MLP Market Update

MLP Market Update
Commentary on Master Limited Partnerships

Published
Apr 19th, 2015

Category:
MLP Market Post

MLP Week Thoughts: Production Cuts, Both Ways

MLPs traded positively for the 5th straight week, with the Alerian MLP Index (AMZ) increasing 1.1%.  The AMZ is now 6.6% higher than its most recent low on March 16th, and has produced total returns of 7.5% since its 52-week low reached on January 13th.  But the index remains 15% lower than its peak in August.  MLPs were helped by higher commodity prices and limited equity issuance again this week. MLPs outperformed the S&P 500 (-1.0%) and utilities (-1.2%) by a wide margin this week.  Year to date, the AMZ is still in the red, but is moving up the leaderboard, distancing itself from utilities and edging closer to the S&P 500.

Weekly Review_4-17-15

Oil futures finished 8.6% higher than last week, making it 5 straight positive weeks.  Oil price in the spot market is now 28.3% higher than its 52-week low reached on March 17th, and reached its highest point so far this year on Thursday.  Oil prices rallied sharply after the latest oil inventory report was released by the EIA that showed a smaller than expected inventory build.

Reduced drilling activity is beginning to impact U.S. oil production, which was certainly expected to happen after all the capex cuts we heard about since November.  Good for prices, but bad for gathering, processing and pipeline volumes in the short term.

KMI Stressed over Lack of Distress

The biggest news in MLP land was non-MLP KMI released 1Q results this week that met the market’s expectations.  KMI highlighted the strength of its development backlog, particularly related to demand-pull natural gas pipeline projects.  CEO Rich Kinder also expressed frustration on the conference call with the lack of distress amongst producers.  Producers have been able to issue equity and attract private equity to support them, and that has kept more distressed asset sales from materializing.

We’ve seen that play out with MLP acquisitions from producers this year, which are getting done at non-distressed multiples.  There is a lot of cheap capital chasing returns all along the energy value chain, and that tends to mask what otherwise would be distress, and reduces the acquisition opportunity set for well-capitalized buyers. MLPs have shown that capital is available to them as well, which may limit consolidation activity in the MLP sector this year.

Such is the paradox of oil prices and M&A for the MLP investor.  In the short term, we are rooting for less production to get prices up to stimulate more production in the long term.  And we are caught between rooting for distress among producers to shake loose assets, so long as those distressed producers aren’t major customers of MLPs we may own.  We will see the beginnings of the impact of these paradoxes as MLP 1Q results start streaming in.

CBRE Clarion Web Series

My firm has recently launched a series of videos produced in association with papers we publish on various infrastructure and MLP-related topics.  My colleague Marc DeCroisset was featured in one, and I was featured in another, each of us alongside the head of our infrastructure investment team, Jeremy Anagnos.

Marc discussed the emergence of renewable energy as an invest-able category within the universe of publicly-traded infrastructure stocks. You can watch the video by clicking on the picture below, and you can read the related whitepaper here.

Marc

In the other video, I discuss with Jeremy the technological improvements and cost reductions that are driving production efficiency gains and may lead to a lower breakeven oil price over the next few years, and also how that should allow MLPs to realize volume growth and growth in opportunity set even in a lower price environment. You can watch the video by clicking on the picture below, and you can read the related whitepaper here.

Hinds

Winners & Losers

Oil prices up, upstream and services MLPs up, which explains the top 5.  Marine transport MLPs dominated the bottom 5 (4 out of 5).  Besides CPLP (equity offering), none of them had any news, but there must be some reason they all fell in unison.

Top5Bottom5_4-17-15

GLOP moved from the top 5 to the bottom week over week, but no other repeats week over week.

Top5Bottom5_4-17-15_Chart

As you would expect when looking at the year to date chart of winners and losers, there are plenty of commodity sensitive names among the bottom 5, names you would expect to be down when oil and natural gas prices drop, with one significant outlier at the bottom: CNNX (note that the list does not include NKA, which is down 30.4% year to date).  Expectations for CNNX were very high at IPO, but lately CNNX seems to have slipped into obscurity.

Top5Bottom5_4-17-15_YTD

LINE crept back into the top 5 this week, while FISH dropped out. SDLP displaced EVEP in the bottom 5.
Top5Bottom5_4-17-15_YTD_chart

News of the (MLP) World

Another quiet week all around for MLPs. A few pending MLP IPOs filed amended S-1s this week (PennTex filed first amendment since December this week, among others), implying the IPO market may re-start soon. See below for an updated backlog of energy MLP IPOs, which totals 17.

