I was curious to get a better sense of what’s been driving the S&P 500 higher lately.  Below is a chart breaking down the total return of the S&P 500 segment ETFs and the MLP Index.  Retail is the only S&P 500 sector that’s outperforming the MLP Index so far this year, driven by companies like Whole Foods and Netflix.  Materials (Monsanto, Dow Chemical, Du Pont biggest holdings) is bringing up the rear, followed closely by Technology (Apple, Microsoft and Google).  Besides tech, seems like sectors doing relatively poorly are the traditionally defensive sectors.  MLPs (considered by many MLP investors to be conservative investments) stand out alongside traditionally cyclical sectors, but YTD MLP performance is distorted by what appears to be the mythical re-valuation of MLPs higher to reflect lower yields closer to REITs and Utilities that the sector’s been waiting for.   Either that or yield-starved exuberance that could lead to a sharp MLP selloff at some point….

MLPs hit the capital markets hard this week, selling $1.5bn in MLP units (not including overallotment options or ATMs), and $1.1bn of that was primary issuance (CVRR’s $369mm deal was all secondary).  It was the biggest equity issuance week of the year  so far.  Performance of these deals in the market after pricing has been mixed, but not poor enough to discourage other MLPs from making their withdrawals from the capital markets in the next few weeks.  There was also a hefty portion of M&A announced this week, outlined below in the news section.

This week, the sector’s focus will be on the NAPTP conference, which (as mentioned in my conference hacks post from last year) is the biggest MLP conference of them all.  It will be in a new hotel, but same area of Connecticut.  I look forward to seeing old friends, meeting management teams of a few recent MLP IPOs, and getting everyone’s general mood.  The last three years, the conference happened right around the time of big negative moves in MLPs.  This year, I expect the mood will be more upbeat from investment professionals, and definitely from MLP management teams.  I also expect to hear some disparaging remarks from traditional MLPs concerning the rapid expansion of the MLP wrapper to other asset classes.

Before I get to the Winners & Losers and News…in case you were wondering, I got 2 out of 5 numbers and no powerball in tonight’s $600mm drawing (cash value was actually$376.9mm).  If it wasn’t me, I sincerely hope one of you readers has the winning numbers and might be interested in having some of that new wealth managed, because what better place to put your winnings in than the MLP space?  If nobody won tonight, we could be looking at nearly $1bn face value drawing next week, which would be BANANAS, especially in the neighborhood around me, which includes a few gas stations that are key deposit takers for this particular “Redneck Retirement Plan” (as my dad, an avid lottery player, was fond of calling it).  Even understanding the math and knowing that some people refer to Lotteries as a “Stupid Tax”, I play the lottery occasionally for the entertainment value it provides my imagination, and can justify it easily as someone who doesn’t drink because it costs less than a drink to play.  What’s your excuse?

Winners & Losers

Small cap MLPs led the winners this week.  SMLP was the best performing among them, after raising guidance on Monday with its earnings release and especially Friday after SMLP announced that its GP commenced operations of the Polar Crude Oil and Water Gathering System, which is a future drop down for SMLP.  LGP’s earnings release and 3.4% distribution increase led to its big move this week.  On the downside, only 1 of the 4 MLPs  (TCP) that priced equity offerings this week was down, showing just how open the capital markets are to MLPs.  Expect that to lead to more equity offerings.  GSJK made it into the bottom 5 for the second straight week.

EVEP continues to drop and is getting close to the cellar, but for now OXF still holds the bottom spot for now.  EVEP was also the only MLP in the bottom 5 for the week that’s also in the bottom 5 for the year.  The order and makeup of the bottom 5 stayed the same since last week.  SMLP shot to the top of the winners year to date this week and simultaneously holds both the top spot for the week and year to date.  

Taking a broader view, GPs still lead everything year to date, and variable distribution MLPs are under-performing the rest of the MLP sector.  Generally speaking, as long as you had more money in equities than gold at the beginning of the year, you are doing well on paper.

News of the (MLP) World 

Interesting Articles

• Philip Trinder (MLP Protocol) did a nice piece on MLPs and interest rates in reaction to a comment by Jeff Gundlach (Seeking Alpha)
• WSJ with a sotry on the Freeport terminal receiving approval, LNG and natural gas prices, and both sides of the natural gas export argument (WSJ Article)

Equity

• TC Pipelines (TCP) prices offering of 7.7mm common units at $43.85/unit, raising $337.7mm in gross proceeds

• Rose Rock Midstream (RRMS) files S-3 to register up to $500mm in primary debt or equity and 12.5mm common units

• CVR Refining (CVRR) prices offering of 12.0mm common units at $30.75/unit, raising $369.0mm in gross proceeds to be used to redeem common units owned by its GP

• Western Gas (WES) prices offering of 6.1mm common units at $61.18/unit, raising $373.2mm in gross proceeds

• Suburban Propane (SPH) prices offering of 2.7mm common units at $48.16/unit, raising $130.0mm in gross proceeds

• Tallgrass Energy (TEP) prices IPO of 13.05mm units at $21.50/unit (final prospectus)
  • Priced at 5.35% yield, total gross proceeds of $280.6mm
  • Priced below the filing range of $22-$24 per unit, opened at $22.00, closed flat at $21.50

Debt

• StoneMor (STON) prices private placement of $175mm of 7.875% senior notes due 2021 at 97.832% to yield 8.25%

M&A / Growth Projects

• Tesoro Logistics (TLLP) announces $640mm acquisition of first portion of logistics assets associated with BP Southern California Refining and Marketing Business that Tesoro is acquiring (press release)
  • TLLP to acquire the first portion of logistics assets associated with the BP Southern California Refining and Marketing business (Carson) acquisition by Tesoro’s subsidiary, Tesoro Refining & Marketing Company LLC
  • Acquisition will close concurrent with Tesoro’s closing of the Carson acquisition, scheduled for 2Q 2013
  • TLLP expects $60-$65mm in estimated annual EBITDA from these assets
  • Assets include:
    • Six marketing and storage terminal facilities with a total combined throughput capacity of 224,800 bbls/day
    • Approximately 6.4mm bbls of storage capacity

• TC PipeLines, LP (TCP) announces acquisition of additional 45% interest in Gas Transmission Northwest LLC and Bison Pipeline LLC from TransCanada for $1.05bn (press release)
  • TCP to acquire an additional 45% interest in each of Gas Transmission Northwest LLC (GTN) and Bison Pipeline LLC from GP Transcanada
  • Expected to be immediately accretive to TCP’s cash flow and earnings (TCP to increase distribution 3.8% next quarter)
  • TCP to assume $146mm of GTN’s debt, leaving cash of $904mm, which will be funded with debt and equity, including proceeds from $337.7mm equity offering priced on 5/16

• Hi-Crush (HCLP) announces acquisition of frac sand distributor D&I Silica, LLC for $125mm in cash and equity (press release)
  • HCLP to acquire independent frac sand distributor D&I Silica, LLC in a transaction to close in 2Q 2013
  • Will expand HCLP’s business into transportation, marketing and distribution of Northern White frac sand
  • $125mm purchase price includes $95mm in cash and 1.579mm units priced at $19/unit
  • D&I has 98 employees and operates through an extensive logistics network of rail-served origin and destination terminals in the Midwest near supply sources and throughout Pennsylvania, Ohio and New York

• Mid-Con Energy (MCEP) announces acquisition of additional interests in existing Mid-Con Energy waterfloods for $28.1mm (press release)

It was a bad week all around for any gloom and doomers still left.  For the month of May so far, the MLP Index is up 1.9%, on pace to break its streak of 3 straight horrible May’s, and making most MLP prognosticators (myself included) look silly… Earnings season is largely behind us, and this week we’ll enter follow-on equity offering season again.  But if fund flows continue into the MLP space, those follow ons may get sucked up by MLP buyers.

Anticipation is starting to build for the big NAPTP conference at the end of the month.  Should be another very big turnout and lots of discussion of MLP valuations and where we’re headed for the rest of the year.  Certainly a different conversation that in the last few conferences when volatility and MLP weakness were the topics du juor.

