Mar 9th, 2014
MLP Market Post
The MLP Index drifted higher the first 3 days of this week, and then floated down a bit Thursday and Friday to settle up 0.5% for the week. Oil and natural gas futures were also flat-ish. Issues in the Ukraine slowed the broader U.S. stock market to start the week, but the S&P 500 rallied in each of the subsequent days to close up 1.0% for the week. Friday’s positive employment report didn’t seem to impact stocks too much. Small cap MLPs fared better than larger MLPs, as evidenced by strong performance of the MLP Equal Weight Index.
In the financial press this week, the conversation centered on the 5 year anniversary of the bull market from the S&P 500’s post-financial crisis low on 3/9/2009, especially with the S&P 500 finishing the week at a new all-time high. The MLP Index wasn’t quite at the bottom at 3/9/2009 (financial crisis low for the MLP Index of 152.7 was set in November 2008), but at 166.3, the MLP Index was 51% off its July 2007 peak at that point. In the 5 years since 3/9/2009, the MLP Index is up 177%. In the same time period, the S&P 500 is up an oddly similar 178%. If you include distributions / dividends, the MLP Index is way out in front with 281% total return vs. 208% for the S&P 500.
Let’s hope the seemingly weekly fresh all-time highs for the market and the 5-year anniversary celebrations aren’t signs of the frantic bustle that occurs in a spirited game of musical chairs as the participants jockey for position in anticipation of when the music will stop. But when the music has been playing (more or less) for five years, who is to say when it might stop? In any event, the brief history of MLPs has shown them to be a pretty cozy chair to find when that time comes…
I spent most of the week in New York, meeting with MLP management teams at the Morgan Stanley one-on-one MLP event, and attending/participating as a moderator/panelist at the Capital Link MLP Conference. It was the first MLP event organized by Capital Link, and I thought it was a strong inaugural conference. The venue was very nice (the Metropolitan Club at Central Park Southeast), the speakers were interesting, the panels were engaging, and it was very well attended.
At both events, there was a lot of talk about what MLPs are planning to do about the shifting geography of hydrocarbon supply areas and the reverberations throughout the existing energy infrastructure network. Marcellus natural gas and NGLs, Bakken oil, and Eagle Ford condensate all need to find new markets. MLPs are each hard at work trying to be the first to capitalize on these opportunities. There will continue to be winners and losers as those efforts play themselves out, and handicapping the competition is the big challenge for investors these days. A challenge made especially difficult when MLPs in your portfolio transform (for better or worse) over time, and during that time your tax basis erodes to the point where exiting an MLP position is extremely costly.
Apologies for the brief post this week, but like everyone else in the country, I’m a little short on time this weekend…
At the Capital Link event, both keynote speakers (each of them portfolio managers at MLP investment management firms) brought up in their prepared speeches a question they clearly hear all the time: what inning is the MLP sector in? Perhaps I’ll share my answer to that question next week with the results of the poll. Generally the safe answer is to say in the middle innings, because that’s pretty vague and innocuous. Please let us know which of the below answers best fits your take on the issue.
Winners & Losers
Small-cap compression MLP GSJK was the big winner this week, up 10.6% on follow through after its earnings release on 2/27 that helped send GSJK up 5.9% last week. QRE’s announcement that it was cleaning up its unique management incentive fee program helped it pop 7.0% this week. On the downside, weak earnings from SXE dragged it to the bottom of the MLP sector for the week.
End of an Era
There was one notable loser in the GP space this week. XTXI was down 9.6% on its last week of trading before the Devon merger was completed and the ticker changes to ENLC on Monday. XTXI was down big on Friday, apparently because the market realized that XTXI will be removed from the Russell 2000 post-merger.
Before the new era of EnLink Midstream kicks off Monday, I thought it would be fun to take a look back at XTEX and XTXI since XTXI went public in 2004. XTXI has more than recovered from the financial crises and dividend cut, but XTEX remains below its peak. Investor returns in each vary wildly depending on entry date, but purchasing XTXI at any point in the last 5 years (except last Friday) produced returns that dwarf those of the S&P 500 and MLP Index discussed above.
Year to Date
GSJK’s two week rally has catapulted it to the top of the MLP sector year to date. WNRL popped up into the top five this week, replacing TLLP. On the bottom five, the four weakest performing MLPs kept their places, but APL replaced AMID as the fifth weakest so far.