IPO Backlog_4-17-15

News-of-the-World

Equity

  • Capital Products Partners (CPLP) priced public offering of 12.8mm units at $9.53/unit, raising $122.0mm in gross proceeds (press release)
    • Overnight offering, priced at 4.0% discount to prior closing price, and traded up 1.1% from pricing in the next trading session
  • Marlin Midstream (FISH) filed $1bn mixed shelf, registered 10.7mm units owned by NuDevco Midstream (filing)
  • Targa Resources (NGLS) filed S-3 to register up to $1bn of equity and debt securities (filing)

M&A / Growth Projects

  • JP Energy Partners (JPEP) announced acquisition of Southern Propane for $14.9mm (press release)
    • Southern Propane is an industrial and commercial propane distributor and logistics provider serving the Houston market
    • JPEP will fund the acquisition with cash and 267,000 units issued to seller
  • Magellan Midstream (MMP) announced joint development agreement with TransCanada Corp (TRP) to pursue a Houston pipeline connection project (press release)
    • Project would include construction of a 9-mile, 24-inch diameter pipeline, in which each party would own 50%
    • The joint project is expected to cost $50mm and be completed in 2015
  • Global Partners (GLP) announced acquisition of retail portfolio from Capital Petroleum Group for $156mm (press release)
    • GLP will acquire 97 Mobil and Exxon branded retail gas stations and 7 dealer supply contracts in New York City and Prince George’s County, Maryland
    • GLP expects to close the acquisition in 2Q15 and to pay with borrowings on its revolve
  • Delek US Holdings (DK), sponsor of Delek Logistics (DKL) announced that it has acquired 48% stake in fellow refiner Alon USA Energy (ALJ), sponsor of variable distribution MLP ALDW (press release)
    • ALJ has discussed potentially launching an MLP for its midstream assets that produce around $50-$60mm in EBITDA annually
    • A full tie up between ALJ and DK may lead to those midstream assets being earmarked for drop down into DKL over the next few years

Other

  • Distribution Announcements:
    • OKS/OKE – flat distributions/dividends
    • KNOP +4.1%
    • OCIP +1.2%

Published
Apr 12th, 2015

Category:
MLP Market Post

Week Thoughts: MLPs Moving Higher

MLPs traded positively for the 4th straight week, with the Alerian MLP Index (AMZ) increasing 1.8%.  The AMZ is now 5.4% higher than its most recent low on March 16th, and has produced total returns of 6.3% since its 52-week low reached on January 13th.  But the index remains 16.4% lower than its peak in August.  MLPs were helped by higher commodity prices and limited equity issuance again this week, and MLPs seem to be gaining some traction heading into 1Q 2015 earnings season. MLPs outperformed the S&P 500 (+1.7%) slightly and outperformed utilities (+0.3%) by a wide margin this week.

Weekly Review_4-10-15

I’m writing this on “moving day” at the Masters.  If stock market performance were a golf tournament, MLPs would be in the middle of the pack vs. other sectors, down 3.1% year to date.  MLPs are way ahead of natural gas and utilities, but behind oil prices and way behind REITs and &P 500.  The last 4 weeks of positive returns have kept MLPs in contention vs. stocks, but they need to put up some big numbers to move up the leader board.

Commodity Divergence

Oil prices in the spot market finished 5.1% higher than last week, making it 4 straight positive weeks.  Oil is now 18.8% higher than its 52-week low reached on March 17th.  Oil prices rallied early in the week before falling sharply Wednesday after the latest oil inventory report was released by the EIA that showed U.S. oil in storage rose by 10.9mm barrels to a record level of 482.4mm barrels.

Natural gas price closed at a 52-week low in the U.S. spot market, down 1.6% on the week.  Storage levels for natural gas are 10.5% below the 5 year average for this time of the year, but 79% higher than this time last year.  So, the natural gas situation is considerably less dire than oil, but not great.  The oil rig decline will have a supply impact on natural gas production, given that natural gas production has been supported by associated gas.  On the demand side, a cold winter wasn’t enough this year.  First LNG is approaching for Cheniere and there will be growth from coal plant retirements at some point, but the market has lost patience.

Natural Gas Inventory

Winners & Losers

Commodity prices lifted most MLPs this week.  Outside of QEPM, there was no company-specific news that flowed through to the top or bottom 5.  Falling natural gas prices probably didn’t help FELP and CNNX.

Top5Bottom5_4-10-15

VTTI seemed to be down just because it was up last week, and vice versa for RIGP.  Not much follow through.

Top5Bottom5_4-10-15_Chart

Year-to-date

CCLP had another very good week, maybe helped by management being on the road for a non-deal roadshow following their recent analyst day.  No other changes among the top and bottom 5, although CNNX is now the second worst performing MLP of all, remaining in the doghouse following their revised distribution outlook earlier this year.