Winners & Losers

PSE had the biggest week, after PSE disclosed a buyout offer it received from PXD.  It is amazing that the upstream MLP with the least hype and investor interest gets a buyout offer this week and is all of a sudden the one upstream MLP worth owning this year relative to the MLP Index.  After the CPNO buyout when it seemed CPNO was destined to pay a flat distribution indefinitely makes me think maybe we ought to start taking a harder look at MLPs that haven’t raised distributions in years, but probably not given that these were both pretty unique cases.

Other big movers were MWE (up on earnings release and M&A news), GEL and TCP on no news, and NRGY on the big news of the week that it will be teaming up with Crestwood (and First Reserve), and dramatically increasing IDR cash flow.  On the downside, NRGM investors weren’t thrilled with the idea of dilution and a flood of NRGM units being distributed to NRGY investors, and maybe a slight reaction to adding gathering volume risk to their list of risk factors with the CMLP addition.  The team of LNCO and LINE had another rough week, despite their best PR efforts on Monday with an appearance on Mad Money.  It should be noted that LNCO (+8.5%) and LINE (+3.6%) are up for the year.  Please don’t ask me my opinion of either one (unless you’re a client, of course), I can only say that I have consulting clients that own LINE, and in my discretionary accounts we do not own LINE or LNCO as of now.

The YTD 40% club swelled this week to 14 MLPs, the top 5 of which are listed below.  Liquids and refined products transportation MLPs are doing well (DKL, BPL, GEL, GLP, TLLP, BKEP), but natural gas pipeline MLP EQM leads everyone.  GEL broke into the top 5 this week, replacing TLLP.  On the downside, the same 5 are on the bottom 5 list as were there last week, although OKS was up this week and is close to escaping the cellar.

For the year, MLPs are dominating, and extended their lead over the S&P 500 year to date with another big week.  MLP GPs are doing even better, which has typically been the case when MLPs are strong.

IPO Update

The IPO wing of the MLP sector is starting to heat up.  Emerge Energy Services (EMES) priced its IPO this week, the first variable distribution oilfield services MLP to go public.  Tallgrass Energy Partners (TEP) hit the road this week, expecting to price early next week at a midpoint yield (5.23%) that would be the second lowest MLP IPO yield of all time.  Also, QEP Midstream, a midstream MLP formed by QEP Resources, filed its initial S-1 for an MLP IPO this week.

Below is an updated list of the 2013 IPOs to date and the backlog of IPOs.  There have been 6 MLP IPOs already this year, which is an unusually high number for a sector that usually starts slow with its IPOs, but early 2013 action was driven by MLPs that didn’t have a chance to get out in the very crowded late 2012.  In 2012 by this date, there had been only 1 MLP IPO, and we went on to see a total of 13 MLP IPOs in 2012.

Another difference between 2012 and this year: MLP IPOs aren’t popping like they did last year.  In 2012, on average MLP IPOs saw their prices pop 11.3% in the first day of trading, 13.4% if you average just the 10 traditionally structure (vs. variable) MLPs.  So far this year, MLPs have averaged negative price action in the first trading day (-1.2%).  4 of the 6 MLP IPOs have closed below their IPO price on the first trading day, compared with only 1 of 13 in 2012 and 5 of 13 in 2011.

One more thing to note, we aren’t seeing the highest quality assets coming to market or at least that’s the market perception.  I’ll try to prove this point with IPO yields.  The highest quality assets with the most growth potential tend to produce MLPs with the highest MLP IPO yields.  MPLX at 4.77% is the record low, other 7% or lower IPOs since 2011 include TLLP, EQM, OILT, TLLP, GMLP.  In 2013, we’ve seen no MLP with an IPO yield at 7% or below.  That will change with Tallgrass pricing next week, but will that mean a meaningful pop from Tallgrass?  I guess we’ll see.

(click to enlarge)

Also interesting this week in light of another midstream MLP consolidation: with a lack of midstream IPOs so far this year, and the increase in consolidations, we might see the end of 2013 end with fewer midstream MLPs than we started with.  With Tallgrass and QEP coming to market and others in the queue, that’s unlikely, but it would have been a really interesting phenomenon if it were to happen.  That just highlights how we might be reaching saturation in terms of the number of individual MLPs it takes to own the available (i.e. not owned by major corps.) midstream infrastructure in the U.S.

Below is the pipeline of pending MLP IPOs.  Quicksilver announced that they were cancelling their MLP IPO process, not a surprise given the last updated prospectus was dated June of 2012.  Also not listed below is Tallgrass which is on the road now.  Several others haven’t updated their S-1s in at least 10 months.  So, the visible MLP IPO queue is 2 at this point, but there are several other companies planning MLP IPOs.  Some of those may already be filed confidentially.

Final Note before News: Financial writer Alan Abelson died at age 87 this week.  He had worked at Barron’s since 1956 and started writing his weekly column in 1966, 47 years ago!  I was 28 when I started writing my blog, will I still be writing it in 47 years?  Will any of you still be reading it? Will I still be alive? Will MLPs still be around?  Who knows, but it was an amazing run for a very popular financial writer that has helped Barron’s remain a viable weekly print publication in a digital world.

News of the (MLP) World

It was an enormous week of news in the MLP space, kicked off by the Crestwood / Inergy combination announcement, but also included several other M&A announcements, growth projects and IPO news.  Combined with all the earnings releases and it was a pretty exhausting week.  Expect more of that to come in the next few weeks.

Equity

• Atlas Resource (ARP) files prospectus to sell up to $25mm in common units at-the-market ()
  • 9 banks on the cover seems like overkill here…

• QEP Midstream (QEP) files initial S-1 registration statement for planned MLP IPO to raise up to $400mm in IPO proceeds (filing)
  • Owns interests in four gathering systems and two FERC regulated pipelines
  • GP owned by QEP Resources
  • Structured as traditional MLP with IDRs

• Emerge Energy Services (EMES) prices initial public offering of 7.5mm common units at $17.00/unit, below the price range, raising $127.5mm in gross proceeds at 16.5% next 12 months distribution yield
  • First oilfield services MLP IPO structured with variable distribution
  • Backed by Insight Equity, a private equity firm

• Brookfield Infrastructure (BIP) prices offering of 5.7mm common units at $37.75/unit, raising $214.3mm in gross proceeds

• Tallgrass Energy (TEP) launches MLP IPO with midpoint IPO yield of 5.23%, expected to price May 13 and to raise $287.1mm in gross proceeds

Debt

• Targa Resources (NGLS) prices offering of $625mm of 4.25% senior notes due 2023 at par

• PVR Partners (PVR) prices upsized private placement of $400mm of 6.5% senior notes due 2021 at par (upsized from $300mm)

• Atlas Pipeline (APL) prices private placement of $400mm of 4.75% senior notes due 2021 at par

M&A / Growth Projects

• Crestwood Midstream (CMLP), Inergy (NRGY) and Inergy Midstream (NRGM) announce merger to be consummated in a series of transactions over next several months: Crestwood Holdings to acquire NRGY’s GP, fold CMLP’s IDRs and GP Interest into NRGY, and exchange all CMLP L.P. units for NRGM units and a $35mm cash payment (press release)
  • Crestwood Holdings will acquire the GP of NRGY for $80mm (mid-June)
    • Prior to closing this transaction, NRGY will distribute to its unitholders the 56.4mm of NRGM units it owns
  • Upon closing, Crestwood Holdings will contribute the IDRs and GP interest of CMLP to NRGY in exchange for NRGY units
  • In the final transaction, expected late in calendar 2013, CMLP will be merged with a subsidiary of NRGM
    • CMLP unitholders will receive 1.07 common units of NRGM per CMLP unit they own (5% premium to 20-day VWAP)
    • CMLP public unitholders will also receive a one-time cash payment at closing of approximately $35mm ($10mm paid by Crestwood Holdings and $25mm paid by NRGM)
    • CMLP Chairman, President and CEO Robert Phillips will assume the role of Chairman, President and CEO of the combined entity, NRGY/NRGM Chairman & CEO John Sherman and President Brooks Sherman to step down from day-to-day management

