MLP Market Update
Commentary on Master Limited Partnerships

Monthly Archives: February 2012

Feb 26th, 2012

MLP Market Post

MLP Week Thoughts: Too Quiet…Expect Equity

MLPs had a quiet week, up 0.8%, the 4th straight positive week for the Index.  Click here to read my post about the week’s winners and losers, and how the index fared compared with a melt-up in gold and oil resulting from geopolitical tension with Iran and geo-financial exhuastion with Europe and Greece.

The MLP Index benefited this week from solid earnings announcements, rising oil prices and a lack of equity issuance.  As a result of a sort of no-catalyst week for MLPs, the Index largely tracked the S&P 500 again this week.

Last week’s earnings were mixed depending on asset type and asset location of the announcing MLPs.  A few notable names that announced last week help illustrate the point:

  • NGLS strong earnings (press release)
    • Higher than expected NGL volumes
    • Reiterated guidance even if ethane prices remained flat
  • EROC weak earnings (press release)
    • Weaker results than expected in E&P on weaker prices
    • Weaker midstream segment results resulting from lower volumes and processing margins
    • Solid coverage of 1.3x for the quarter
  • WPZ earnings (press release)
    • Solid quarter, EBITDA slightly higher than consensus
    • DCF beat street expectations as a result of lower maintenance capex
    • High NGL margins the driver
    • 2012 guidance revised higher
  • PVR solid earnings (press release)
    • Weak results in coal segment (lower prices, lower volume)
    • Solid results in midstream segment despite lower prices
    • 2012 guidance better than 2011 actual, but not by much
  • TOO earnings (press release)
    • Strong results in shuttle tanker segment, weaker results in other segments
  • APL earnings (press release)
    • Slightly weaker than expected results
    • 2012 guidance seemed to disappoint
  • LINE earnings (press release)
    • Beat expectations on better than expected production for recently completed acquisitions.

This week’s MLP earnings calendar is dominated by small cap MLPs.  Most of the big names have announced earnings already.

  • MLPs with earnings this week: EVEP, GSJK, DPM, CMLP, XTEX, WES, BBEP, CHKM, OXF, CPNO, MWE, MMLP, RNO, VNR.
  • I’ll be interested in particular to hear about natural gas drilling curtailment effects from dry gas focused MLPs like CMLP, CHKM and XTEX.
  • Also it will be interesting to hear from CPNO and MWE about the NGL market and their thoughts on NGL prices.
  • Finally, everyone will be curious to hear about the Utica from EVEP.

Not that I’m Complaining, but Where are the Equity Offerings?

For investors that are waiting for better entry prices, potentially from follow-on equity offerings that knock prices down to attractive levels, last week offered nothing, no equity offerings for the second straight week.   Its fairly typical to see fewer equity offerings around earnings season.  Despite not have a public offering since February 10th in the MLP space, this year has seen more equity issued year to date than at this point last year (if you don’t count KMI IPO in Feb 2011), thanks to 9 follow on deals in January, including the largest one ever by LINE ($703 mm).  Year to date, MLPs have issued $2.8 billion of equity compared with $1.1 billion through the same time period last year.

So, we’re on an equity issuance break, which is fine with me.   That will not last.  Each week when there is no equity issued increases the backlog, which may lead to a massive amount of issuance in a short time period like we saw late last year.

From July to October of last year, equity issuance slowed considerably, the result of challenging equity capital markets, when volatility was peaking and MLP prices were trading lower.  The opposite has been true the first 2 months of the year, we’ve seen benign markets and all time high valuations.  So, its my bet that MLPs are gearing up to issue equity en masse as soon as possible.  So, if you have cash burning a hole in your brokerage account, I expect you to have buying opportunities around equity offerings in the next few weeks.

KMI Sells EP’s E&P Business, Contingent on Close of EP Acquisition

Big news came out late Friday afternoon, when El Paso announced the sale of its E&P business to a consortium of large private equity firms for $7.2 billion (press release).  This is a positive for KMI, which is currently in the process of buying EP.  This sale represents another step in KMI’s plan to acquire EP, and the proceeds will be used to reduce the cash KMI will need to fund the acquisition of EP.  The $7.2 billion is in line with expectations of value that I heard / read.  KMI seemed to react positively in advance late Friday, and perhaps the reaction next week will be muted as a result.


Other News of Note:

APL Added to Swank Index – Swank Capital announced that Atlas Pipeline Partners (APL) would be replacing Inergy (NRGY) in its Cushing MLP High Income Index, a response to the announcement by Inergy of its intention to reevaluate (cut) its quarterly distribution next quarter.  The change will be effective after the close of trading Wednesday, Feb. 29th (press release).

