Jan 26th, 2014
MLP Market Post
MLPs were one of the few bright spots in the market this week, with a 1.5% gain for the Alerian MLP Index compared with a 2.6% loss for the S&P 500. The recipe for big MLP out-performance: sell-off in global equity markets, lower interest rates, colder than expected temperatures leading to spiking commodity prices, and a general lack of MLP equity issuance.
MLP index returns are now well ahead of the S&P 500 year to date, after trailing heading into the week. The Alerian MLP Index was up slightly more than the Alerian MLP Equal Weight Index, implying strength in large cap MLPs. MLP affiliate corporations (SEMG, WMB, KMI, PAGP, TRGP, XTXI and OKE) were almost universally down (XTXI was the exception), which I believe to be a function of their corporate status that makes them more broadly owned (given their lack of K-1) and more susceptible to broad market declines.
Spiking natural gas price was the big story this week, given the relentless winter weather hitting all around the U.S. to various degrees. Short term supplies have not been able to keep up with peaking demand, driving the spot price for natural gas priced at Henry Hub on Thursday to more than $5.50/mmbtu, a level not reached since February 2010. Week over week, the change was 19.3% for natural gas. Below is a chart of natural gas prices over the last 6 months.
Natural gas prices have trended higher throughout this extremely cold winter, and may begin to positively impact 2014 guidance for some MLPs that benefit from higher natural gas prices (upstream MLPs and MLPs with gathering assets in dry gas areas most directly), although gains from natural gas pricing and activity may be balanced against operational disruptions due to extreme winter weather for some MLP assets.
Ethane and propane continue to be in shorter supply as well, which has led their prices to multi-year highs. The Mt. Belvieu price for these lighter NGLs doesn’t capture some of the extremes at the margin, however. In some areas, propane was delivered to retail customers at nearly $5.00/gallon, and in some cases it was not delivered at all (according to this Reuters story).
Equity Issuance YTD
I mentioned above that there has been a lack of equity issuance. Below is a chart showing the amount of equity issued in the first 24 days of each of the last 5 years. So far in 2014, MLP equity issuance in marketed offerings is well behind the pace of the last four years, which averaged $1.6bn through January 24th. So far, there has been 1 small IPO (CELP), 1 small primary equity offering (from AMID – see below), and a secondary offering (ETP selling APU units).
The chart above doesn’t capture how much equity has been issued via at-the-market equity distribution arrangements (ATMs) that have become more common among MLPs in recent years. But even assuming a liberal amount of equity issued via ATMs, equity issuance has been light, which can be both good and bad. A lack of equity deals means that on a day-to-day basis there is less selling pressure, which is good for MLP prices generally. On the other hand, if the assumption is that the MLP sector needs to issue at least $20bn in equity in 2014 to fund capital programs, each day they don’t issue equity increases the overhang from expected equity for the remaining days of the year.
Winners & Losers
The range of returns among MLPs was pretty tight this week. EVEP led all MLPs higher this week at 6.1%, while NMM was down the most at 4.2%. EVEP’s strength may have been the result of commodity price strength. Last week’s biggest loser, DKL, bounced back into the top 5 this week. The three pure-play contract compression MLPs made the chart below, with GSJK and EXLP in the top 5 and USAC in the bottom 5. GSJK and USAC both announced distribution increases that seemed to be larger than expected. AMID was the only MLP that announced a transaction (not counting the 40+ MLPs that announced distributions this week), and pressure from its equity offering seemed to push down its price late in the week.
For the year so far, EPB and APL climbed out of the bottom five this week, replaced by RRMS and CMLP. No change to the early leaders among MLPs year-to-date.
News of the (MLP) World
It was a very light news week for MLPs, with just a single acquisition and a related equity offering, and a bunch of distribution announcements. In the upcoming week, the analyst community will be focused on digesting whatever news comes out of the Kinder Morgan analyst day. According to our poll question last week, most of you believe either that the analyst day announcements will (1) not meaningfully impact any of the Kinder Morgan-related stocks or (2) that they will have an impact on KMI above any of the MLPs. We’ll get to see how that plays out this week, and we’ll also see another round of distribution announcements that may drive individual MLP performance.