• Eagle Rock Energy (EROC) announces dedication of 150,000 gross acres in the Texas Panhandle through a fee-based gas gathering and processing agreement with Monarch Natural Gas (press release)
  • EROC entered into new fee-based gas gathering, processing, and purchase agreement with Monarch Natural Gas
  • Monarch has dedicated to EROC all of its gathered natural gas volume from wells within an area of more than 150,000 gross acres, located in Hemphill, Lipscomb and Ochiltree counties in the Texas Panhandle
  • Monarch will gather natural gas in the area and deliver it to EROC at central points for further gathering and processing

• MarkWest Energy (MWE) announces $245mm acquisition of midstream assets in the Anadarko Basin from Chesapeake Energy Corp. (press release)
  • MWE to acquire certain midstream assets in the Anadarko Basin from subsidiary of Chesapeake Energy Corp (CHK)
  • Assets consist of: 200 mmcf/d cryogenic gas processing plant (Buffalo Creek Plant), 22 miles of gas gathering pipeline in Hemphill County, TX and 30 miles of rights-of-way for future trunk line, An amine treating facility and 5 mile gas gathering pipeline in Washita County, OK
  • In conjunction with the acquisition, MWE executed long-term, fee-based agreements with CHK
  • MWE forecasts EBITDA of $30mm for the full-year 2014, increasing to more than $50mm by 2017 from the assets
  • MWE expects to invest $90mm over the next five years for completion and expansion of associated infrastructure

• Pioneer Southwest (PSE) announces buyout proposal from Pioneer Natural Resources Company (PXD) whereby PXD would acquire all outstanding public units of PSE for 0.2234 PXD shares per PSE unit (press release)
  • PSE announced that PXD has proposed a buyout of all publicly-held PSE common units through a stock-for-stock exchange, whereby PSE unitholders will receive 0.2234 shares of PXD for each PSE unit they own
  • Price represents an 18.1% premium from PSE’s closing price prior to the announcement

• Crosstex Energy, Inc. (XTXI) announces $25mm in a third natural gas compression and condensate stabilization facility in the Ohio River Valley

• Seadrill Partners (SDLP) announces acquisition tender rig T-15 from Seadrill Ltd for $210mm

• Sunoco Logistics (SXL) announces plans to develop a propane export/import facility backed by a long-term agreement with Shell (press release)
  • SXL has executed agreements with Shell Trading US Company to move forward with a LPG export / import facility
  • Project will be called Mariner South, with Shell as an anchor customer
  • Project will integrate SXL’s existing Nederland, TX Marine Terminal and pipeline from Mt. Belvieu, TX to Nederland with the Mt. Belvieu fractionation and storage facilities of LoneStar NGL LLC (JV of Energy Transfer and Regency Energy)
  • Mariner South will have an initial capacity of 6mm  bbls per month and will be designed to load LPG carriers with an approximate capacity of 550,000 bbls
  • Project expected to be operational by 1Q 2015

• Blueknight Energy (BKEP) announces plans to re-activate 200-mile oil pipeline from Longview to Houston, TX in JV with Silverado Pipeline

The MLP Index still leads the S&P 500, but not by as much as earlier in the year.  GPs are running away at this point, up 2.3% this week and up more than 25% on average.

Winners & Losers

EROC was the big loser this week, after dismal earnings.  Weak earnings were expected, but the results shocked to the downside, with several impossible to forecast items hitting all at once and taking adjusted EBITDA for the first quarter down to $53.6 vs. consensus EBITDA of $70.2mm.  I’ll be out with a research note on them tomorrow to give my updated take.  Upstream MLPs dominated the bottom five this week, with LRE, EVEP and BBEP joining the upstream half of EROC in the bottom five.  Barclays downgraded TCP this week, which helped land it in the bottom five.  On the plus side, refined products MLPs DKL, TLLP and BPL were among the winners.  TLLP makes its second straight appearance in the top 5 this week.  EXLP was up on good earnings and ARLP was bid up after last week’s earnings and ahead of its ex-date (tomorrow).

The 40%+ YTD total return club now has 9 MLP members.  All five of the top five YTD from last week were displaced this week by a new top five, which is extremely rare.  EXLP leads all MLPs in performance at 54.7% year to date.  EVEP is getting dangerously close to claiming the bottom spot.  Other disappointing MLPs this year include OKS and SXE.

That’s all as far as commentary goes for this week.  Busy week upcoming with more earnings reports pending.  I’ll also be a panelist at the Infocast Utica & Marcellus Infrastructure Development Summit in Pittsburgh late in the week.  Find me if you plan to be there as well.

News of the MLP World

Aside from the MLP transactions below, several constituent changes were made to Alerian MLP Indexes (to replace CPNO, which trades no more) that seemed to have varying degrees of impact on the MLPs added: TLLP to the Alerian MLP Infrastructure Index, GMLP to the Alerian MLP Index and Alerian MLP Equal Weighted Index, Crestwood added to the Alerian Natural Gas MLP Index.

Also, a few MLP GPs announced acquisitions this week, including SEMG (RRMS’s GP) buying $300mm of CHK’s midstream assets in the Mississippi (Lou Talarico’s LCT Capital advised SEMG group on the transaction, congrats to him – he’s my office neighbor).  RTK (RNF’s GP) also announced the acquisition of a wood chip processor, Fulghum Fibers.

Finally, Barron’s ran another LINE hit piece in this week’s edition.  LINE has been range bound for the last few months, oscillating between $36 and $39, and earnings were disappointing, but the allegations in the Barron’s piece were much more serious than just missing numbers.  Will be interesting to see if continued financial media onslaughts from Barron’s and Hedgeye will continue to impact LINE’s trading.

Equity

• Emergy Energy Services (EMES) launches initial public offering of 7.5mm common units in variable MLP structure at 14.0% midpoint yield (filing)
  • Variable distribution, private equity-backed oilfield services MLP

• Northern Tier Energy (NTI) prices upsized public secondary offering of 12.0mm common units at $26.28/unit, raising $362.7mm in gross proceeds to the selling unitholder (press release)
  • Selling unitholders to receive $362.7mm in gross proceeds

  • Transaction upsized from 10.0mm units originally filed

  • One day book-build, unit price rose during marketing period by 0.92%

M&A / Growth Projects

• Spectra Energy Partners (SEP) announces acquisition of 50% of Express Platte Pipeline System from Spectra Energy Corp for $823mm in total consideration (press release)
  • SEP to acquire 50% interest in Express-Platte Pipeline System for $555mm in cash, $139 in newly issued units and $129mm in assumed debt
  • Expected to close in 3Q 2013
  • Express-Platte system is 1,717 of crude oil pipeline running from Hardisty, Alberta to Wood River, Illinois with capacity of 280,000 barrels/day
  • Full year 2013 EBITDA for SEP’s portion is expected to be $72mm

• Enterprise Products (EPD) announces expansion of storage capacity at its ECHO and Bertron facilities and expansion of pipelines to directly connect ECHO with major refineries in South Texas
  • EPD plans to expand certain storage and pipeline assets, including adding 4mm barrels of crude oil storage capacity at its ECHO and Bertron facilities and approximately 55 million of 24-inch and 36-inch pipeline to directly connect ECHO with major refineries in the Southeast Texas market
  • Expansion will be completed in phases with final completion expected in 4Q 2014

• MPLX LP (MPLX) announces acquisition of additional 5% interest in MPLX Pipe Line Holdings from Marathon Petroleum Corp for $100mm
  • MPLX to acquire additional 5% interest in MPLX Pipeline Holdings LP for $100mm (funded with cash on hand)
  • Transaction will increase MPLX’s stake in MPLX Pipeline Holdings to 56%
  • MPLX Pipe Line Holdings owns a 100 percent interest in Marathon Pipe Line LLC (MPL) and Ohio River Pipe Line LLC (ORPL). MPL and ORPL own one of the largest networks of common carrier crude oil and product pipelines in the U.S. based on total volume delivered; a barge dock on the Mississippi River; and crude oil and product storage facilities
  • Acquisition represents a 9.5x multiple of next twelve months EBITDA

• Enbridge Energy (EEP) announces plans to construct 150mmcf/d processing plant in East Texas for estimated cost of $140mm
  • EEP plans to construct 150mmcf/d processing plant near Beckville in Panola County, TX