News of the (MLP) World
Management changes and analyst ratings reshuffling post-earnings also gave this week’s MLP news an air of musical chairs.
- Atlas Resource (ARP) prices public offering of 5.5mm common units at $21.18/unit, raising gross proceeds of approximately $116.5mm in gross proceeds (press release)
- Overnight offering, priced at 4.1% discount to prior close
- ARP traded up 0.8% in the next session following pricing
- Vanguard Natural Resources (VNR) prices public offering of 7.0mm 7.625% Series B Cumulative Redeemable Perpetual Preferred Units at $25.00/unit, $175.0mm (press release)
- Kinder Morgan, Inc. (KMI) announces authorization for KMI to re-purchase an aggregate of up to $100mm of its outstanding common shares and warrants to buy common shares (filing)
- Martin Midstream (MMLP) files equity distribution agreement to sell up to $300mm of common units at the market (filing)
- Access Midstream (ACMP) prices public offering of $750mm (upsized from $600mm) of 4.875% senior notes due 2024 (press release)
- Niska Gas Storage (NKA) prices private placement of $575mm of 6.5% senior notes due 2019 (press release)
M&A / Growth
- Southcross Energy (SXE) announces acquisition of natural gas pipelines near Corpus Christi, TX for $40mm (press release)
- 50 miles of pipeline
- Transport natural gas to two power plants in Nueces County TX under fixed fee contracts that extend through 2029
- Memorial Production (MEMP) announces $35mm acquisition of oil and gas properties from sponsor Memorial Resource Development (press release)
- 15.4 bcfe of proved reserves (100% PDP, 54% natural gas / 46% liquids)
- Reserves to production ratio of 9.8 years
- QR Energy (QRE) announces acquisition of its general partner, eliminating management incentive fee structure (press release)
- Semgroup and Rose Rock Midstream (RRMS) announces Carlin Conner to serve as President & CEO, replacing retiring CEO Norm Szydlowski (press release)
- Former CEO and current chairman of the board of the GP of Oiltanking Partners (OILT)
- Oiltanking (OILT) announces Ken Owen has been appointed CEO and Director (press release)
- Southcross Energy (SXE) announces John Bonn to serve as President and COO (press release)
- Bonn previously served as President of NiSource Midstream Services, LLC
- Energy Transfer (ETP) wins $319mm pipeline verdict against Enterprise Products (EPD) over its Double E Pipeline joint venture (Bloomberg)
Mar 1st, 2014
MLP Market Post
Returns for the Alerian MLP Index were slightly lower than flat for the week at -0.2%, but well below those of the S&P 500 at +1.3%. Sharply lower commodity prices and some weak 4Q13 results by a few prominent MLPs (MWE, LINE, BBEP, XTEX, VNR and CMLP within the index) helped drag down the MLP index, while the S&P 500 hit another all-time high, and swung to a positive year-to-date return.
For the month, MLPs were down 0.2%, and are up 0.4% for the year so far. An update on where the MLP Index stands relative to recent past performance is below.
Natural gas futures prices were down 7.9% week over week, but there may have been a monthly changeover in the futures that made that drop look less drastic than it was. Spot natural gas prices dropped more than 20%. Ethane and propane prices likewise saw massive week-over-week declines, while oil prices were basically flat.
Earnings results were mixed this week, with the likes of OILT, TEP, and WES producing strong results, while names like LINE, BBEP, and MWE disappointed. Earnings season started off strong, but this week’s results were less encouraging overall. The press release machines have come to life again with drop-down announcements aplenty and large capital markets activity in debt and equity this week. M&A activity, even if it’s mostly drop downs, is encouraging as M&A was a big driver of intra-sector returns last year.
Tax Reform Proposal
In MLP tax news, Senator Camp’s tax proposal (released on Wednesday, details can be found here) seemed at first glance to leave traditional energy MLPs unscathed. If the intent is to spare energy MLPs from taxes that’s great, but there are some energy MLP implications to the proposal in its current (and very far from final) form. The removal of rent and dividends from the definition of qualifying income will impact certain MLPs (including those with corporations embedded in their org charts). Also, IDR owners could fall under the carried interest umbrella that will be subject to tax. The market reaction seemed to focus on the positives, however, as MLPs rallied sharply on Wednesday afternoon after the proposal was released, so maybe energy MLPs really will escape intact.