- American Midstream (AMID) prices public offering of 3.4mm common units at $26.75/unit, raising $91.0mm in gross proceeds (press release)
- One day marketed offering, file-to-price decline of 4.0%
M&A / Growth Projects
- American Midstream (AMID) announces $100mm acquisition of natural gas gathering system in Eagle Ford Shale (press release)
- AMID to acquire 120-mile natural gas gathering and re-delivery system located in the oil window of the Eagle Ford shale
- In December, Penn Virginia Corporation (PVA) agreed to sell the assets to an affiliate of AMID’s general partner
- AMID will acquire the entity that has the agreement with PVA for $100mm
- PVA will dedicate for 25 years all current and future natural gas production from the areas around the system to AMID
- AMID expects the assets to generate $8mm of EBITDA in 2014 (12.5x EBITDA multiple)
- Additional capex of $60-$70mm to be spent in the next 5 years to increase annual EBITDA to $25mm ($165mm of acquisition cost and capital implies a 6.6x multiple of 2018 EBITDA)
- XTXI: $0.15, +15.4%
- WGP: $0.23125, +8.2%
- EQM: $0.46, +7.0%
- XTEX: $0.36, +5.9%
- PSXP: $0.2248, +5.8%
- OILT: $0.47, +5.6%
- USAC: $0.48, +4.3%
- SMLP: $0.48, +4.3%
- TLLP: $0.565, +3.7%
- WES: $0.60, +3.4%
- BKEP: $0.1265, +3.3%
- RRMS: $0.465, +3.3%
- DKL: $0.415, +2.5%
- GLP: $0.6125, +2.1%
- CEQP: $0.1375, +1.9%
- GSJK: $0.4375, +1.7%
- CMLP: $0.41, +1.5%
- HEP: $0.50, +1.5%
- MWE: $0.86, +1.2%
- LGCY: $0.59, +0.9%
- MMLP: $0.785, +0.3%
- FISH, VLP, CQP, AMID, CPLP, KNOP, RNO, NSLP, MCEP
Jan 19th, 2014
MLP Market Post
MLPs were basically flat this week, but both the Alerian MLP Index and the Alerian Equal Weight MLP Index beat the S&P 500, which was down slightly. Commodity price strength (see below) and slightly lower interest rates did not translate into much immediate MLP price strength.
Commodity prices were universally strong this week:
- Crude oil prices rose 1.5%, but remains 4.5% lower than year end
- Natural gas prices bounced back, +6.1% this week
- Record natural gas storage withdrawal of 287 bcf
- Ethane was up 22.8%, which seems like a lot, but is really just $0.06/gallon
- Propane strength continues, +7.6% this week, makes it +70.6% year over year
- 52-week highs for both propane and ethane
- Propane closed the week at its highest price in more than two years (since 1/3/12)
MLP earnings season kicked off with the Kinder Morgan family of companies reporting results on Wednesday that were largely in-line with analysts’ expectations. The earnings call included some table pounding by CEO Richard Kinder on behalf of what he views as a clearly undervalued Kinder Morgan Inc (KMI), see this WSJ.com blog post about the call. There was less table pounding around EPB and KMP… In any event, Kinder will be hosting an analyst day on January 29th to unveil its full year 2014 budget and long term distribution expectations for its various entities.
Winners & Losers
Brand new MLP Cypress (CELP) had a nice pop, rising each of its first 3 trading day to finish the week up 12.3%. On the downside, DKL led the sector lower (-6.9%) after Barlcays downgraded it from overweight to equal-weight. APU was under some selling pressure from ETP’s underwritten offering of APU units owned by ETP, but not weak enough for APU to land on the bottom five chart.
For the year so far, CELP’s early strength catapults it right near the top of the list, alongside CLMT. DKL dropped from the second spot to out of the top five, but is still up for the year. RNO and GLP continue to trade well early in 2014. In the top five are 3 MLPs with less than $500mm market caps and the average market cap of the top 5 is less than $1.0bn.
It might be tempting to say that because the top 5 are small cap MLPs, it means small cap MLPs will outperform in 2014 or that you should buy more of them vs. larger MLPs. The top five or bottom five in any given year are typically the more volatile MLPs or are ones that have had a transforming transaction, neither of which are necessarily attractive traits in an MLP. It is interesting and worth noting, however, that the top five is loaded with small caps, especially when the bottom 5 is loaded with MLPs that have more than $4.0bn market cap (like EPB, ETP and CMLP).
If you haven’t already, check out the 2014 Over Unders post from earlier this week and make sure your vote is counted. I’ll tally those votes and summarize the results next week. I will be implementing polls on a more regular basis going forward, some tied to specific weekly transactions, so hopefully that will generate some interesting results. This week’s poll question is below.
