide Angle Still Ugly
Everything was up this week, but MLPs were near the bottom of the list as shown below. Natural gas futures were up more than 13% week over week, driving the energy sector higher (XLE was up 2.6%). The S&P 500 was up 1.8%, breaking a 2 week streak of MLP outperformance.
Propane doesn’t look so bad this week, but its all about timing. NRGY’s announcement of better than expected distribution cut (sort of like a weaker than expected punch in the face) and the announcement NRGY will exit the retail propane business sent it up 20.4% for the week to $19.08. Widen the lens a bit, and the picture is not so bright, last April 27th NRGY closed at $40.24 per unit, so that’s more than 50% decline in value last 12 months. But hey, could have been worse, and it appears NRGY plan to spin off NRGM with excessive IDRs, then morph NRGY into a pure play GP holdco may work.
In other names, CQP had a huge week even with higher natural gas prices, NKA continued its strong trading, and FGP caught the “propane may not be absolutely terrible” wave to a strong week as well. NS had ok earnings, but flat distributions and not many very high growth expectations sent it lower.
Remember that wider lens we were talking about for NRGY and OXF? Even with the sharp uptick this week, OXF and NRGY remain in the cellar on a year to date basis. CQP is far and away the big winner this year to date.
The wide look at year to date performance highlights that even with the great week natural gas had, natural gas remains the biggest loser. With the S&P 500′s outperformance this week, MLPs are back to more than 10% underperformance year to date. Note that doesn’t include distributions. GPs are way out in front.
Distribution Announcements
30 MLPs and 3 GP holding companies announced distributions this week. So far this quarter, 60 MLPs have announced distributions, averaging 0.9% distribution growth quarter over quarter. 37 of those 60 MLPs have raised distributions. 6 out of 7 GP holding companies have announced distributions, 4 announced raises, average dividend / distribution growth of 4.2%.
- LINE raised 5.1%
- APU raised 4.9%
- EROC raised 4.8%
- ATLS raised 4.2%
- MWE raised 3.9%
- CHKM raised 3.8%
- MMP raised 3.1%
- OILT raised 2.9%
- RRMS raised 2.8%
- PVR raised 2.0%
- PSE raised 2.0%
- WPZ raised 2.0%
- SXL raised 1.8%
- APL raised 1.8%
- DPM raised 1.5%
- HEP raised 1.1%
- EXLP raised 1.0%
- VNR raised 0.9%
- LGCY raised 0.9%
- EVEP raised 0.1%
- NRGY cuts distribution 46.8%
- OXF held flat, but cuts subordinated distribution to $0.10 (77.1% less than common unit distribution of $0.4375, saves $3.5 million per quarter)
- RGP, MMLP, CPLP, NKA, NS, NSH, STON, NMM, ETP, ETE, MCEP announced flat distributions
More to come in Week Thoughts tomorrow or Sunday on earnings this week and next.
MLP Week Thoughts: Earnings Incoming, Strap In
The start of earnings season was in focus this week, and while AAPL had a rough week (down 5.3%, second straight down week), the rest of the S&P 500 did fine, up 0.6% on the week. MLP performance was varied this week, but the large caps did very well, so the MLP index was up 1.8%, gaining on the S&P 500 slowly. Its a race to the bottom between interest rates and natural gas prices. Both were down this week, natural gas is down to $1.93 and the 10-year is down to 1.97%.
MLPs separated from the S&P 500 and the energy industry on Thursday and Friday, as the broader market rally slowed as the week progressed. That could have been a result of decent earnings for KMP and the implications for earnings upcoming this week.
How Good Will Earnings Be?
Earnings season will kick into full gear after we got warmed up with KMP earning Wednesday of last week. For a sense of how earnings will go, let’s review how some market forces have trended and how that might impact certain types of MLPs. Certain MLPs will have very good earnings, others will have scary earnings, and of course, at least one MLP (NRGY) will cut its distribution. Active, careful MLP selection is more important than ever.
- Natural gas prices remain very unattractive
- Bad for gathering companies with percent of proceeds (POP) contracts
- Bad for gathering volumes in predominantly dry gas plays (like Barnett and Haynesville)
- Bad for natural gas storage players
- Bad for Texas intra-state natural gas system owners (ETP and KMP)
- Bad for E&P MLPs with heavy concentration of natural gas production
- Good for fertilizer producers
- Good for LNG export facility developers
- Bad for compression providers
- Oil prices remain high, Oil drilling activity remains high
- Good for oil focused pipeline MLPs with assets located near heavy activity areas (like Bakken and Eagle Ford)
- Good for E&P MLPs with heavy concentration of oil production
- Processing margins and NGL prices remain very attractive
- Good for MLPs with processing capacity close to Mt. Belvieu
- Good for gathering MLPs with fee-based contracts in liquids-rich plays
- Good for gathering MLPs with percent of liquids (POL) or keep whole contracts in liquids-rich plays
- Good for NGL pipeline operators debottlenecking Conway to Mt. Belvieu
- Good for E&P MLPs with heavy concentration of liquids production
- High propane prices relative to natural gas causing volume declines for propane MLPs
- Coal prices and demand are very weak, but exports of met coal are in high demand
- Bad for coal royalty players and coal producers
- Good for coal export terminal operators (like KMP)
- Refined products demand remains weak
- Bad for refined products pipeline operators (but rate increases are coming next quarter)
- Much warmer than average weather
- Bad for propane MLPs
- Bad for heating oil
- Bad for natural gas prices
Kinder Earnings
KMP earnings came in ok, roughly inline with analyst expectations. High oil and liquids prices helped KMP’s CO2 business outperform expectations again, and coal export growth helped boost terminals results. Those segments combated weaker results in natural gas pipeline and refined products pipeline segments. There are many moving pieces in the KMP/KMI/KMR/EP/EPB puzzle right now, but a Kinder offered some clarity and guidance on drop downs. KMI will drop down all of Tennesse Gas Pipeline and portion of El Paso Natural Gas Pipeline to KMP in 3Q12. KMP will fund a portion of those drop downs with concurrent agreed-upon sales of assets like KMP’s 50% stake in Rockies Express. Also, EP has offered to sell the remaining 14% of the Colorado Interstate Gas and all of Cheyenne Plains Pipeline to EPB. Other notes:
- Terminals organic capex was increased by $350 million, most of it related to build out of coal export facilities. As discussed here, coal exports were higher in 2011 than any year since 1991. This is another case when owning the infrastructure is better than owning the producers.