Not my First Rodeo
The Houston Livestock Show and Rodeo kicked off this week. The 20-day event, considered the city’s signature event, has been held in Houston since 1931. Entertainers from Elvis Presley to Willie Nelson to Justin Bieber have played the event. I remember spending many a night as a kid in the parking lot of the Astrodome where the carnival was (and probably still is?) set up, alongside rows of booths featuring every possible variety of food on a stick. The George Strait’s and Garth Brooks’s of my youth have been supplanted by newer country stars whose names I don’t recognize and by pop acts like Usher, Maroon 5, and Robin Thicke, but the Rodeo appears to be as popular as ever with 2.5mm people attending in 2013 (by comparion the Houston Astros drew just 1.65mm fans in 2013).
One of my favorite events at the rodeo was always the calf scramble. It features 26 students chasing 14 calves. Each student that gets a calf is awarded a $1,250 gift certificate to purchase a “registered beef heifer”. In the event, all the calves are roughly the same and the kids are mostly in the same age range. It is mass chaos.
If I were to attempt a comparison between a calf scramble and the current MLP market, the MLPs would be the calves, but they would be varying sizes and they’d be running at varying speeds. The MLP calf scramble would include a big mob of people chasing these calves, but they’d mostly be chasing after the fastest and fittest ones, largely ignoring the slow, sickly ones.
The current market dynamic wherein MLPs with great prospects trade much better than those that have weaker prospects is directionally rational, but can get irrational if the spreads between the haves and have-nots grows too wide. The crowds chasing the haves MLPs can grow large enough to encourage some investors to peel off to take a second look at the slower and weaker bum steer MLPs. So far, that’s been a dangerous proposition, and some investors have ended up trampled (see BWP and EPB). In any event, like the calf scramble, it’s great fun to watch.
Winners & Losers
For the second straight quarter, MWE disappointed the market’s expectations and pushed out its distribution ramp up deep into 2015. Two prominent analysts cut their rating on MWE Friday, which helped the initial Thursday selloff carry into Friday. MWE stated on its earnings call its goal of re-entering the top quartile of the sector in terms of annual distribution growth rates (which management has stated is high single digits, low double digits). The visibility is there for the distribution growth to ramp up, given its processing capacity dominance in the Marcellus and Utica shales and lack of IDRs, but at this point that visibility might require binoculars to spot on the horizon.
On the positive side of the ledger, TEP and OILT announced strong results and both indicated drop down transactions are in the works at their respective parent companies. NKA hit the top five for the second straight week, as it continues to recover after its big selloff around when BWP cut its distribution.
Year to date, TEP has taken the lead from PSXP, which was downgraded on valuation by one analyst early in the week. Small-cap compression MLP GSJK popped into the top 5 this week, displacing VLP. On the negative side, NKA climbed out of the bottom 5, replaced by AMID.
News of the (MLP) World
One very large equity offering, and two debt deals this week indicate the capital markets may be ramping up again. But the big action this week was in M&A. We saw 4 separate drop down acquisitions announced, one asset sale (RNO), and two related third party transactions (EXLP and ACMP). Most of these drop downs were telegraphed (WPZ) or expected as part of an ongoing drop down program (DPM, MPLX, WES). We still haven’t seen the anything like the big third party M&A or MLP-on-MLP M&A that we saw last year, but it’s still early in the year.
