Oct 12th, 2014
MLP Market Post
As noted and discussed in my Friday post, the Alerian MLP Index was down 7.0% this week, and the Alerian MLP Equal Weight Index was down 7.7%, which is explained mostly by smaller-weighted upstream MLPs vastly underperforming, and mega-weighted KMP outperforming.
The interesting thing to note about the Equal Weight Index is that after this week’s decline, it is very close to flat for the year (not counting distributions), and is underperforming the S&P 500 by quite a bit. So, if you didn’t own KMP and you didn’t participate in any hot IPOs, and maybe had a few upstream MLP positions, your MLP portfolio is probably not having a very good year, which seems incredible given how just 6 weeks ago we were sitting at all-time highs.
Enough about MLPs, the real story of the week is commodity price weakness, and questions about where the demand will come from to soak up surplus oil given questions about global economic growth. WTI oil futures closed at $85.56/bbl, a 4.7% decline week over week. Natural gas, ethane and especially propane sold off sharply as well. Oil’s decline was just a continuation of the steady decline from the end of July when oil was above $105/bbl.
This week was a clear reminder that interest rates are second to fundamental commodity flows and prices in terms of impact on MLPs. The US 10 year rate was down 15 bps to 2.28%. Treasuries and U.S. utilities were two of the only places to hide out this week (the UTY index was up 1.1%).
Winners & Losers
Upstream MLPs were the clear losers this week (LGCY, QRE and MCEP all in the bottom 5). LGCY’s relationship with WPX (announced strategic changes to drilling focus this week) contributed to it having the biggest decline of all MLPs. Well, technically not all MLPs, because variable distribution MLP EMES was down 21.8%, and general partner holdco MLP ATLS was down 20.7%. CELP’s business is tied directly to upstream activities, which means it gets sold when energy and commodities get sold as well. SUSP seems to be the outlier among the bottom five, dropping 18.1% despite having a business that is driven by drop downs and not oil prices, but perhaps financing those drop downs gets more challenging in the current MLP environment.
On the upside, IPO USDP did ok, considering it was marketing against Dominion Midstream this week, and then it priced right into the worst MLP sell off in years. Non-US focused MLPs SDLP and GMLP did well. Lightly-traded small cap refined products MLP WPT beat everyone and was one of only 2 MLPs that went up in price this week.
Besides ATLS’s weakness, other GPs were pretty consistent in their under-performance: NSH (-14.3%), SEMG (-14.0%), CEQP (-12.6%), TRGP (-12.4%), ETE (-12.1%), ENLC (-11.1%), WMB (-10.2%), and OKE (-9.2%) were all down between 9-15%. WGP, KMI and PAGP, which all out-performed the MLP Index. The under-performing GPs included high-growth, popular GPs like SEMG, ETE, TRGP, and WMB, but also the limited growth GPs like CEQP and NSH. This is more evidence of widespread selling that (with a few minor exceptions) had little to do with outlooks for individual stocks.
The year-to-date chart looks a bit different this week. SUSP and RRMS fell out of the top five, replaced by EQM and SRLP. CMLP joined the bottom 5, while VNR joined the bottom 5 for the first time this year, after falling 24.5% since mid-September.
While not top of mind during this week’s meltdown, at some point in the next few months, we will learn the fate of KMP and KMI in the eyes of the MLP indices that Alerian manages. For now, Alerian has been understandably quiet on the issue, especially given how much capital tracks their indices.
The Alerian MLP Index is not capped, so keeping KMI in the index would make it a very large position, and around 35% of the index comprised of just 2 names (EPD and KMP), based on our calculations. There is at least one research analyst that believes Alerian might stage a staggered exit for KMP over more than one quarter if it does come out. Also, KMI could stay in one MLP index (like AMZI) while exiting the original index. A couple of questions / issues come to mind.
- If they changed the rules to allow KMI to be in the index, wouldn’t they need to allow in ETE and companies like Columbia Pipeline Group (the spin off from NiSource) as well?
- Why is the most-followed index in the industry capped at 50 names? It would be great if Alerian used this as an opportunity to change course and become more inclusive going forward.
- Keeping KMI in any index is problematic if KMI starts to acquire assets outside of traditional MLP assets. KMI will not be obligated to own MLP qualifying assets.
It will be very interesting to see how it plays out, because there are certainly large dedicated MLP managers that would prefer KMI stay in the index.