Top5Bottom5_4-10-15_YTD

Top5Bottom5_4-10-15_YTD_chart

News of the (MLP) World

News this week was business as usual: equity offerings, acquisition of midstream assets from distressed producer, and a clean-up merger.  Distribution announcements began this week, Kinder releases earnings this week, MLPs kick off the week after.  Business as usual.

News-of-the-World

Equity

  • Genesis Energy (GEL) priced public offering of 4.0mm units at $44.42/unit, raising $177.7mm in gross proceeds (press release)
    • Overnight offering, priced at 5.4% discount to prior closing price
    • Possibly as a result of the wide discount and the smaller size of the offering, GEL traded well in the aftermarket, finishing the week 3.2% higher than pricing
  • Memorial Production (MEMP) priced secondary offering of 4.7mm units at $16.60/unit, raising $78.0mm in gross proceeds for selling unitholder Memorial Resource Development (press release)
    • Block trade, priced at 4.4% discount to prior closing price
    • 100% secondary offering, no new units issued and no proceeds to MEMP
    • Another example of a producer using a secondary sale to shore up their finances (like DVN’s sale of ENLK units)
  • Atlas Resource (ARP) priced offering of 255,000 10.75% Class E Cumulative Redeemable Perpetual Preferred Units at $25.00/unit, raising $6.4mm in gross proceeds

M&A / Growth Projects

  • Williams Partners (WPZ) announced acquisition of additional interest in Utica East Ohio Midstream from EV Energy (EVEP) for $575mm (press release)
    • WPZ’s interest in the midstream JV will increase to 70% following this acquisition
    • WMB has agreed to forego $43mm of incentive distribution rights payments over the next 3 years to support the acquisition
    • M3 Midstream, which currently owns 30% of Utica East Ohio Midstream, has the option to acquire 8% of the 21% WPZ has agreed to acquire, so WPZ may only acquire 13%
  • Tesoro Logistics (TLLP) announced acquisition of remaining outstanding L.P. units of QEP Midstream (QEPM) in a unit-for-unit exchange valued at $392mm (press release)
    • QEPM unitholders will receive 0.3088 TLLP common units for each QEPM common unit
    • The market reacted positively to the exchange ratio that valued the QEPM units at 8.5% premium to its closing price on 4/6/15
  • EPD provided updates on growth projects, including:
    • Completed expansion of LPG loading capabilities (press release)
    • Open season for expansion of the Aegis ethane pipeline system (press release)
  • NuStar Energy (NS) announced expansion and extension of agreement with an affiliate of Pemex to transport and store Naptha (press release)
    • Agreement in place since 2005 has been renewed and extended an additional 10 years
    • NS will expand its storage capabilities by 50,000 barrels to support the agreement, and the related capital expenditures are accretive to cash flow per unit

Other

  • Distribution Announcements:
    • EPD: $0.375/unit, +1.4% quarter over quarter, +5.6% year over year
    • GEL: $0.61/unit, +2.5% quarter over quarter, +10.9% year over year
    • PAA: $0.685/unit, +1.5% quarter over quarter, +8.7% year over year
    • PAGP: $0.222/unit, +9.4% quarter over quarter, +30.2% year over year
  • Pemex considering MLP IPO (per Oro Negro)

Published
Apr 5th, 2015

Category:
MLP Market Post

MLP Week Thoughts: Signs of Seasonal Strength

In a holiday shortened week, the Alerian MLP Index (AMZ) traded up 1.0% to make it three straight positive weeks.  MLPs seemed to be helped by higher commodity prices and no equity issuance this week.  MLPs outperformed the S&P 500 (+0.3%) slightly while underperforming utilities (+1.7%).

Weekly Review_4-2-15

Despite the market holiday on Friday, the U.S. jobs report for March showed the lowest amount of job growth in 15 months, which calls into question the strength of the economic recovery and may call into question the Fed’s plan to raise short term interest rates.  A weaker recovery in the U.S. doesn’t bode well for much-needed commodity demand, but lower for longer interest rates may steer yield-hungry investors towards high dividend stocks like REITs, utilities and perhaps MLPs.

Oil price finished slightly higher, making it 3 straight positive weeks for oil prices as well.  Oil prices rallied Wednesday after data from the EIA showed that oil production declined week over week by 0.4%, the first weekly decline since January.  Oil storage continued to build in the U.S. to record levels, but the addition to inventory was less than last week.  Natural gas remains volatile week over week, but remains well below $3/mmbtu.

Status Update

We passed through another month and quarter this week, which gives us an opportunity to take stock in where we are.  March saw the MLP Index decline 4.2%, making it 6 negative months out of 7.  The index declined 5.2% over the first 3 months of the year, a second consecutive negative quarter.  Taken together, the most recent two quarters trail only the second half of 2008 for the worst 6 month stretch in MLP history.  In the 5 years that followed, the MLP index produced average annual returns of 29.5%.  It’s doubtful that a rally like that is pending, but it is logical to expect some relief at some point.