- DCP Midstream (DPM) prices public offering of 12.5mm common units at $48.90/unit, raising $611.3mm in gross proceeds (press release)
- One day marketed offering with a file-to-price decline of 3.1%
- Sunoco Logistics (SXL) files S-3 to register up to $250mm of primary common units (filing)
- Williams Partners (WPZ) prices public offering of a total of $1.5bn of senior notes, including $1.0bn of its 4.3% senior notes due 2024 at 99.791% of par and $500mm of its 5.4% senior notes at 99.676% of par (press release)
- Magellan Midstream (MMP) prices $250mm offering of its 5.15% senior notes due 2043 at 103.085% of par to yield 4.95% to maturity (press release)
M&A / Growth Projects
- Williams Partners (WPZ) announces acquisition of the currently in-service Alberta, Canada operations of Williams (WMB) for $1.2bn (press release)
- Assets include an oil sands offgas processing plant, 260 miles of NGL and olefins pipelines, as well as an NGL/olefins fractionation facility and butylene/butane splitter at Redwater
- WPZ will also acquire an in-progress expansion project at the Redwater facility
- Impact of the acquisition was included in WPZ’s 2014 guidance
- Assets expected to contribute $200mm to $240mm of distributable cash flow to WPZ in 2015
- WPZ to fund the acquisition with the issuance of 25.6mm Class D PIK limited partner units to WMB, $25mm in cash and an increase to the G.P.’s capital account to maintain WMB’s 2% G.P. interest
- DCP Midstream Partners (DPM) announces acquisition of $1.15bn acquisition from parent DCP Midstream, LLC, and associated $250mm growth project (press release)
- DPM to acquire:
- 33.3% interest in the 720-mile, fee-based Sand Hills NGL pipeline, transporting NGLs from plants in the Permian Basin and Eagle Ford Shale to facilities along the Texas Gulf Coast and Mont Belvieu
- 33.3% interest in the 800-mile, fee-based Southern Hills NGL pipeline, which provides 175,000 bbls/d of takeaway capacity from the Midcontinent to Mont Belvieu
- Remaining 20% interest in the Eagle Ford system (will now own 100%), which includes 7 integrated plants with total processing capacity of 1.2 bcf/d
- Lucerne 1, a 35 mmcf/d cryogenic natural gas processing plant located in the DJ Basin, and includes a long-term fee-based processing agreement with DCP Midstream
- DPM to build Lucerne 2 plant, a 200 mmcf/d plant, which will include a 10-year fee-based processing agreement with DCP Midstream
- Will be connected to the Front Range Pipeline for NGL takeaway capacity to Mont Belvieu
- Expected to be in-service by mid-2015 and will cost $250mm overall (but just $180mm additional capital expenditure following close of acquisition)
- DPM to acquire:
- MPLX LP (MPLX) announces $310mm drop down acquisition (press release)
- MPLX to acquire an additional 13% interest in MPLX Pipe Line Holdings LP from parent Marathon Petroleum Corp
- 2nd drop down acquisition since IPO in October 2012
- Will increase interest in MPLX Pipe Line Holdings to 69%
- To be funded with $40mm of cash on hand and $270mm of credit facility borrowings
- 10x EBITDA multiple, implying $31mm of EBITDA
- Western Gas (WES) announces $375mm worth of drop down acquisitions (press release)
- WES to acquire 20% interest in each of Texas Express Pipeline LLC and Texas Express Gathering LLC, and a 33.3% interest in Front Range Pipeline LLC from Anadarko Petroleum (APC)
- 100% fee-based assets that gather and transport liquids from the Anadarko, Permian, and DJ Basins
- WES to finance the acquisitions with $350mm of credit facility borrowings, $6mm in cash and 308,490 common units (at $60.78/unit) issued to APC
- Access Midstream (ACMP) announces acquisition of certain midstream compression assets from a subsidiary of Chesapeake Energy Corp for $160mm (press release)
- Acquisition adds natural gas compression assets, historically leased by ACMP, in the Utica and Marcellus Shale regions
- Transaction allows ACMP to in-source compression costs in the area at an 8.0x EBITDA multiple
- Assets include more than 100 compression units with a combined capacity of ~200,000 horsepower
- Exterran Partners (EXLP) announces acquisition of compression assets from a subsidiary of Chesapeake Energy Corp for $360mm (press release)
- EXLP to acquire 334 compression units, with a total horsepower of ~440,000, which currently are being used to provide compression services to a subsidiary of Access Midstream (ACMP)
- EXLP and ACMP have entered into a 7-year services agreement, under which EXLP will provide compression services to ACMP in the Permian, Eagle Ford, Barnett, Anadarko, Mississippi Lime, Granite Wash, Woodford, Haynesville, and Niobrara Basins
- Rhino Resource (RNO) announces sale of its oil and gas properties in the Utica Shale to Gulfport Energy Corp. for approximately $185mm (press release)
Feb 23rd, 2014
MLP Market Post
After 6 straight positive weeks that took the Alerian MLP Index on a price basis near its all time high, MLPs were unable to breakout and the index tumbled 1.5% this week. The S&P 500 (-0.1%) continued to gain on MLPs with a second consecutive week of out-performance. Large cap diversified MLPs (that dominate the Alerian MLP Index) were down more than others, as shown in the variance of the MLP Equal Weight Index performance this week. Heading into the final week of February, MLPs are slightly better than flat for the month so far, and slightly better than flat for the year (inclusive of distributions) in a slippery market environment.