- 1.1x coverage for the quarter. This is enough for KMP, which (differently from EPD) chooses to pay out almost all of its cash flow and externally finance growth. Management expects that KMP’s coverage will dip below 1.0x for the next 2 quarters, but will be above 1.0x for the 4th quarter and full year.
News of the (MLP) World
Despite no capital markets transactions and minimal M&A announcements, it was a really busy week for MLP news. There were 21 distribution announcements (details below on those), 1 earnings announcement (discussed above), a new MLP filed, a new MLP ETF launched, several expansion projects announced and 1 LNG terminal authorization announcement.
NRGY Credit Facility Cut – NRGY released 8k stating it’s credit facility decreased to $550mm from $700mm. The amended credit agreement allows for NRGY to sell up to 5mm NRGM common units. It also allows for NRGY to sell all of the assets related to U.S. Salt.
- Still no clarity on how much the distribution will be cut, but I expect another sell off to happen when the distribution does get announced. NRGY won’t bottom until that final big sell off, in my opinion.
New MLP Filed – From Charlesbank, the private equity group behind Regency Gas Services (before they sold it to another private equity group, HM Capital), comes another gathering and processing MLP called Southcross Energy Partners, L.P. (SXE). According to the initial S-1, SXE is expected to earn EBITDA of $61.5 million in the next 12 months, and $48.0 million in distributable cash flow. That implies around a $650 million enterprise company, which is pretty big for an MLP just going public. SXE expects to generate around 63% of its gross margin from fixed-fee or fixed-spread contracts. 20.8% of its 2011 revenue came from Formosa Hydrocarbons Company (S-1 Filing)
Positive LNG Developments
- Sempra Energy (SRE) signed development agreement with Mitsubishi and Mitsui for its Louisiana LNG facility. Construction is expected to start late 2013 with operations starting in late 2016 (press release)
- Cheniere (LNG / CQP) received FERC authorization to construct and operate liquefaction facilities at Sabine pass in Louisiana. This comes on the heels of CQP taking the steps to arrange up to $4B in financing yesterday (press release)
Another OKS Growth Project - OKS announced plans to invest $350mm in Cana-Woodford Shale. Organic capex budget is now expected to be $1.5 billion in 2013 and $1.0 billion in 2014.
Memorial Productions Partners Acquisition – MEMP’s second acquisition in 2 months, this one ($38 million) a bit more than twice the size of the first ($18 million). Properties purchased are in East Texas and North Louisiana. Sponsor support is clearly there, but an acquisition every month until gas prices rebound is probably asking too much.
- 6-6.5x EBITDA range, paid around $1.70 per mcfe of proved reserves
- Acquisition will be paid for with revolving credit facility, which still has $100+ million available
- MEMP remains the MLP with the most concentration of natural gas production (95%+)
New MLP ETF Launched - ticker MLPA, sponsored by Global X, will track the Solactive MLP Index (please let me know if you have heard of either Global X or Solactive MLP Index before right now). Big selling point for MLPA is the lower expense ratio of 0.45%. (read more)
Distribution Announcements This Week
21 Distribution / Dividend Announcements this week for an average quarter over quarter change of 2.1%:
- XTXI ups 9.1%, 33.3% year over year
- CLMT ups 5.7% qoq, 17.9% yoy
- WES ups 4.5% qoq, 17.9% yoy
- TLLP ups 4.1%, 11.9% since IPO
- OKS ups 4.1% qoq, 10.4% yoy
- KMP ups 3.4% qoq, 5.3% yoy
- KMI ups 3.2% qoq, 10.3% since IPO
- XTEX ups 3.1%, 13.8% yoy
- EPB ups 2.0%, 10.9% year over year
- CMLP ups 2.0% qoq, 13.6% yoy
- SEP ups 1.1% qoq, 4.3% yoy
- BBEP ups 1.1% qoq, 9.0% yoy
- LGCY ups 0.9% qoq, 4.7% yoy
- CQP, GSJK, MEMP, GLP, NRP, RNO, SPH, TLP held distribution flat qoq
Disclosure: The information in this article is not meant to be financial advice, I am not your financial advisor and I am posting my comments for informational purposes only.