News of the (MLP) World
- USD Partners (USDP) prices IPO at $17.00/unit, below the filing range (press release)
- IPO yield of 6.76%, highest since GLOP in May of this year
- USDP opened its first trading day Thursday at $15.80, and closed at $16.00 (-5.9%)
- Natural Resource Partners (NRP) prices public offering of 8.5mm units at $12.02/unit, raising $102.2mm in gross proceeds (press release)
- One day marketed offering, with a file-to-price decline of 6.8%
- Dominion Midstream Partners (DM) launches MLP IPO to raise $350mm at a midpoint yield of 3.5% (filing)
- Midpoint price already represents a record low MLP IPO yield, very confidently priced
- Still on track to price Tuesday
- Breitburn Energy (BBEP) prices public offering of 14.0mm units at $18.64/unit, raising $261mm in gross proceeds (press release)
- Overnight offering, priced at 3.9% discount to prior close
- Navios Maritime Midstream Partners files initial prospectus for an MLP IPO to raise up to $100 (filing)
- Markwest Energy (MWE) files S-3 to raise up to $1.5bn worth of common units (filing)
M&A / Growth Projects
- Targa Resource Partners (NGLS) announces plans to construct Delaware Basin and Williston Basin natural gas processing plants (press release)
- Delaware Basin plant (in-service by 1Q 2016): 300 MMcf/d processing plant, a header pipeline originating at the new plant and extending into the southern portion of the play
- Williston Basin (YE 2015 in-service): A 200 MMcf/d processing plant in McKenzie County
- No indications on the economics or expected construction costs, but based on other plants, the combined cost of these plants should be at least $500mm
- Global Partners (GLP) announces acquisition of Warren Equities for $383mm (press release)
- Warren sells ~500mm gallons of fuel annually through 520 retail locations, and operates 147 Xtra Mart convenience stores
- This transaction is the latest in what has become the most active asset acquisition corner of the MLP space
- GLP expects the acquisition to produce $50-60mm of EBITDA in its second full year of operations (7x multiple)
- NGL Energy (NGL) announces successful open season for recently announced Grand Mesa crude oil pipeline from DJ Basin in Colorado to Cushing (press release)
- Grand Mesa pipeline is being developed jointly by NGL and Rimrock Midstream, LLC
- Pipeline should be in-service by 2016 and will include 550 miles of new pipeline, 1,500,000 barrels of operational storage, and multiple truck injection points
- Natural Resource Partners (NRP) announces $340mm acquisition of non-operated working interests in Bakken oil & gas properties (press release)
- NRP acquiring 5,700 net acres from Kaiser-Francis Oil Company
- Expected to generate $58-60mm in EBITDA in 2015, implying a 5.8x multiple
- EPD, PAA, GEL kicked off distribution announcement season with increases that were in line with recent quarterly raises
- Oiltanking (OILT) announces new CEO from EPD’s deep management bench (press release)
Oct 10th, 2014
MLP Market Post
MLPs were in free fall this week, the likes of which we haven’t seen since August 2011. The Alerian MLP Index officially reached correction levels intra-day on Friday, reaching its lowest point since late March of this year. At its low point for the day, the index was down 5.6% intra-day, 13.0% in 15 trading days since September 19th, and 13.5% since its most recent all-time high reached on the last day of August. There is more on how recent MLP weakness compares with other selloffs in MLP history below, and more on individual MLP performance in my regular weekly post.
In times like this, when paper value is evaporating and fear starts to set in, it is important to step back and review the investment case for MLPs. Last week, we published a marketing commentary on the MLP space. The focus was to look at some of the fundamentals of the sector and highlight the strengths of the MLP story. The main conclusion is that MLPs are poised to deliver 6-8% distribution growth, in line with historical averages.
You can click here to read the report, and please take the energy futures chart with a grain of salt as the data is from 9/15.
What the market is willing to pay for that 6-8% growth is the question mark. After this week, it is clear that the market either doesn’t believe in continued distribution growth along historical levels, or that it believes the growth and doesn’t want to pay quite as much for it. If growth is in question, that may have some merit if you believe oil prices get so low that drilling slows down or if you believe weaker economic growth reduces global demand for energy. But the impact of those macro factors is probably overdone, especially given the fee-based nature of cash flow, recent long-term commitments to pipeline projects and LNG projects, and given we sit on the precipice of another potentially cold winter.