  • Expected to cost $140mm and to be in service by early 2015

Corporate Actions

• Kinder Morgan Energy (KMP) announces closing of merger with Copano Energy (CPNO)
  • CPNO is now a part of KMP and will no longer trade
• Distribution Announcements:
  • Quarter over quarter increases:
    • APU: $0.84, +5.0%
    • MPLX: $0.2725, +3.8%
    • GMLP: $0.515, +3.0%
    • SEP: $0.50125, +1.3%
    • BPL: $1.05, +1.2%
    • EXLP: $0.5175, +1.0%
    • EVEP: $0.768, +0.1%
  • Flat quarter over quarter:
    • SDLP ($0.3875), BWP ($0.5325), SXE ($0.40), EEP ($0.5435)
  • Variable:
    • ALDW ($1.48), CVRR ($1.58)

Commodities had a strong week as well, with gold (+4.7%) and oil (+5.5%) rebounding, natural gas down but holding at $4.25/mmbtu, and NGLs with small gains.10 year US treasury interest rates dropped and are at year-to-date lows.  The combinations of stronger commodity prices, low interest rates and strong broader stock market should support MLPs through the ex-date weakness this year, but we’ll see.  We will also get more color on MLP managements’ expectations going forward on earnings conference calls as we enter the heart of earnings season.  This week was the last big week for distribution announcements, which have been largely in-line with the Street’s expectations, although upstream MLPs thus far have shown a tendency towards announcing distributions below expectations, LINE and ARP in particular.

Below is a chart of this week’s price action for the Alerian MLP Index vs. that of the S&P 500.  MLPs diverged from the S&P 500 on Thursday and Friday.

When looking at the last two weeks, MLPs and the S&P 500 ended at roughly the same place after MLPs outperformed last week and under-performed this week.

The top 5 MLPs this week were led by EQM, a recent midstream drop-down IPO with a limited float.  EQM announced a 5.7% quarter over quarter distribution increase, which helped them get noticed.  Other drop down MLPs TLLP and MPLX were up big this week as well.  NRGM, with storage and transportation assets in the northeast that will benefit from higher recent natural gas prices and expected natural gas activity, got noticed this week as well, and was up 9.0%.  The market seemed to like AMID’s GP sale and acquisition announced late last week, and it was up 10.6% on that and a flat distribution announcement.  On the downside, the market was surprised at how low NS’s distribution coverage was (0.64x, vs expectations of around 0.9x for most analysts).  XTEX investors seemed to head for the exists following its ex-date this week, as XTEX was down 3.3% Friday.  OKS and NGLS also passed through ex-dates this week contributing to their weakness.

The 40% club for the year now includes 6 MLPs (EXLP not pictured below), all small cap MLPs that were trading at yield discounts to the MLP Index at the beginning of the year or that had concerns about distributions or their businesses.  Those concerns have either gone away (with stronger natural gas prices, or through expansions into other business lines – GLP) or the desire to grab yield is so great that these MLPs have way outperformed.  On the bottom 5, we have only 4 negative MLPs for the year.  EVEP got some press this week after research firm Hedgeye came out with negative commentary on EVEP.  Not a difficult call to pick on EVEP, would have been a more impressive short call if they made it at the beginning of the year.  Its almost as if Hedgeye is taking the top buy picks of Ethan Bellamy at R.W. Baird and building short cases.

Variable distribution MLPs did better this week (+2.3% on average), with strength from PDH, TNH, CVRR in particular, but that corner of the MLP space continues to under-perform this year.  MLP GPs continue to produce returns at a slightly faster rate than the MLP Index for the year (+22.7%), but were slightly lower this week.

News of the (MLP) World

MLP press releases were dominated by distribution announcements this week.  Also of note,

General

• MLP Parity Act Reintroduced (Barrons post on it)
• AMJ premium blows out.  In the middle of the week, AMJ’s premium to its underlying index spiked before falling back inline on Friday.  AMJ, the $5.8bn ETN sponsored by JP Morgan, used to track its index very precisely, but last June JPM announced there would be no further creations of AMJ, and its tracking proficiency has diminished slightly.  Speculation on the Internet is that perhaps the spike had to do with the Parity Act reintroduction announcement and eagerness to find a way to play that news.

Equity

• Teekay Offshore (TOO) prices public offering of 6.0mm 7.25% Series A Cumulative Redeemable Preferred Units at $25.00/unit, raising $150mm in gross proceeds (press release)

Debt

• Regency Energy (RGP) prices private offering of $600mm of 4.50% Senior Notes due 2023 (press release)

Corporate Actions

• Global Partners (GLP) CFO Tom Hollister announces retirement, effective 6/30/13
• Distribution Announcements:
  • Quarter over quarter increases:
    • RRMS: $0.43, +6.8%
    • SGU: $0.0825, +6.5%
    • EQM: $0.37, +5.7%
    • SXL: $0.575, +5.5%
    • CLMT: $0.68, +4.6%
    • ACMP: $0.4675, +3.9%
    • OILT: $0.405, +3.8%
    • ATLS: $0.31, +3.3%
    • AHGP: $0.7625, +3.0% / ARLP: $1.13, +2.0%
    • DKL: $0.385, +2.7%
    • LNCO: $0.725, +2.5%
    • WPZ: $0.8475, +2.4%
    • USAC: $0.348 (pro-rated $0.435), +2.4%
    • SMLP: $0.42, +2.4%
    • BKEP: $0.1175, +2.2%
    • GLP: $0.5825, +2.2%
    • MCEP: $0.505, +2.0%
    • APL: $0.59, +1.7%
    • HEP: $0.4775, +1.6%
    • ETE: $0.645, +1.6%
    • MMP: $0.5075, +1.5%
    • DPM: $0.70, +1.4%
    • NRGM: $0.395, +1.3%
    • MWE: $0.83, +1.2%
    • BBEP: $0.475, +1.1%
    • LGCY: $0.575, +0.9%
    • STON: $0.595, +0.8%
    • MMLP: $0.775, +0.6%
  • Flat quarter over quarter:
    • NRP, RNO, RGP, PSE, TCP, SPH, NMM, CPLP, NS, NSH, LINE, NRGY, ETP, PVR, EROC, QRE, SXCP, AMID
  • Variable: RNF ($0.50), PDH ($0.67)

MLPs were mixed this week, but the MLP Index inched slightly higher, following last week’s +1.9% gain.  It was the worst week of the year so far for the S&P 500, which makes the MLP outperformance more meaningful.   Commodity trends continued from last week. Gold, which was down 6.0% last week, was down another 6.0% this week.  Oil, which was down 2.2% last week, was down 3.2% this week.  Natural gas, which was up 2.5% last week, was up another 3.8% this week.

KMP reported solid earnings as usual.  Segment by segment, the refined products segment better than consensus expectations, driven by growth in biofuels volume.  Natural gas pipeline segment was better than expected, driven by volume growth from its Eagle Ford footprint.  CO2 and terminals segments were weaker than expected, but each segment had non-recurring issues to deal with (CO2: temporary spread blowout for Midland – Cushing, terminals segment: refinery outages reduced petcoke volumes, which was partially offset by a record coal export quarter.  Solid results from KMP, big midstream M&A deal at a big value, and higher natural gas prices drove the MLP Index higher this week.

Winners & Losers

The biggest winners and losers are shown below.  Of note, VNR may finally be moving (up 2.9% this week).  NRGM broke down this week, presumably on the news that Commonwealth pipeline project was definitively not going to happen.  Management indicated almost as much on the conference call for fiscal 1Q.   EVEP was at the bottom of the sector for the second straight week, not a great sign.

For the year to date, GLP reclaimed the top spot this week, leapfrogging EXLP, NKA and SMLP, all of which were down this week. If the MLP index was up 0.3%, but we went from five  40%+ YTD total return MLPs down to 2 this week, it stands to reason that the larger cap MLPs that are in the Alerian MLP Index caught more of a bid this week than small cap, high beta MLPs that have led the way so far this year.  When stocks are down, like this week, its good to see investors piling into the large cap, diversified MLPs that (for the most part) comprise the Alerian MLP Index.  Only 4 negative MLPs for the year, so no complaints as long as you were wise enough to allocate capital to MLPs.