Monthly Check_3-31

If investors are seeking relief, history suggest April is the month that offers it.  The MLP Index has produced positive returns in April for 10 consecutive years and 15 of the last 17 years.  The broader stock market has enjoyed success in April as well, with the S&P 500 averaging +1.3% return in April since 1928, making it the third best month on average.  As shown below positive streaks for MLPs are quite rare these days.  If April finished negative there will be only one month left with more than 1 year in a row of positive returns.

Consecutive Months

Winners & Losers

Each of the top 5 represents MLPs that operate fundamentally different assets along the energy value chain, and none of the top 5 announced any company-specific news this week.  On the downside, however, negative company-specific news impacted stocks like CELP and SDLP.

Top5Bottom5_4-2-15

No repeats among winners or losers this week, a testament to the lack of follow through and the way MLPs have been trading in fits and starts.

Weekly Review_4-2-15_chart

Smaller MLPs continue to dominate the top of the year-to-date performance table.  Upstream MLPs dominate the bottom 5.

Top5Bottom5_4-2-15_YTD

DLNG dropped out of the top 5, replaced by fellow marine transport MLP CPLP.  ARLP climbed out of the bottom 5, replaced by fellow coal MLP NRP.

Top5Bottom5_4-2-15_YTD_chart

News of the (MLP) World

With Good Friday, it was a quiet week for MLP press releases.  Although there were some interesting drop-downs, and a few new midstream JVs with companies just outside the U.S.

Equity

  • CNX Coal Resources (CNXC) filed initial registration statement to raise up to $250mm in an MLP IPO (filing)
    • Formed to manage and develop all of CONSOL Energy’s thermal coal operations in Pennsylvania

M&A / Growth Projects

  • Dominion Midstream (DM) announced acquisition of Dominion Carolina Gas Transmission from sponsor Dominion for $495mm (press release)
    • Funded with $200mm of DM units and a two year note to Dominion
  • Kinder Morgan (KMI) and Keyera Corp (TSX: KEY) announced plans for a JV to construct a new crude oil terminal in Edmonton (press release)
    • The JV owners have entered into long-term, firm take-or-pay contracts with customers to build 4.8mm bbls of crude oil storage at the facility
    • KMI’s investment will be CAD$342mm for an initial 12 tank build-out to be completed by 2H 2017
    • KMI will invest an additional CAD$69mm outside the JV for connecting pipelines and related infrastructure
  • Delek Logistics (DKL) announced acquisition of crude oil logistics assets from sponsor Delek US Holdings (press release)
    • The assets, purchased for $61.9mm, include an oil storage tank adjacent to Delek US’s Tyler refinery and rail offloading racks adjacent to Delek US’s El Dorado refinery
    • The assets are expected to produce $6.7mm of annual EBITDA (8.2x implied EBITDA multiple)
  • ONEOK Partners (OKS) announced pipeline JV with Mexico City-based natural gas Infrastructure company Fermaca to construct export natural gas pipeline to Mexico (press release)
    • Pipeline will extend from OKS’s WesTex Transmission pipeline system in Coyanosa, TX to an international border crossing connection at the U.S. and Mexico border where it will connect with Fermaca’s Tarahumara gas pipeline
    • The project is expected to cost $450-500mm and to be completed in 3 phases, with the final phase expected in 2019

Other

  • Breitburn Energy (BBEP) announced $1bn capital infusion by private equity firm EIG Global Energy Partners (press release)
    • Capital consists of $350mm of perpetual convertible preferred equity and $650mm of senior secured notes
    • BBEP also announced a further 50% distribution cut
    • BBEP will likely be removed from the Alerian MLP Index as a result of this second distribution cut, leaving just 3 E&P MLPs (LGCY, MEMP and LINE)
  • Enterprise Products (EPD) announced CEO Michael Creel to retire by at the end of 2015 (press release)
    • Creel has been CEO of EPD since 2007, and has held the position for longer than anyone else since EPD’s IPO
    • Creel will be replaced by Jim Teague, EPD’s COO, who will be the 5th EPD CEO since its 1998 IPO
    • EPD also announced that Randy Fowler will be appointed to new role of Chief Administrative Officer, and Bryan Bulawa will take over as CFO
  • Seadrill Partners (SDLP) announced receipt of early termination for West Sirius contract and extends West Capricorn contract (press release)
    • SDLP received notice from BP for termination of the contract for the West Sirius, SDLP agreed to lower day rate and decrease term to July 2017
    • BP extended West Capricorn lease with SDLP by two years at an increased day rate to make up for the West Sirius cash shortfall through 2017
    • SDLP expects no material impact to cash flow over the contract period through 2017