Historical Context of the Correction
This week was the 10th worst week for the MLP Index of all time (see below for others, many of which were associated with the financial crisis). It was also the worst week in about 4 and a half years. MLPs have been down for 6 straight days, and week over week have been down for 3 consecutive weeks.
This current 6-day streak is the 29th streak of 6 or more consecutive down days for the Alerian index since 2000, and it is the 3rd such streak so far this year, but saw overall declines during the streak of less than 5%, compared with the current streak at -7.2%. The good news in all of this is that history says after a horrible week like this, the market tends to bounce back, and recoup at least some of the losses from the selloff.
The Alerian MLP Index is at its lowest point since May of this year. We have seen a 9.7% correction since the end of August, and a 9.2% correction since 9/19 levels. This is a full correction. If you go back and track the peaks and troughs of the MLP sector, the average peak-to-trough decline is around 9.6%, based on the below chart I published last year. The current decline is near the average, which doesn’t mean it’s over, but it may help comfort you after a rough week.
More on the week in MLPs later this weekend.
Oct 5th, 2014
MLP Market Post
MLPs declined for the second straight week, with the Alerian MLP Index down 0.3%. The Equal Weight version of the Alerian for the second straight week was significantly lower than the cap-weighted version, highlighting the broad-based nature of the recent selloff. Utilities were up 1.5% and interest rates were down this week, so it seems like MLPs traded more as a result of lower crude prices than other factors. Front month WTI futures closed the week below $90/bbl on global oil price weakness resulting from a Saudi price cut and higher than expected OPEC production. MLPs did better than the S&P 500 this week, and are still well ahead of the broader stock market so far this year.
Enterprise Products Partners, the largest of all MLPs, announced the acquisition of the GP of OILT at around 50x 2015E GP cash flow. The deal was greeted with some skepticism by the market (both EPD and OILT were down for the week). The $6.0bn, two step acquisition was the largest ever for EPD. It was also the first major third party acquisition (not counting the TPP merger in 2009, the EPE merger in 2010 and the DEP merger in 2011) by EPD since the $1.2bn acquisition of assets from M2 in 2010, the acquisition of TEPPCO’s GP in 2005 for $1.1bn and the $3.9bn merger with Gulfterra in 2004.
EPD has been very disciplined over the years, touting returns on growth projects as much more attractive than high priced acquisitions. Acquiring an MLP at a high multiple rather than continue to invest in low multiple growth projects may be a subtle hint that the well of organic growth capital projects at EPD is starting to dry up. The assets OILT had talked about acquiring from its parent were not included in the deal, which may say something about how long OILT expected to be able to sustain 20%+ distribution growth.
Fundamentally, the major themes in the MLP space right now are the massive natural gas and oil pipeline build-out and the build-out of export capabilities for natural gas, NGLs and refined products. Corporate action-wise, however, the two major themes continue to be consolidation and IPO activity. MLPs old (ENLK, PVR, TLP, KMP/EPB), and new (ACMP, SUSP, OILT, QRE) are being acquired or merged. Investors are losing some pure play growth stories (ACMP, OILT) in some cases and are seeing new life pumped into less exciting stories (ENLK, SUSP). All the while, the market is being replenished with new MLP IPOs that offer exposure to a variety of new growth opportunities.
In all of this, the acquired MLPs and the public GPs of the acquirers (ETE, WMB, ENLC) are the big winners, while the large cap MLP acquirers (EPD, RGP, WPZ) tread water. To use a term that originated in the 1960s, there is a growing generation gap in the rapidly evolving MLP sector between older MLPs straining to grow through their IDR burden and large size, and newer MLPs with clean balance sheets, low IDR takes and high growth. Just like in the 1960s, old school MLP investors may scoff at the viability of some of the growth rates of some of the newer MLPs, secure in the wisdom that nothing grows 20% forever…
Press for CBRE Clarion Securities
An interview I did in late August was featured in Investor’s Business Daily’s special report on income investing. You can read it here and see the results of the photo shoot below.
Winners & Losers
For the second straight week, HCLP was the worst performing MLP, down 10.9% after a 12.3% decline last week. HCLP weakness certainly was helped by significantly lower crude prices. Among the winners, ETP and TCP showed follow through from their strong September performance.