The MLP Index is having a banner year so far, but when MLPs do well and optimism around MLP growth increases, GPs tend to outperform, which was been the case this year  (this week’s performance driven by ATLS, which was up 12.5% on heavy volume this week on news of the Teak acquisition by subsidiary MLP APL.  WGP was up 3.1% on light volume).  But this year has become the year of natural gas, which is up 28.1% YTD.

The picture above is of the poster my wife made on Tuesday to remind our neighbors and others that something happened in Boston and its ok to show that you care.  I wore Boston sports-related apparel all week, which eventually became a thing for people to do, although I see much more of it in Florida this weekend than I saw in Austin.  By the end of the week that was understandable because being less than 150 miles from West, TX (and the higher death toll), Austinites would probably have a hard time justifying a call of solidarity for Boston alone.

In any event, I definitely watched more cable news than I have in a long time this week, and I lost several hours of sleep following real time news on Twitter of both tragic events.  Hold your kids close, and make sure everyone important in your life knows how you feel about them, because it seems like there have never been more ways to die in the U.S. than there are right now.  Industrial accidents, terrorist attacks and lunatic rampages.  Even though cancer kills more people than any of those things, I guess my message would be: smoke ‘em if you got ‘em [where 'em is life].

News of the (MLP) Week

Pretty busy week.  We had an MLP GP change hands, we had a $1.0bn acquisition, an equity deal, and tons of distribution announcements.

Equity

• Atlas Pipeline (APL) prices public offering of 10.3mm common units at $34.00/unit, raising $402.7mm in gross proceeds
• Teekay Offshore (TOO) announces sale of 2.06mm common units to an institutional investor for total proceeds of $60mm, ($29.21/unit implied purchase price)

M&A / Growth Projects

• Atlas Pipeline (APL) announces acquisition of TEAK Midstream, LLC, a natural gas gathering & processing company with assets in the Eagle Ford Shale, for $1.0bn in cash
  • APL to acquire 100% of equity of TEAK Midstream, LLC, a private midstream operator, for $1.0bn in cash
  • APL issued $400mm Series D Convertible Preferred units in private placement
  • To be funded with cash, borrowings, $400mm of preferred unit private placement and common equity offering above
  • TEAK assets are located in Eagle Ford Shale and include:
    • A 200 MMcf/d cryogenic processing plant
    • 265 miles of 20-24-inch high-pressure gas gathering and residue lines with 750 MMcf/d of capacity
    • 275 miles of low pressure gathering lines
    • A second 200 MMcf/d cryogenic processing plant expected to be in service during 1Q 2014
  • APL to spend approximately $100mm in growth capital to fund the second processing plant and other growth projects
  • 80% of TEAK gross margin derived from fixed-fee contracts, majority of volumes under minimum volume commitments
  • Run-rate Q4 2014 EBITDA expected to be $160mm from TEAK assets
  • This was a big auction process, with multiple rounds of bids, and APL is the winner…good for ATLS

• American Midstream (AMID) announces sale of 90% of its GP and 100% of its subordinated units to an ArcLight Capital portfolio company called High Point Infrastructure Partners
  • High Point Infrastructure Partners, a portfolio company of ArcLight Capital Partners, acquired 90% of American Midstream GP, LLC, the GP of American Midstream and 100% of the subordinated units of AMID from AIM Midstream Holdings, an affiliate of American Infrastructure MLP Funds
  • AMID concurrently announced issuance of $90mm of Series A convertible preferred units to High Point in exchange for contribution of High Point’s operating assets and approximately $15mm in cash
  • Preferred units issued at $17.50/unit, a 3.8% premium to average 30-day price of AMID
    • Entitled to quarterly cash distributions of $0.25/unit and in-kind distributions of $0.25/unit for 6 quarters
    • After 6 quarters, will be entitled to receive greater of common unit distribution or MQD
  • High Point has agreed to forego a portion of the cash distributions to its subordinated units through the end of 2013
  • High Point is evaluating a permanent restructuring of AMID’s subordinated units and incentive distribution rights

• American Midstream (AMID) announces acquisition of High Point Infrastructure’s operating assets and $15mm in cash in exchange for $90mm of Series A convertible preferred units

• Plains All American (PAA) announces plans to construct new 310-mile, 20-inch crude oil pipeline from McCamey, TX in the Permian Basin to Gardendale, TX for a cost of $350mm to $375mm

• Global Partners (GLP) announces approval from Bangor Planning Board to develop a compressed natural gas loading station in Bangor, Maine (expected to be open by end of August 2013)

Distribution Announcements (partial list)

• Quarter over quarter increases:
  • WES: $0.54, +3.8%
  • WGP: $0.17875, +8.2%
  • KMP: $1.30, +0.8%
  • EPB: $0.62, +1.6%
  • KMI: $0.38, +2.7%
  • NGLS: $0.6975, +2.6%
  • TRGP: $0.495, +8.2%
  • LRE: $0.4825, +0.5%
  • TOO: $0.5253, +2.5%
  • TLLP: $0.49, +3.7%
  • OKS: $0.715, +2.1%
• Flat quarter over quarter:
  • CMLP: $0.51
  • NSLP: $0.27417 (pro rata MQD)
  • TGP: $0.675
  • TLP: $0.64
  • XTEX: $0.33 / XTXI: $0.12
  • HCLP: $0.475
  • VNR: $0.2025 monthly

Have a good week everyone, hope you appreciate the post, which I wrote late the night before going to the Magic Kingdom at Disney by myself with two kids under 6yrs old…

MLPs, natural gas and GPs dominating so far this year, but the S&P 500 has put in an impressive showing year to date as well.  Variable distribution MLPs are no longer the hottest thing in the MLP space, especially the fertilizer ones.  Gold is the big loser this year (and gold miners are doing even worse).  Gold closed the week at a 52-week low after a 5% drop on Friday alone that sent prices to their lowest levels in three years.  Gold is a lot of things to a lot of people, but its mostly a combination fear and inflation-hedge index, and right now the fear isn’t there and money is flowing away from gold into stocks.  No surprise to see oil and gold moving in the same direction, because on the margin speculators view oil (priced in U.S. dollars) as a solid inflation hedge as well.

Speaking of gold reminds me of the quote from Bishop Don Magic Juan (BDMJ) in the 1999 documentary “American Pimp” from 1999.  American Pimp, directed by the Hughes Brothers (Menace II Society), is one of the more fascinating documentaries I’ve ever seen, right up there with “The King of Kong” in terms of opening my eyes to a culture I didn’t really ever think much about, if you can sit through the expletives and exploitation of women, which is disgusting.  Somehow the entire movie is available free online here (not safe for work), about the 18 minute mark is the BDMJ part.  He claimed his trademark clothing color scheme was green and gold: “that was my trademark, green for the money, gold for the honey”.  I have no idea what that means (but like a lot of the commentary in the movie, it does rhyme).  I do know anything gold in 2013 has definitely not been green.  See below for the green and gold Rolls BDMJ used to have…

We’ll get our first look at how the first quarter was for MLPs when KMP reports on Wednesday afternoon.   KMP’s sheer size plus diversity of business lines and geographies make their earnings widely followed.   So, expect KMP earnings to impact MLPs next week.  Also, there will be many more distribution announcements the next few weeks, which will also be early signals as to how the first quarter was.

Next week’s post may be short or may not happen at all, because I will be taking my two oldest kids (4 and 6) by myself on two airplane rides to Tampa to see the Rowdies play, then on to Disney World for one day (just trying to get an early start on father of the year).  For any readers in San Antonio, the Rowdies will be playing tonight against the San Antonio Scorpions in the first ever game at the new stadium (Toyota Field).  If you aren’t in Tampa or San Antonio, why don’t you buy some gear at our online store.  Remember, its always cool to be a fan of something that no one in your city has ever heard of (like me with Rowdies gear in Austin).