EXLP Announces $184 mm Drop-Down – EXLP to acquire compression (contracts and compressor units for 40 customers) and processing assets (a 10 mmcf/d processing plant in the northeastern U.S.) from parent company Exterran Holdings for approximately $184 million (press release).

ARLP Acquisition – Alliance Resource Partners (ARLP) announced the acquisition of the coal assets of Green River Collieries, LLC (Green River), located in Western Kentucky.  The transaction includes approximately 40.0 million tons of coal reserves, currently producing approximately 2.1 million tons of coal per year (press release).

VNR Exits A-Basin – Vanguard Natural Resources, LLC (VNR) announced the company would be exiting its non-operated (and non-strategic) position in the Appalachian Basin, in exchange for retiring 1.9 million common units previously held by the Nami Group, a founding partner of Vanguard.  1.9 mm units is equivalent to approximately $52.8 million in VNR units at today’s prices (press release).

Feb 25th, 2012

MLP Market Post

Winners & Losers: Oil and Gold Outshine MLPs

The MLP Index finished this week up for the fourth straight week, and up for 7 of the last 8 trading days.  It was also the second straight week that the index finished at all time highs.  The S&P 500 finished up for the second straight week, as well, but only slightly.  Oil was the story this week, rising 5.5% on geopolitcal tension.  Natural gas was down 4.5%, certainly more reflective of domestic supply and demand than oil prices.  GPs were up 1.9%, behind strong weeks from KMI (+3.1%), XTXI (+4.5%) and TRGP (+5.7%).

HEP was down the most this week, going from first last week to worst this week, but remains more than 11% up for the year.  EROC was down 4.5% after announcing weaker earnings on low natural gas prices.  FGP was the leader this week, recovering from Moody’s downgrade a few weeks ago, and maybe surprising the market by not cutting its distribution, and declaring a flat distribution for the 65th straight quarter.

Year to Date

MLPs are catching up to the S&P 500 for the year.  Gold continues to outperform the market, up 13.3% YTD.  Oil has reached nine month highs, and is up 10% for the year, and natural gas continues to trade poorly as we wait for drilling to slow down or demand to pick up, both unlikely.  General partners holding companies are outperforming year to date, as expected.  I expect to see KMI perform well next week after the $7.2 billion sale of EP’s E&P business on Friday, further adding to GP outperformance.

The bottom 5 year to date saw some turnover last week.  FGP, SPH and BPL climbed out of the cellar, crowded out by 3 coal MLPs: OXF, NRP and ARLP.  In the top five, little changed, although HEP fell out of the group, replaced by AMID.

More detailed thoughts on the week in tomorrow’s Week Thoughts post.  Have a great weekend, I’ve got my hands full with my son’s 3rd birthday today.

Feb 24th, 2012

MLP Market Post

Natural Gas is Old News, NGL Price Decline in Focus, is Oil Next?


The talk for the last few months has been natural gas price declines, drilling curtailments, adjusting to a newer normal of natural gas prices below $3.00 on a sustained basis, after having only recently adjusted to the new normal of natural gas below $4.00.   The focus has shifted to NGL prices this quarter.  Earnings calls Q&A’s were chock full of NGL and ethane questions, and with good reason.  Ethane prices peaked on October 21, and have dropped since around 47% through last Friday, and overall NGL prices are down 18% over the same time period.  Its not just the decline, but the decline as a percentage of crude oil prices that is significant.  Ethane is down to around 20% 0f crude oil price, compared with a typical range of 40% to 55%, according to the chart below from Raymond James.

Ethane consumption decreased 3.5% from December (a record high month) to January.  That decline in demand has been rationalized away by the people that know more about NGLs than everyone else as mostly related to planned plant turnarounds and downtime, and most expect NGL prices to firm up in the second half of 2012.

Since 2009, MLPs with well-located processing and fractionation assets have been the primary beneficiaries of high NGL prices. Names like OKS, NGLS, and EPD have posted great numbers in their NGL businesses.  NGL-focused MLPs have been able to identify very attractive processing and fractionation projects to develop recently and have been holding up the MLP space (along with crude-focused MLPs).  If the NGL party were to end, the MLP sector would face some serious headwinds.

To be clear, the party doesn’t end at today’s prices, which are still historically high.  As EPD’s Jim Teague said on EPD’s earnings call: “we talk about softness [in ethane prices], we’ve gone from phenomenal margins to just great margins. We’ve had quite a few turnarounds. We’ve lost probably 50,000 barrels a day; that’s to be expected. We’re still pretty excited [about ethane prices].”