ENLK, which continues to announce transactions across its 4 avenues for growth, made a rare appearance among the top 5 after generally trailing the Alerian MLP Index this year so far. In just the last few weeks, ENLK has (1) completed organic growth projects (Phase II at Cajun Sibon and the Bearkat natural gas processing plant) and announced an NGL pipeline project with Marathon (organic growth), (2) announced expansion of its Bearkat natural gas processing facility, supporting by Devon production (organic growth with Devon), and (3) announced a third party acquisition. All that’s left is a drop down to complete the quad-fecta, but the market appears to be warming to the story, at least for this week.
We rolled over another month end this week, so it makes sense to take a look at the month that was in MLP land. CNNX was the big winner, even though it traded only 4 days in the month. TCP was up 15.5% on not much beyond a sharp change in sentiment. ETP management was vocal about how cheap its unit price was at a conference early in the month, and then ETP followed through with an earlier-than-expected drop down to SUSP on top of major pipeline project announcements in August.
Turning to YTD returns, all of the top 5 except for SUSP was down this week, but none of the constituents or order changed. On the bottom 5, NKA replaced MMLP as the 5th worst performing MLP so far this year.
News of the (MLP) World
This week in MLP news we saw more strategic restructuring from owners of midstream assets looking to unlock value (NiSource) and more strategic consolidation from large MLPs with deep pockets (EPD). Plus, 3 new MLP IPOs filed. Oh, and after two MLP name changes announced last week, we get another one this week. The MLP sector has never been more dynamic.
- JP Energy (JPEP) prices IPO of 13.75mm common units at the midpoint $20.00/unit (6.50% yield), raising $275mm in gross proceeds (final prospectus)
- First day of trading: opened at $20.50, traded as high as $20.60, but closed at $19.11, down 4.5%
- First MLP to trade down in its first day since FELP, breaking the streak of 5 MLP IPO pops in a row
- Legacy Reserves (LGCY) prices public offering of 10.0mm units at $27.38/unit, raising $273.8mm in gross proceeds (press release)
- Overnight offering, priced at 3.75% discount to prior closing price
- USD partners (USDP) launches MLP IPO to raise $177mm at a midpoint yield of 5.75% (filing)
- Columbia Pipeline Partners (CPPL) files initial registration statement to raise up to $800mm in an MLP IPO (filing)
- CPPL will start out as a subsidiary of NiSource, Inc, but NiSource is spinning out the midstream business (including the GP of this MLP) at some point in mid-2015
- $800mm IPO would be the largest ever for an MLP if that’s the amount ultimately raised (Shell Midstream is on file with a $750mm IPO, which would also be bigger than the current record of $690mm by CVRR in 2013)
- CPPL will initially own a 14.6% interest in Columbia OpCo, which will own all of NiSource’s natural gas transmission and storage assets, including 15,000 miles of strategically located interstate pipelines extending from New York to the Gulf of Mexico, one of the largest underground natural gas storage systems in the nation, and related gathering & processing assets
- CPPL will principally grow by acquiring additional interests in Columbia OpCo over time
- Columbia OpCo is expected to produce $620mm of EBITDA in the next 12 months, of which $90.5mm would represents CPPL’s interest
- PennTex Midstream Partners (PTXP) files initial registration statement to raise up to $150mm in an MLP IPO (filing)
- Backed by private equity firm NGP (backer of other MLPs MEMP and EROC in the past)
- Initial assets supported by 15-year, fee-based commercial agreements, with minimum volume commitments an firm capacity reservations with Memorial Resource (NASDAQ: MRD)
- Initial assets include a 200 mmcf/d natural gas processing plant in the Cotton Valley in Louisiana, a rich gas gathering pipeline feeding the plant, and NGL and natural gas pipelines exiting the plant
- PTXP will also have ROFO rights on two additional processing plants, one in the Cotton Valley and one in the Permian Basin
- PTXP is projecting $38mm of EBITDA for the 12 months ending 3/31/16
- Costamare Partners (CMRP) files initial registration statement to raise up to $100mm in an MLP IPO (filing)
- CMRP will operate containerships under long-term, fixed-rate charters
- Initial assets include 4 containerships with average capacity of 9,000 twenty foot equivalent unit (TEU) and an average remaining charter term of 6.7 years