Commodity prices were mostly higher, although the spot price for Mt. Belvieu propane was down 13.2% and Permian crude oil price (not pictured below) was also down. Front month natural gas futures spike an amazing 18.6% week over week to close well above $6.00/mmbtu. Weak propane prices and higher natural gas prices combine to generally reduce processing and fractionation margins, but the forward curve suggests that the near-term natural gas spike (which seems to have lasted a while now) will be short lived and will rationalize a bit (maybe from its current downhill ski slope shape to a gentler ski school run) once this irrational winter finally wanes.
Earnings were once again in focus this week, with the Energy Transfer (ETE/ETP/SXL/RGP) and Williams families (WMB/WPZ/ACMP) reporting results for the 4th quarter of 2013. No real surprises among those names. WMB’s Bluegrass Pipeline project was delayed 6-12 months (although not canceled entirely). A lack of bad news proved to be a positive for WMB’s share price, which was up 3.7% on the announcement. WPZ was down, however, perhaps due to pending (and growing) equity financing needs to fund announced projects.
This dramatic bifurcation within the same family of companies highlights the ongoing trend in trading for GP (and incentive distribution rights) holding companies and their underlying MLPs. Sell-side equity research analysts may have done too good a job spreading the gospel of IDRs and total return in recent years, to the point where now trading in public GP holding companies is disconnected with its underlying MLP, and investor focus has shifted away from the base MLP businesses to the parents. The recent price charts of TRGP/NGLS, PAGP/PAA, WMB/WPZ, OKE/OKS, ETE/ETP show the trend much better than I can explain it. One of those is highlighted here. It may be starting to get awkward for MLP management teams that typically have more of their wealth tied up in the GP holding companies than in the MLP. It will be interesting to see if and when the narrative changes for certain equity research analysts from growth back to value. Growth remains king of the hill for now, and GP holding companies have that in spades, as do the drop down MLPs that are leading the sector in returns year to date (like PSXP and VLP).
Update on Risk Poll
Thanks to all who participated in our latest poll a few weeks ago, where I asked what you thought was the single biggest risk to MLP performance over the next 12 months. The results are summarized below. Rising interest rates remain the biggest single concern, although rising rates certainly weren’t insurmountable last year when the US 10-year interest rate was up 127 basis points and MLPs produced great returns.
The second and third most popular risks below, general stock market sell-off and general economic slowdown, are similar in that they are circumstances outside the energy space that could impair MLP performance. Survey data can be like a Rorschach, but what I see in the results is that my readers are bullish on secular energy themes that are driving opportunities for MLP cash flow growth, but remain wary of broad macro-economic factors that may impact MLPs ability to attractively finance that growth. What is less of a concern, based on the above chart, is the possibility of someone crashing the MLP party with tax reform or some other energy legislation that might curtail production.
Winners & Losers
ATLS and APL released 4Q results that were below expectations and also lowered guidance for 2014, which the market did not appreciate, at least until Friday when APL bounced 4.0%, which was enough to escape the bottom 5 list below. GEL reported results that included a series of one time issues (again) that have investors spooked, but analysts almost universally believe GEL will have no trouble raising distributions at its usual 10% again in 2014, helped by growth of volumes on the CHOPS pipeline and by the lack of IDRs. Weather issues in the Permian caused LGCY to miss expectations in their earnings release this week. Shipping MLPs in general were weak, but beyond a few downgrades, I couldn’t find any company-specific news that would account for the outsized declines in GMLP and NMM.
On the positive side, PSXP continues to defy gravity, up another 10.3% this week, making it 2 straight weeks of double digit gains. The read-through continues for VLP, which has a very similar business model to PSXP, but is a few months earlier in its lifecycle.
On the year to date chart, PSXP is comfortably ahead of the pack now, overtaking CELP, which was own 6.7% on the week. No changes among the constituents in the bottom 5, but NKA crept a few spots higher this week.