So questions have been raised on NGLs, and skepticism is developing as to the ability of petro-chemical demand to keep pace with NGL production from liquids-rich natural gas wells.  If NGLs were to break and become so oversupplied that NGL prices collapse in the manner that natural gas has over the last few years, would the rigs just move onward and upward to focus on crude oil?  How long after that before questions started to emerge about oversupply of crude oil?  Raymond James’ research team came out with a report this week that lowered their long term oil price target to $90 from $105, even as oil hits new nine month highs.  Is this a sign of things to come if the geopolitical situation in Iran calms down and the speculation in crude dissipates?  I think its possible.

Extrapolating Production Trends?

Speaking of oil production, there has been chatter from research analysts and journalists on the subject of American energy independence.  Citigroup released a report early this month that touted the potential for shale oil as the lever that will help America finally achieve Energy Independence (at least those from the Middle East, Canada is ok).  Even the EIA is sending muted signals of the possibility of liquids imports going away:

U.S. dependence on imported oil has dramatically declined since peaking in 2005. This trend is the result of a variety of factors including a decline in consumption and shifts in supply patterns.  The economic downturn after the financial crisis of 2008, improvements in efficiency, changes in consumer behavior and patterns of economic growth, all contributed to the decline in petroleum consumption. At the same time, increased use of domestic biofuels (ethanol and biodiesel), and strong gains in domestic production of crude oil and natural gas plant liquids expanded domestic supplies and reduced the need for imports. (EIA, June 2011)

Domestic oil production highest in 8 years.  The proportion of demand met from domestic sources over last 6 years to 81% according to department of energy.  But as shown in the chart below, crude imports are still double current production.  Not exactly drowning in oil…

Clearly we have a long way to go to achieve independence on crude oil, but factoring in growing exports of coal and natural gas, declining demand for gasoline from vehicle efficiency, and production increases it may be possible to have the overall energy balance swing to a national net export situation.

Can we Drill our Way to Financial Independence?

Energy independence is clearly a buzzword that gets used by research analysts to generate buzz.  Its pretty far-fetched to think that we may at some point be totally energy independent as a country.  Regardless of its likelihood, the conversation / debate is happening.  Just do a google news search for “Energy Independence”, and you get articles on both sides, such as:

  • The Myth of Energy Independence: Why We Can’t Drill Our Way to Oil Autonomy (the Atlantic)
  • Energy Independence Gives Opening for Renewables (Bloomberg)
  • Energy Independence, impending oil shocks (Smart Planet)
  • America Will be Energy Independent by 2030 (Daily Finance)

What I read in the above article by Smart Planet is that initial production rates for Bakken wells are not that impressive, with large decline curves.  At a current cost per well of $7 million, it would appear that the amount of capital and wells drilled (16,000 by the author’s estimation) to continue to achieve substantial growth in production out of Bakken is not feasible.  That ignores the potential for U.S. producers to advance up the learning curve, master the process of drilling thousands of wells per year and eventually lower the cost of each individual well.

Also, arguments that focus on oil production growth domestically not impacting global prices because of the massive expected demand growth out of China and India ignore the potential for our technology and mastery of shale development to be exported to other countries.  They ignore the potential for some other country to follow our lead and grow their own oil production from previously discarded reserves.

The debate should not be focused on whether or not it is possible for shale oil to solve our energy problem, because the truth is no one knows.  The discussion should be around the fact that the U.S. is growing oil production substantially for the first time in decades, and what that could mean.  Even if we don’t become energy independent, can this new oil production change our current economic outlook, or potentially change the world’s view of the U.S. dollar?  Will this new production allow us to hold on a bit longer to our status as the world’s reserve currency?  Can we hold on long enough to re-emerge as the dominant global economic force?  Is the production impact large enough to create an economic windfall from cheaper energy and create jobs to save us from a public balance stagflation crisis akin to Japan for the next few decades?  In short, can this new oil save the country?

Or, a different line of questioning: could this potential glut of oil destroy all hope of innovating cheap alternative energy sources?  Will our thirst for domestic production destroy the environment?  If the entire world goes shale crazy, how fast will the oil reserves be depleted.  Or will there be innovation that allows us to use some alternative to water in the fracking fluid?

Sorry that this post had far more questions than answers, but I hope I’m asking some of the right questions.  If you have the answers, please feel free to comment below or send me an email.