Winners & Losers:

TLP made a comeback this week after being down 11.2% last week.  SXE rallied sharply as well, after being down 7.5% last week. GSJK has been in the top 5 the last 2 weeks (+5.6% last week), and joined the 40% total return club this week, which has 5 members in 2013 so far.  OXF led the way, and is up 35.7% since March 5, but is still trailing all other MLPs for the year.

For the year, SMLP jumped to the front this week, leapfrogging NKA and GLP in the process.  EXLP and GSJK are new to the top 5 this week, as it looks as though higher natural gas price is a good thing for contract compression providers unit prices…who knew?  The bottom 5 made up some ground this week, the two worst performing MLPs were at the top of the weekly chart, a very rare occurrence.  EVEP dropped one spot, and is challenging SXE for the second-to-worst performing MLP spot.

New of the (MLP) World

Equity

• KNOT Offshore Partners (KNOP) prices IPO of 7.45mm common units at $21.00/unit (7.14% yield), raising $156.5mm in gross proceeds (final prospectus)
  • 7.45mm common units priced at the upper end of the price range ($21.00), raising $156.5mm in gross proceeds
  • IPO price represents a 7.14% yield, based on minimum quarterly distribution of $0.375/unit ($1.50/unit annualized)
  • KNOP closed its first day of trading at $21.79/unit, rising 3.8% in its debut
    • 5th MLP IPO of the year, first one to be up significantly on day one (SXCP, NSLP and USAC all down day 1, CVRR was up 0.2%)
  • KNOP owns and operates crude oil shuttle tankers under long-term (5 years or more) charters, and will be treated as a corporation for U.S. Federal income tax purposes

• Natural Resource (NRP) files S-3 to register 3.8mm common units currently owned by insiders (filing)

Debt

• Memorial Production (MEMP) prices $300mm private placement of 7.625% senior notes due 2021 at 98.521% (press release)

• Cheniere Energy Partners (CQP) prices offering of $500mm of 5.625% senior secured notes due 2021 at 102.5% of par and prices $1.0bn of 5.625% of senior secured notes due 2023 at par (press release)

• Rentech Nitrogen (RNF) prices private offering of $320mm of second lien senior secured notes due 2021 (press release)

M&A / Growth Projects

• Williams Partners (WPZ) announces new midstream joint venture with Shell to provide gathering & processing services to producers in the Marcellus and Utica shale wells in the Northwest Pennsylvania area (press release)
  • New JV formed to provide gas gathering and gas processing services for production located in Northwest Pennsylvania
  • JV will invest in wet gas handling and dry gas infrastructure service Marcellus and Utica Shale wells in the area
  • The new venture, Three Rivers Midstream, has signed a long-term fee-based dedicated gathering & processing agreement for Shell’s production in the area, including 275,000 dedicated acres
  • Three Rivers plans to construct a 200 mmcf/d cryogenic gas processing plant by 2015
  • WPZ will initially own substantially all of JV.  Shell has right to invest capital and increase ownership prior to mid-2015
  • WPZ’s portion of initial capex on the plant, not including the gathering system, is expected to be ~$150mm

• Holly Energy (HEP) announces construction (jointly with parent HollyFrontier Corp.) of a rail facility in New Mexico for loading and unloading crude oil (press release)
  • HEP and HollyFrontier Corp. (HFC) announce the companies are collaborating to construct a rail facility that will enable crude oil loading and unloading near HFC’s Artesia and/or Lovington, NM refining facilities
  • Initial capacity expected to be 70,000 bbls/d and project is expected to be completed by early 2014

• Rhino Resource (RNO) announces sale of its 20% royalty interest on its owned Utica Shale for $10.5mm (press release)
  • This event didn’t turn out to be the positive catalyst I thought it would be a year or so ago

Corporate Actions

• Vanguard Natural Resources (VNR) announces it will change listing from NYSE to NASDAQ

• Distribution Announcements:
  • Quarter over quarter increases:
    • PAA:  $0.575, up 2.2%
    • EPD:  $0.67, up 1.5%
    • GEL: $0.4975, up 2.6%
  • Flat quarter over quarter:
    • PNG:  $0.3575
    • CPNO:  $0.575
  • Variable: DMLP ($0.448209/unit)

The 10-year treasury interest rate closed the week at lows for the year, slightly below 1.7%, which puts the MLP Index yield spread to the 10-year at more than 400 basis points.   An EPA announcement regarding sulfur standards for refineries this week sent refineries into a tailspin, dragging related entities (in some cases their pipeline subsidiaries) down with them.  The MLP sell-off was overdue, and a little more short term MLP weakness would probably be healthy for the MLP space at this point.

For the year, MLPs are still way out in front, slightly behind GPs, which have produced 18.4% total returns on average.  Variable distribution MLPs were hit hard this week as both fertilizer production and crude oil refining MLPs (previously white hot sectors) were down big, including ALDW down 16.6%, NTI down 10.9%, and RNF down 10.7%.

Winners & Losers

NKA was the big outlier for the week, up 20.4% after management announced an equity restructuring to replace subordinated units and original IDRs with a new set of IDRs that are entitled to receive 48% of any quarterly distributions by NKA after common unitholders have received the full minimum quarterly distribution (still $0.35/unit).  XTEX was another big winner, probably not the result of Guzman & Company initiating XTEX at Neutral on Monday.

MPLX and DKL found themselves in the bottom 5 this week, likely a knock-on effect of weakness in parent refinery players after the sulfur requirement announcement.  If implemented, the new sulfur standards would cost some refineries a substantial investment to comply, and they might try to pass that along to consumers at the pump, which might reduce demand and therefore volumes in pipelines owned by the refined products MLPs.  So there is some fundamental impact on MLPs, but probably not enough to warrant such losses.

The top 5 for the year was shaken up this week, as BKEP, NKA and XTEX popped into the top 5, displacing BPL, OILT, and DKL.  SMLP and GLP remained in the top 5, but GLP had a down week.  There are still only 4 MLPs with negative total returns in the sector this year (not counting variable MLPs), and there were no changes tot he bottom 5 constituents and their order.

Don’t know what to expect this week.  It could be a quick rebound, which would signify large capital had been waiting for even the slightest downdraft to plow more funds into MLPs.  It could be a flat week, or one that sees MLPs trade with the market in whichever direction it goes.  Or we could see more pain, leading to a desperate search for the reasons for the selloff, and to many emails to me regarding my thoughts on MLPs being taxed, or distributions being cut…

Longer term, I am very pleased with the prospects of the MLPs I own for myself and for clients, and expect them to produce returns that exceed the market.  There is not much else to say beyond that (especially after another crazy Saturday filled with soccer practice and birthday parties for kids I’ve never met), so good luck this week and please sign up to receive research at www.guzman.com, becauseI am expecting to initiate on another MLP this week.

News of the (MLP) World

Equity

• Energy Transfer (ETP) prices public offering of 12.0mm common units at $48.05/unit, raising $576.6mm in gross proceeds (press release)
  • ETP to raise $576.6mm in gross proceeds from the offering, net of which will be used to reduce borrowings
  • Overnight offering, priced at 4.6% discount to prior close
  • ETP units traded up 1.1% from offer price in the session after pricing

• Spectra Energy Partners (SEP) prices public offering of 4.5mm common units at $37.25/unit, raising $167.6mm in gross proceeds (press release)
  • SEP prices offering at $37.25/unit, raising $167.6mm in gross proceeds, net of which will be used for capital expenditures and acquisitions
  • Overnight offering, priced at 4.0% discount to prior close
  • SEP units traded down 0.5% from offer price in the session after pricing

• Williams Partners (WPZ) files S-3 to sell up to $600mm worth of  common units (filing)

• KNOT Offshore Partners (KNOP) launches IPO of 7.45mm common units, which would raise $149.0mm at the midpoint price of $20.00/unit (7.50% yield).  Expected to price April 9 after the market close (latest F-1)

Debt

• Rentech Nitrogen (RNF) launches private offering of $320mm of second lien senior secured notes due 2021 (press release)

M&A / Growth Projects

• Ferrellgas (FGP) announces acquisition of Western Petroleum, a Utah-based propane company with residential and industrial customers

• New Source Energy (NSLP) announces acquisition of 3.9 MMBoe of oil and natural gas reserves, funded with 1.4mm common units of equity issued to New Source Energy Corp.