News of the (MLP) World
- Amerigas (APU) announces that Energy Transfer (ETP) priced an underwritten public secondary offering of 8.0mm APU units at $42.73/unit, raising $341.8mm in gross proceeds for the selling unitholder (ETP) (press release)
- Overnight offering, priced at 4.3% discount to prior close
- Traded down 1.1% in the next session
- Cypress Energy (CELP) prices initial public offering of 3.75mm common units at $20.00/unit, raising $75mm in gross proceeds (final prospectus)
- Priced at the midpoint of the pricing range, which represents a 7.75% IPO yield
- Opened trading at $20.00, reached a high of $21.74 (+8.7% from IPO price), before closing at $21.30 (+6.5%) on its first trading day
- CELP is a services MLP that provides saltwater disposal wells and operates a pipeline inspection business
- GasLog Ltd (GLOG) announces its Board of Directors has authorized the company to file a draft registration statement for an IPO of an MLP that would own certain of GLOG’s LNG carriers with multi-year charters (press release)
- Crosstex (XTEX / XTXI) and Devon (DVN) announce combined mistream business to be named EnLink Midstream (press release)
- Cheniere Energy (LNG / CQP) announces CFO change (press release)
- CFO Davis Thames ceased to serve on 1/14, replaced by Michael Wortley (internal promotion from prior role of VP, Strategy & Risk)
- Ferrellgas (FGP) announces diversification initiative (away from propane), announces new SVP of Strategic Development to lead it (press release)
- TRGP: $0.6075, +6.6% quarter over quarter
- TEP: $0.315, +5.9%
- HCLP: $0.51, +4.1%
- TOO: $0.5384, +2.5%
- TGP: $0.6918, +2.5%
- NGLS: $0.7475, +2.0%
- EPD: $0.70, +1.4%
- KMP: $1.36, +0.7%
- OKS: $0.73, +0.7%
- LRE: $0.49, +0.5%
- EPB (streak of 22 straight quarterly distribution increases officially ends), KMI, TLP, WPT, OCIR
Jan 16th, 2014
MLP Market Post
Now that everyone has read everyone else’s 2014 outlook on MLPs, natural gas prices, oil exports, U.S. production, propane exports, etc., you can apply what you’ve learned by sharing your expectations with us. Below, for the third straight year, I outline the MLP odds. The goal is to discern the market’s expectation for certain numbers related to the MLP sector, and then to make a directional call on that number with some commentary. In other words, we set lines for MLP sector numbers and we enter our picks (see previous years: 2012 and 2013). Then we come back next year and review how we did (last year I went 8 for 13). The concept was originally inspired by a recurring segment on the TV show “Pardon the Interruption” called Over Under.
Because I set the lines, it would be easy for me to set it up so that I get almost everything right. I do make an honest attempt to set the lines, though, because this piece is more about having fun and stimulating thought than about getting everything right. This year, by voting in the 10 categories below yourself, you can either agree with my pick or disagree, and as Rich Kinder said on the KMP earnings call yesterday, “you sell, I’ll buy and we’ll see who comes out best in the long run” (transcript).
1. MLP IPOs
- Line: 12
- My Pick: Under
- 2013 Result: 19 (not counting CQH or PAGP)
- 2012 Result: 12
The last three years, we have seen an average of 15 MLP IPOs per year. I expect fewer IPOs this year than last year. At the beginning of 2013, the pipeline of companies that had discussed forming an MLP or had filed a prospectus for an MLP IPO was significantly higher that it is today. Also, the tailwinds from the stock market and MLP stock prices helped keep the IPO train going all year in 2013. Although it is still early in the game, we haven’t seen much strength in MLPs this year.
2. Returns vs. S&P 500
- Line: Pick ‘em
- My Pick: Over
- 2013 Result: -482 basis points
- 2012 Result: -1050 basis points
My thought is that MLPs will outperform the S&P 500 this year after underperforming by a wide margin in each of the last two years. Interest rates and tempered 2014 guidance proved to be a headwind in the second half of 2013 for MLPs. Interest rates may rise, but probably not on a percentage basis by as much as they did in 2013 (when the U.S. 10-year treasury rate rose from 1.76% to 3.03%), and modest rate increases we believe are priced in. The secular tailwinds of U.S. energy activity persist for MLPs, and should help MLP distribution continue in 2014, even if the broader stock market takes a pause, allowing MLPs to hopefully outperform in 2014.
