Category Archives: MLP Market Post

Rhino Resources (RNO), an MLP so small it’s not in the Alerian MLP Index, released news about its Utica acreage yesterday.  RNO is predominantly an operating coal company in a time when spot steam coal prices are dropping along with natural gas prices.  It carries a 9.3% current distribution yield.

RNO gets lumped in with another small, relatively new MLP that mines coal: Oxford Resources (OXF).  OXF has seen its business deteriorate in recent quarters more than other coal operators and has seen its price drop 40% so far in 2012.  RNO is more than twice as large as OXF in terms of market cap, but OXF actually sells more tons of coal (4.9mm for RNO in 2011, 8.5mm for OXF).   So, its not too surprising that RNO would trade down in the face of weak earnings from OXF and weak trending commodity prices.

The one unknown potential catalyst for RNO has been the 10,000 acres of land in the Utica shale it purchased before the Utica buzz really began.  The best performing MLP in 2011 was EV Energy Partners (EVEP), after investors realized the Utica acreage it held was going to be very valuable.  RNO investors like me are hoping for a mini-replay of the EVEP story from last year.

The deal announced yesterday was for 1,500 of RNO’s 10,000 net acres.  Chesapeake has agreed to pay RNO $9.0 million up front ($6,000 per acre) plus a 20% royalty on future gross proceeds received for oil and gas produced from that acreage for a five year term, with a three year option.  (Press Release)

RNO has disclosed previously that it owns 1,500 acres outright, and then acquired an additional 8,500 net acres with a group in 2011, paying $20 million for its net 8,500 acres.  The Chesapeake deal must be on the 1,500 acres the company owns outright.  If the group that collectively owns the rest of the acreage RNO is involved in were to execute similar lease arrangements on the remainder of its acreage, RNO would stand to collect an additional $51 million in up front fees, plus royalties.  That’s a fantastic return for RNO.  The $9.0 million in fees alone will increase EBITDA by 11%.

In the last few days (as shown in the chart above comparing RNO with OXF and the MLP Index), RNO has started to rebound sharply, perhaps the bounce was just a reaction to overselling last week…or perhaps it had something to do with this deal.  I purchased RNO for clients right before the end of 2011, betting on its valuation attracting buyers in 2012 and the potential Utica catalyst.  So, it wasn’t me bidding it up this week, and it won’t be me buying today, but I will be smiling…

Related: My list of Utica Puns, Uti-Can You Dig It?

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.  Long RNO.

It was an active week again for MLP M&A announcements, less so for capital markets activity, although there was one equity offering, an overnight deal from Plains All American for $400 million, which priced at a 2.77% re-offer discount to the previous close.  That discount was the lowest of 2012, and lowest since EPD’s December offering at a 2.74% discount.  MLPs were down slightly on the week, although small cap MLPs were largely up on the week, as discussed in my Winners & Losers post from yesterday.

As shown in the chart below, the MLP Index tracked the S&P 500 very closely until Thursday morning when the S&P 500 jumped and MLPs didn’t.  Thursday’s rally was largely attributed by the financial media to a resolution to the Greek issue.  Stocks continued up Friday after a strong unemployment report.  MLPs stagnated Thursday, as natural gas supply report came in higher than expected (i.e. less of a draw than expected).  Weather nationally continues to trend much warmer than normal, helping to hold natural gas prices down (natural gas futures down 6.1% week over week).

I didn’t make it to CERAweek this year, but clearly many reporters made the trip, see below for some of the reports from the speeches there.  Nothing earth shattering, and a lot of CEOs talking their books.  E&P CEOs believe natural gas is the future, and if we were able to generate more demand for natural gas, those E&P companies would realize higher prices.  Utilities are trying to use more natural gas, and petro-chemical companies would prefer that the US did not export natural gas.  One interesting article was about how shale gas will struggle to be developed around the world in the same way that it has developed in the U.S. to date.

News and Links of the (MLP) World

M&A:

• El Paso stockholders approve merger with KMI (WSJ Deal Journal, Dealbook coverage).  Not a big surprise, KMI has already lined up buyer for the E&P business and EP shareholders got a pretty good deal for their shares.  EPB unitholders have more with which to argue against the deal, but I believe KMI/KMP will take care of EPB unitholders at some point down the road, as long as it benefits KMI to do so.
• Memorial Production Partners executes first drop down acquisition, buying properties in East Texas from its financial sponsor for $18.3 million in cash. 20 bcfe of reserves with a 23 year reserve life, 82% of the production is natural gas.  Transaction is accretive to DCF and to MEMP’s coverage ratio.  This is a small start to the expected bounty of drop downs that MEMP will acquire from its parent over time, but it shows MEMP can support distributions and coverage by making acquisitions.   (press release)
• Linn Energy, LLC announced a $175 million acquisition, almost 10x the size of MEMP’s announced acquisition.  This makes more than $1.4 billion in acquisitions for LINE so far in the first quarter 2012.  (press release)
• Natural Resource Partners (NRP) announced a $58.9 million acquisition, funded with cash and debt.  NRP is acquiring rail loadout, associated infrastructure assets and a contractual overriding royalty interest on tonnage at Sugar Camp coal mine in Illinois.  Acquisition will add approximately $7.5-8.5 million in additional distributable cash flow to NRP’s distributable cash flow. Seller was the Cline Group. (press release)

Capital Markets Deals:

• PAA Equity – priced 5.0 million units for $80.03 per unit (press release)
• DPM priced $350 million senior notes due 2022 at 4.95% (press release)
• EVEP priced $200 million add on of 8.0% senior notes due 2019 at 7.28% (press release)

Other:

• EPD, EEP and APC have signed up shipper commitments for 232,000 bpd of NGL capacity on the joint venture’s Texas Express Pipeline. (press release)
• CVR Energy Inc files S-1 to eventually sell some of its units of CVR Partners. (S-1 Filing)
• GLP announced better than expected earnings, despite persistent weak market conditions. (press release)

Interesting Articles

• CERA: Recreating U.S. Shale Gas Overseas Faces Challenges (Fuelfix)
• The Natural Gas Riddle (WSJ Deal Journal)
• Chris Helman reports on Tillerson CERA speech (Forbes)
• Chris Helman reports on CERA speech by Dow Chemical CEO Andrew Liveris, where he discusses how LNG exports will harm the petrochemical industry and the economy (Forbes)
• Interesting that Liveris sees domestic market for ethane to be structurally long for the next decade, based on comments from DOW’s quarterly conference call, maybe that was predicated on LNG exports being stalled somehow with his help.
• More on the forces lining up against natural gas exports from Wall Street Journal (Odd Alliance Says No to Gas Exports)

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.  Long KMI, MEMP, EPB.