Corporate Actions

• Niska Gas Storage (NKA) announces equity restructuring and elimination of subordinated units, replaced by a new IDR structure (press release)

• New Source Energy (NSLP) announces plans to increase quarterly distribution 4.8% to $0.55/unit in 2Q 2013 and another 4.5% to $0.575/unit for 3Q 2013

First off, we’ll look at the broadest of my charts, a breakdown of the average total return of the MLPs in the Alerian MLP Index (which was up 19.8% for the quarter) vs. those that were not in the MLP Index (not including GPs and variable distribution MLPs, so it’s an apples to smaller apples comparison).  MLPs in the index did better than those not in the index, which is the reverse of what happened in 2012, when IPOs (by definition not in the index) did very well and boosted returns of the non-index MLPs.  2011, we saw MLP Index MLPs outperform.  Typically, you would expect MLPs in the Index to do better, because they are larger, more recognized names, with typically more proven asset bases, but also because of the fund flows into ETFs and other MLP investment vehicles that track the MLP Index or have to own the bigger MLPs that comprise the index.

What’s Working?

Second chart we’ll look at is the breakdown of performance by subsector.  If you click on this chart you can see a bigger version of it.  You can quibble with my classification of MLPs into various categories, but the major trends won’t change if you change a few MLPs to different categories.  The biggest positive trend is that liquids-focused MLPs are doing the best, particularly those transporting crude oil and refined products.  Coal MLPs are doing the worst (as usual the last few years).  Variable distribution MLPs have fallen off of late when compared with last year (and that trend is accelerating today with the refining beatdown and weakness in fertilizer fundamentals.  Upstream MLPs are also underperforming despite recent natural gas and oil price strength.  Upstream MLPs represent the best value in the sector right now, but they have less visible growth tied to M&A deals and they face large equity funding needs to execute those deals as they arise, which I guess scares investors away.  Also, the MLP ETF is under-performing, which will always be the case when MLPs are going up.

One final chart on MLP performance is a breakdown by historical distribution growth.  MLPs that grow continue to command a premium in the market, with those MLPs that grow distributions by more than 10% annually perform the best.  Distribution growth still trumps everything.  There are several MLPs with lower growth that have seen rebounds this year (like NKA and GLP), but on average they are still underperforming.

MLP Equity Issuance Update

The first quarter saw the most equity issuance ever for MLPs in public equity offerings (including IPOs).  It was also the first time 2008 that we saw a first quarter MLP IPO, and we actually had 4 of them.  In total, there were 23 MLP equity offerings in 1Q 2013, 19 follow-ons and 4 IPOs.  1Q tied the record for most equity deals in a quarter (tied with 4Q 2012), but it wasn’t the most active follow-on quarter we’ve seen, because in 1Q 2010 there were 21 follow-on deals.  I put this chart in here in response to a reader question regarding seasonality in equity issuance.  MLP IPOs do tend to happen more frequently in 3Q/4Q vs. 1Q.  For follow-ons, 1Q and 4Q tend to have more issuance than other quarters, but it really depends on market conditions.  3Q 2011 was a very challenging time to try to market an equity offering, as was 2Q 2012.  Less seasonality than just MLP price weakness that causes MLPs to issue less equity.  When times are good, expect to see MLPs take advantage of that and issue as much equity as they can / need.

MLPs and refiners are bouncing back for now, hopefully you got some bargains while they lasted.  I wouldn’t be too regretful if you didn’t, there will be other opportunities this year.

It was the best quarter ever recorded for the Alerian MLP Index (+19.7% total return), narrowly beating 2Q 2009′s previous record of 19.3%.  Back in 2Q 2009, 86% of the return came from price appreciation as opposed to distributions vs. 91% this quarter, which makes sense given that distribution yields were much higher in 2009.  In 2009, MLPs had virtually no distribution growth, and most of the returns came from price appreciation, as yield on the MLP Index dropped from 10.9% to 9.2% quarter over quarter.  This quarter, the yield on the MLP Index went from 6.57% to 5.67%, and the implied MLP Index distribution grew 1.6% quarter over quarter.  MLPs were up 11.9% in January, flat in February and up 5.27% in March with approximately 150 basis points of 1Q returns resulting from distributions.   March’s 5.3% return was good for 2nd best March on record, surpassed only by March 2002 (+7.3%).  More on the quarter in a wrap up post that should come out at some point past midnight Sunday night / Monday morning…

When I have talked about MLP the MLP Index making all-time highs on a price and total return basis, I’ve been quick to point out that we are not seeing all time low yield for the index yet.  The all-time low yield is 5.37%, set back in July 2007.  We are now less than 30 basis points away from that, and with another month of MLPs potentially being bid up before distribution ex-dates happen, we could soon see a fresh all time low yield.  Should that happen, I likely would start to raise cash in my client accounts in earnest, which I have yet to do, even though the tone of my posts of late has been cautious.

Speaking of my bearish tone of late: the last 4-6 weeks, I have been airing my concerns over fresh all time highs.  Having spent the majority of my professional investing career during the last 4 years, its easy to figure out why I would be bearish after a 25% total return for the MLP Index in 4.5 months since 11/15/12.  The last 4 years, the trend has been up for MLPs and stocks, but each sharp rally was followed by renewed fears and a correction.  Sort of a whack-a-mole market, and if I’m the mole, I guess I’ve been flinching for a month or so waiting for the whack that hasn’t come yet.  

And yet, my cautious tone hasn’t manifested itself in the accounts I manage that were fully invested heading into this rally.  I haven’t lightened up my long exposure in any of our portfolios (although I did sell some calls last week).  I haven’t raised cash in separate accounts and haven’t shifted closer to neutral in our fund.  But this week, I probably will.  And if the reverse jinx continues for another week or even 6 more weeks until distributions get paid, that’s fine.  At this point, I’m going to maintain my bearish short-term stance even thought all signs point to a continued rise.  Its almost superstitious at this point.  The reverse jinx seems to be working, so why change my tone now?

Winners & Losers

SXE was the story of the week, after it posted very weak earnings on Thursday.  SXE was down more 20.5% for the week.  CLMT had an equity offering, which is behind its 4.5% decline this week.  STON and FGP, which typically exhibit low correlation to the rest of the MLPs, were also down.  LINE finally got into the top five to finish a tumultuous quarter on a positive note, buoyed by higher oil and natural gas prices.  Notable this week was that the biggest positive move was just 6% (all of the top 5 last week were up more than 6% last week), indicating broad participation in the rally, with not high side outliers.

For the year, DKL was the only new addition to the top 5, displacing GEL from last week.  Each of the top 5 MLPs this year are up more than 35%.  In total 16 MLPs have produced total returns of 30% or more YTD, which is amazing to me.  For the year, the aforementioned SXE joined the bottom 5, bumping LRE off the loser list.

MLPs are dominating this year to date vs other investments, on pace to start a new S&P 500-beating streak in 2013. GPs have outperformed, while last year’s big winners, the group of variable distribution MLPs, has lagged as a result of weakness in fertilizer companies in general lately. Oil and natural gas have been cooperating quite well for us MLP investors.  Natural gas above $4.o0 is a welcome sight for many MLPs.

News of the (MLP) World

All of a sudden the pending IPO list has heated up.  We went from pending MLP IPOs (all with stale registration statements) to 3 fresh MLP IPO candidates, after 3 MLP IPO’s filed their respective S-1s this week.  Below is an update of the IPO pipeline.  At some point it probably makes sense to remove those that haven’t filed an updated S-1 in more than 8 months, maybe once they’ve been stale for a year.  So far in 2013, we’ve seen 4 MLP IPOs, including; USA Compression, CVR Refining, SunCoke Energy, and New Source Energy.

There were also 2 MLP equity offerings this week.  ACMP performed well in the aftermarket, as have several of the recent equity offerings, which bodes well for future equity offerings (and for brokers selling those deals).  If follow-ons get in the habit of trading up after pricing, then the deals get easier to place, which opens up the equity markets to bigger and more frequent equity offerings.  Below is a summary of the last 10 overnight equity offerings, and their short term aftermarket performance.