3. Variable Distribution IPOs
- Line: 3
- My Pick:Under
- 2013 Result: 3
- 2012 Result: 3
Variable distribution MLPs have their place, and their niche of the overall MLP sector will continue to grow in 2014. But I don’t see a flurry of variable distribution MLPs going public this year, perhaps 1 or 2. The buzz in the marketplace around the structure when it was new and interesting is just not there any more, but the market is still there as an exit option for owners of non-traditional MLP assets. Fertilizer MLPs have started very strong so far this year, and they may perform well enough to spark more variable distribution IPO activity in 2015, but not in 2014.
4. General Partner Holding Company IPOs
- Line: 1
- My pick: push
- 2013 Result: 1, but 3 if you count CEQP and OKE
- 2012 Result: 1
Each of the last 4 years, we have had 1 MLP GP IPO. I believe we see another one in 2014, but not more than that. The logical candidates have all gone public. In 2013, PAA’s GP went public (PAGP), CMLP’s GP executed a reverse merger into NRGY and is now CEQP, and OKE announced a spinoff of its natural gas utility business to leave OKE as essentially a GP holding company of OKS.
5. MLP Consolidations / General Partner Sales
- Line: 4
- My Pick: over
- 2013 Result: 9
- 2012 Result: 2
This line was determined based on the average of the prior three years results, and I think reflects about where the market expectations are. It is unlikely that we see as many MLPs change hands in 2014 as last year, but I expect we’ll see a few of them. My best guess is between true consolidations and GP sales, we get around 5 such transactions.
6. MLP Distribution Cuts
- Line: 1.5
- My pick: over
- 2013 Result: 1
- 2012 Result: 3
NRP already announced a distribution cut, just a week into 2014. So there will be at least as many distribution cuts in 2014 as there were in 2013. I bet we see at least one more distribution cut. Anecdotally, an increasing number of MLPs have grown comfortable running their businesses with less than 1.0x distribution coverage. When an MLP doesn’t cover its distribution with cash flow, that MLP has little margin for error, because one more misstep can put the MLP in major distress that might lead to a distribution cut. I see that risk rising for MLPs in 2014, particularly those that have direct commodity price exposure and have been holding on to their distribution and waiting for commodity prices to rise and bail them out.
7. MLP Tax Law Changes
- Line: None
- My pick: None
- 2013 Result: None
- 2012 Result: None
MLPs have clearly climbed the wall or worry around MLP tax changes. I think 3Q 2011 was the last time that MLP tax changes fears materially impacted MLP stock prices. I don’t see those fears resurfacing this year either. At some point, MLPs may come under fire as part of a broad based tax reform, but I view the risk of such tax reform happening in 2014 as very small. If you feel otherwise, please indicate by voting as such below.
8. Equity Issuance in Marketed Offerings
- Line: $27.5bn (average of last two years)
- My Pick: under
- 2013 Result: $26.5bn (doesn’t include CQH and PAGP)
- 2012 Result: $28.7bn
Consistent with my picks of under on IPOs and over on ATM programs, which would both reduce the pool of equity raised via marketed offerings, I am going under the $27.5bn line. I expect that this year we will see marketed equity offerings (IPOs and follow-on offerings) will represent the lowest percentage of the sector’s market capitalization since 2010, when the equity markets were just opening up again after the Global Financial Crisis.
9. MLPs Launching At-The-Market Equity Distribution Programs
- Line: 12.5 (average of last two years)
- My pick: Over
- 2013 Result: 17
- 2012 Result: 8
MLP ATMs have become a large slice of the equity capital markets activity of MLPs, much to many a banker’s chagrin. Expect MLPs to continue to put these programs in place, and expect the biggest MLPs to issue more than $500mm each using those programs in 2014. For example, KMP issued more than $1.1bn under its ATM program in 2013.
10. MLP Sub-Sector Returns
Sub-sector returns the last 2 years are broken down in the chart below. General partner holding companies, as per usual, performed well, and were the biggest outperformers last year. That was helped by the success and trading action in ETE and XTXI. Upstream MLPs had the weakest results. I think if each of the subsectors below had a betting line, the favorite would probably be G.P. holding companies. That subsector is the perennial favorite, akin to the New England Patriots in the NFL. Upstream MLPs would consistently be the longshot, as more often than not, upstream MLPs have underperformed the MLP Index.
My Pick: I’m not going to bet the favorite, although I do have a favorable view of the prospects of GP holding companies. My darkhorse pick for the top subsector this year is the gathering and processing MLPs, which should generally benefit from rising natural gas and NGL prices as the excitement builds in the second half of 2014 for export possibilities and domestic petrochemical demand coming online in the following few years. I also believe gathering and processing MLPs will be active in the M&A market, either as acquirers of assets or as acquirees if the MLP consolidation trends continues. What do you think?