News of the (MLP) World
This week’s $540mm KMP overnight transaction marked the first significant (>$150mm) public equity offering of primary units of an MLP so far this year. Mid-February is the latest point in a year that we have gone without a primary equity offering of at least $150mm in the last 8 years at least (my equity database goes back to 2005). The prevalence of ATM equity distribution programs in place and the large amount of equity raised by MLPs in 2013 has slowed down equity issuance materially year to date. If you’re tired of me saying that, sorry, but it’s a fascinating development for a sector whose capex plans have not slowed down.
Speaking of planned capex, there were several announcements on the organic capex front this week, highlighting continued opportunities to deploy capital. No M&A this week, however.
One more thing, Barron’s published an article highlighting the bear case for Kinder Morgan Energy Partners (KMP). The article’s primary source was the Hedgeye analyst Kevin Kaiser, who has recently had success with his sell recommendation and campaign against BWP several months ago, which dropped 45%+ in price last week. This article on KMP is basically the analyst’s victory lap after his success with BWP, but there may be some added volatility in KMP units this week. MLPs are almost becoming a regular thing at Barron’s after last week’s MLP Round Table discussion, maybe they should get an MLP column going…
- Kinder Morgan Energy (KMP) prices public offering of 6.9mm units at $78.32/unit, raising $540.4mm in gross proceeds (press release)
- Bought deal, re-offered and priced to the public at 2.0% discount to prior close, and closed up 0.3% from pricing the next trading session
- KMP are the masters of the bought deal, and it is KMP’s usual method for executing public equity offerings. The underwriters acquire the units at a discount and then re-offer them to the public. The result is a public offering price that is at a very tight discount to prior close.
- KMP has now executed 8 such deals since the beginning of 2009 for total gross proceeds of $2.9bn at an average discount to the public of 2.1%
- When other MLPs execute bought deals, the discounts offered to the public are typically 3.5% to 4.5%. I’m not entirely sure how KMP manages the tight discount, but its very efficient.
- Markwest Energy (MWE) files shelf registration statement (S-3) to register up to $1.2bn of common units (filing)
- Likely to be sold over time via the ATM, given the recent capital markets strategy of MWE
M&A / Growth Projects
- Genesis Energy (GEL) announces new Gulf Coast import / export terminal in Baton Rouge, LA (press release)
- Project expected to cost $150mm to construct and is expected to be complete by 2Q 2015
- Terminal will be located on ~90 acres of land near the Port of Greater Baton Rouge and will be connected to the port’s existing deepwater docks on the Mississippi River
- GEL will construct 1.1mm barrels of tankage for storage of crude oil, intermediates and/or refined products with the capability to expand to provide additional terminaling services to its customers
- Terminal will also be connected to ExxonMobil facilities in the area as well as to GEL’s previously-announced Scenic Station rail facility
- Williams Partners (WPZ) announces binding commitments for 1.7mm bcf/d of firm natural gas pipeline capacity on its proposed Atlantic Sunrise Expansion (press release)
- Pipeline would significantly expand Transco to create southern market connection for growing Marcellus shale supplies
- 9 shippers have committed for 100% of the 1.7 bcf/d of capacity for 15 years
- Pipeline is expected to be in service by the second half of 2017, assuming timely regulatory approvals
- WPZ’s net investment for the pipeline expansion feeis expected to be $2.1bn
- Energy Transfer (ETP) announces long-term agreement with XTO Energy to provide gathering and processing services in the Permian Basin (press release)
- To support the agreement, ETP will construct a 130 mmcf/d cryogenic processing plant (expandable to 200 mmcf/d), and will build over 100 miles of high pressure and low pressure gathering pipelines in Glasscock County, Texas
- New plant and gathering lines expected to be in-service by 3Q 2014
- EQT Midstream (EQM) announces long-term agreement with Range Resources Corp. to provide midstream services in the Marcellus shale (press release)
- Agreement includes fee-based, 10-year minimum volume commitment for gathering and transmission services
- EQM will invest approximately $30mm in gathering infrastructure and $25mm in a transmission expansion project to support the agreement
- The transmission expansion will add 100 BBtu/d of capacity to EQM’s transmission system in Southwestern Pennsylvania and is expected to be in service by November 2014