Equity Transactions this Week

• Tallgrass Energy Partners, LP (TEP) files S-1 to raise up to $315mm in MLP IPO (initial registration statement filed confidentially under JOBS Act)
  • MLP that owns a midstream portfolio acquired for $3.3bn from KMP in November 2012
  • Assets initially contributed include the TIGT System, a FERC-regulated natural gas transportation and storage system with approximately 4,645 miles of transportation pipeline and natural gas storage facilities in the Rockies area
  • Tallgrass CEO Dave Dehaemers has extensive MLP experience at (NRGY and KMP) and Bill Moler (COO) also worked at NRGY
  • Standard IDR structure

• Phillips 66 Partners LP (PSXP) files initial S-1 to raise up to $345mm in MLP IPO
  • Another big brand name refined products drop down MLP, in the tradition of MPLX and TLLP
  • Standard IDR structure

• Access Midstream (ACMP) prices public offering of 9.0mm common units at $39.86/unit, raising $358.7mm in gross proceeds
  • ACMP to receive gross proceeds of $358.7mm, net of which will be used for general partnership purposes
  • Overnight offering, priced at 3.3% discount to prior close
  • ACMP units traded flat from offer price in the session after pricing

• Calumet Specialty Products (CLMT) prices public offering of 5.25mm common units at $37.50/unit, raising $196.9mm in gross proceeds
  • CLMT to receive $196.9mm in gross proceeds, net of which will be used to reduce borrowings
  • Overnight offering, priced at 4.0% discount to prior close
  • CLMT units traded down 0.5% from offer price in the session following pricing

• Emerge Energy Services LP (EMES) files S-1 to raise up to $100mm in MLP IPO (initial registration statement filed confidentially under JOBS Act)
  • Oilfield services MLP with frac sand operations and fuel processing / distribution segment
  • Backed by Insight Equity, a smaller PE investment firm
  • CFO is long-time MLP investment banker Robert Lane and Kayne Anderson’s Kevin McCarthy will serve as an independent director
  • No IDRs

Debt

• No transactions this week.

M&A / Growth Projects

• No significant transactions this week.

]]> http://mlpguy.com/archives/3118/feed 0 http://mlpguy.com/archives/3105 http://mlpguy.com/archives/3105#comments Sat, 23 Mar 2013 06:11:38 +0000 Hinds http://mlpguy.com/?p=3105 MLPs posted their biggest weekly gain of the year since the first week of the year when MLPs posted a 7.0% gain on the Euphoria following the New Years Eve deal to avoid the fiscal cliff.  That week’s gains came when the S&P 500 went up 4.6%.  This week’s gains were against the grain of a flat market.

This week’s gains (as far as I can tell) were the combination of higher commodity prices (including a welcome uptick in NGL prices, which remain woefully low), a low interest rate-friendly Fed release on Wednesday, and investors anticipating the money Neuberger Berman’s new MLP closed end fund will need to invest into MLPs once the fund prices its IPO (expected next Monday afternoon).  Last week, I wrote that after a 5 day shallow sell-off in MLPs, the bounce back that followed would probably be shallow as well  I was clearly wrong.  After 7 straight down days, the MLP index exploded with 3 straight 1% days to close at a fresh all time high.

There were some headwinds in MLP land, like 5 follow-on equity offerings (STON, MEMP, HEP, CMLP, LRE), but the combined total gross proceeds of those 5 deals ($553.1mm) doesn’t even add up to one typical ETP, WPZ, or LINE deal.  So, a lot of press release, but not an overwhelming amount of new MLP paper this week.

Not sure what we should expect from MLPs next week.  I have been wary generally of MLP valuations recently, and so my bias would be for another dip next week, but it seems as though any momentum the interest rate spike crowd was starting to gain has been crushed for now, so maybe its smooth sailing as investors bid up MLPs in advance of the next seasonal catalyst: distributions in May.   MLPs typically get bid up as distribution ex-dates approach.

MLPs still represent a great alternative to other income-oriented securities, and so far this year, it hasn’t mattered much which ones you own or buy.  A year like this one is starting out as is hard on active managers.  If you aren’t fully invested when the index goes up 3% in a week, it can really hurt relative performance.  Not what you’d call a stock pickers market, unless you picked the top 5 performers this year to date, then you’d be up 30%+ compared to the index at 17.6%.

Winners & Losers

HEP was the big loser this week, pricing its equity offering at -3.5% from prior close and then dropped another 3.1% the next day.  Half of HEP’s offering was secondary units sold by parent HollyFrontier (HFC), which may have had something to do with it.  CMLP didn’t fare much better.  Other MLPs that executed offerings this week fared much better: MEMP closed the week up 5.9% from its offering price, STON up 4.9% from its offer price and LRE up 1.4%.  CPLP was the big winner this week after last week’s preferred private placement and acquisition.

For the year, just 4 MLPs are down, which is incredible.  Of the winning-est winners, GLP is still in the lead.  OILT and HEP popped up into the top five, displacing CLMT and HEP.

GPs on average have outperformed everything year to date, after a 3.3% average positive move this week.Variable distribution MLPs are under-performing the rest of the MLPs after a -1.1% average decline, led by a -10.8% down week for RNF and a 6.3% decline for ALDW.

News of the (MLP) World

EQUITY

• STON prices upsized 1.4mm unit offering at $25.35, raising $35.49mm in gross proceeds
  • Overnight deal priced at 3.5% discount to prior close
  • Units traded up 3.7% the next session

• MEMP prices of 8.5mm unit public offering at $18.35/unit, raising $156.0mm in gross proceeds
  • MEMP to receive gross proceeds of $156.0mm ($179.7mm including exercise of overallotment option), net of which will be used to partially fund drop-down acquisition
  • Overnight offering, priced at 3.7% discount to prior close
  • MEMP units traded up 2.6% from offer price in the session after pricing

• HEP prices 3.75mm unit public offering (1.875mm primary units and 1.875mm secondary units owned by HFC) for $40.80/unit, raising $76.5mm in primary proceeds
  • Offering was half primary units and half units owned by HEP’s GP HollyFrontier Corp
  • Gross proceeds from primary issuance of $76.5mm, net of which will be used to reduce credit facility borrowings
  • Overnight offering, priced at 3.5% discount to prior close
  • HEP units traded down 3.1% from offer price in the session following pricing

• CMLP prices 4.5mm unit public offering at $23.90/unit, raising $107.6mm in gross proceeds
  • CMLP to receive $107.6mm in gross proceeds, net of which will be used to reduce credit facility borrowings
  • Overnight offering, priced at 3.8% discount to prior close
  • CMLP units traded down 1.0% from offer price in the session after pricing

• PNG files equity distribution agreement to sell up to $75.0mm of common units at the market (filing)

• LRE prices 6.0mm unit public offering at $16.84/unit, raising $101.0mm in gross proceeds
  • LRE to receive $101.0mm in gross process, net of which will be used to reduce borrowings
  • Overnight offering, priced at 3.8% discount to prior close
  • LRE units traded down 0.5% from offer price in the session following pricing

DEBT

• PDH prices private placement of $365mm of 6.25% senior notes due 2020 at par

• EXLP prices private placement of $350mm of 6.0% senior notes due 2021 at 98.4% of par

M&A / GROWTH PROJECTS

• SUSP announces completion of 3 sale / leaseback transactions with sponsor Susser Holdings (SUSS) for $15.1mm

• ETP announces acquisition of remaining 60% stake in ETP Holdco Corporation from Energy Transfer Equity (ETE) for $3.75bn of cash and ETP common units
  • ETP continues the process of simplifying the most crowded org chart in all the MLP land

• LRE announces $38.2mm acquisition of oil and gas properties in Mid-Continent from its sponsor Lime Rock Resources

• MEMP announces $200mm acquisition of oil & gas properties in East TX and North LA from its sponsor Memorial Resource Development

CORPORATE ACTIONS

• VNR announces monthly distribution of $0.2025/unit, flat month over month
• MEMP announces $0.5125/unit quarterly distribution, an increase of 1.0% from last quarter