- CMRP will be treated as a corporation for federal income tax purposes, and investors will get a 1099 rather than a K-1
- Sponsor Costamare Inc (NYSE: CMRE) has 68 containerships in its fleet with total capacity of 450,000 TEU
- CMRP will have a full set of IDRs ending with a 50% top tier
- Enterprise Products (EPD) prices $2.75bn of Senior Notes (press release)
- $800mm of 2.55% senior notes due 2019 at 99.981%
- $1.15bn of 3.75% senior notes due 2025 at 99.681%
- $400mm of 4.85% senior notes due 2044 at 100.836%
- $400mm of 4.95% senior notes due 2054 at 98.356%
M&A / Growth Projects
- Enterprise Products (EPD) announces acquisition of general partner and L.P. interests in Oiltanking (OILT), proposes merger of OILT units into EPD (press release)
- EPD acquired the general partner, IDRs, 15.9mm common units and 38.9mm subordinated units of OILT
- Purchase price of $4.41bn, paid in $2.21bn of cash and $2.0bn worth of EPD units issued to Oiltanking Holding
- Upon conversion of the subordinated units in November, EPD will own 66% of the common units of OILT
- EPD has proposed merging the remaining OILT units into EPD in an all-equity transaction at an exchange ratio of 1.23 EPD units per OILT unit, valued at $1.4bn
- Total value of the transaction is $6.0bn, including both steps and $228mm EPD paid to assume OILT notes outstanding
- OILT unitholders don’t get a premium, but they will receive 70% higher distributions going forward as a result of owning the higher yielding EPD units
- EPD represented 30% of OILT’s revenue in 2013, EPD will be able to realize significant synergies by eliminating payments and obligations to OILT under its current lease arrangement
- EnLink Midstream (ENLK) announces $235mm acquisition of Gulf Coast natural gas pipeline assets from Chevron (press release)
- Assets include 1,400 miles of natural gas pipelines spanning from Beaumont, TX to the Mississippi corridor and ~11 bcf of working natural gas storage capacity in Southern Louisiana
- Enbridge Energy Partners (EEP) announces 1-year delay for Sandpiper pipeline project (filing)
- In-service date was originally expected to be early 2016, now the expectation is for during 2017
- Delay is due to a longer than expected permitting process in Minnesota
- Sandpiper is a 616-mile crude oil pipeline project designed to take up to 225,000 bbls/d of oil from North Dakota to Clearbrook, Minnesota and expected to cost around $2.6bn
- TC Pipelines (TCP) announces acquisition of remaining 30% interest in Bison Pipeline from TransCanada Corp (press release)
- Expected to be immediately accretive to cash flow
- Bison pipeline transports Rocky Mountain natural gas to Midwest markets through a connection with TCP’s Northern Border pipeline system
- Bison is supported by long-term ship-or-pay contracts that extend through 2020
- EPD announces 9th NGL fractionator at its Mont Belvieu complex (press release)
- 9th fractionator will have nameplate capacity of 85,000 bbls/d and is expected to be in-service by January 2016
- Including this latest fractionator, EPD will have 755,000 bbls/d of fractionation capacity at Mont Belvieu and 265,000 bbls/d of propane production capability
- EPD announces plans to build a new natural gas processing plant and related infrastructure to serve Delaware Basin production (press release)
- The plant will have initial capacity of 200 mmcf/d and is expected to be in-service by 1Q 2016
- The plant will be built in Eddy County, New Mexico
- EPD plans to construct 80 miles of natural gas gathering pipelines to supply the new plant, and a 75-mile NGL pipeline to transport NGLs to EPD’s Hobbs fractionation facility
- Delek Logistics (DKL) announces $10mm acquisition of light refined products logistics assets (press release)
- DKL acquired the assets from Magellan Midstream (MMP)
- DKL expects to earn $1.4mm in EBITDA from these assets in 2015 (7.1x multiple)
- FERC approves the construction of Cove Point (Maryland) LNG export terminal being developed by Dominion Resources (Reuters)
- First LNG export project outside of the U.S. Gulf Coast to receive FERC approval
- The LNG facility is expected to cost $3.4-3.8bn
- Cove Point will send LNG to Japan and India under 20-year agreements
- Lehigh Gas Partners (LGP) announces closing of its GP buyout by CST Brand, Inc. and announces name change to CrossAmerica Partners, with the ticker “CAPL” (press release)
- Group of smaller refineries says there is ample refining capacity to absorb as much as 4.3mm per day of additional crude production growth (Fuel Fix)
- Saudi Arabia oil price cut is seen by some as potential first step in a market share battle between OPEC and the U.S. (Fuel Fix)