Jul 27th, 2014
MLP Market Post
Even as natural gas prices continue to plummet (-4.3% this week to $3.78), the Alerian MLP Index edged slightly higher this week. Utilities were down slightly, while the S&P 500, oil and 10-year US treasuries finished the week almost exactly where they started. A solid macro backdrop and low interest rates, combined with solid early earnings results and distribution announcements continue to support MLP valuations.
Distribution and earnings announcements are whizzing past at a dizzying pace, which will only accelerate this week. It can be overwhelming, like when my 3 young kids are all talking at once. EQM and NS had the floor to themselves this week. It’s clear from EQT Corp’s 2Q results that pricing pressure for Marcellus production continues, and wider differentials should lead to greater willingness for producers in the region to commit to natural gas takeaway projects. EQM management said on its conference call that the top priority is to address the southeast demand opportunity while the competition is still somewhat limited.
NS results highlighted growing activity in South Texas, both in terms of production activities, but also in terms of port and terminal activities. It was reported by Platts that crude and condensate shipments out of the port of Corpus Christi rose 61.5% since last year (Fuel Fix). NS results are confirmation of that activity. We’ll get more color on export activity from the greater Houston area ports when EPD and NGLS report results this week.
Winners & Losers
Transactions made the MLP world go ‘round this week. GSJK was down 12.2% after announcing a transformative compression acquisition plus equity and debt financing offerings. GSJK embarked on a rare 4 day roadshow for a follow-on offering, and the offering was almost like a second IPO given how limited its float had been. TEP was also in the market early in the week with a weak earnings pre-announcement and an equity offering, which contributed to its decline. Not transaction-related, OILT and MPLX continued the trend of high growth drop down MLPs making the bottom 5 lately.
On the positive side of the ledger, QRE agreed to merge with BBEP, resulting in a big gain on the announcement. Interestingly, the MLPs you would look at as comparable upstream MLPs that are comparable acquisition targets (LRE and NSLP) both rallied this week more than the MLP that is actually getting acquired. WNRL reversed its negative trend of late to post nearly an 8% price increase.
We have a new leader for year to date returns, which seemed like an impossibility just a few weeks ago, when PSXP was up more than 100% year to date. PSXP continues to slide, even after announcing a 10% quarter over quarter distribution increase this week. HCLP has taken the top spot. Also, GLOP and SUSP climbed into the top five, replacing TEP and OILT. EXLP rejoined the bottom 5, replacing CMLP.
News of the (MLP) World
If you read through the bullets I wrote below on the 3 IPOs in the market this week you will see evidence of a clear formula that has developed. If you have some assets, rather than putting them all into an MLP or putting just a few into an MLP, the formula is to put all your assets into a private vehicle in between the MLP and the sponsor, then sell a portion of that private vehicle to the MLP. Then growth becomes a simple calculation of just selling the remaining percentage of that private vehicle to the MLP in pieces over time. It’s manufactured, but highly visible (at least for a while), growth. If I were launching an MLP, I might be tempted to call it OpCo Partners, just to confuse everyone.
- Westlake Chemical Partners (WLKP) launches $225mm MLP IPO of 11.25mm units (prospectus)
- Expected to price July 29th
- 5.50% midpoint yield, 1.1x distribution coverage
- MLP will own 10% of a company (OpCo) that owns ethylene crackers and has a 12 year contract for 95% of capacity at a fixed $0.10 margin
- WLKP grow primarily by migrating the remaining 90% of OpCo from parent Westlake Corp (WLK) to WLKP over time
- Transocean Partners (RIGP) launches $350mm MLP IPO of 17.5mm common units (prospectus)
- Expected to price July 30th
- 7.25% midpoint yield, 1.1x distribution coverage, almost no debt, 1099 filer
- MLP will own 51% interest in companies (RigCos) that own a combined 3 offshore drilling rigs, contracted with BP and Chevron for a weighted average remaining contract life of 4.1 years
- RIGP will grow by migrating the remaining 49% interests in RigCos and additional assets from parent Transocean (RIG) to RIGP over time
- Seadrill Partners (SDLP) is the closest comp, which is trading at 6.3% yield after growing distributions 29.9% year over year
- VTTI Energy Partners (VTTI) launches $350mm MLP IPO of 17.5mm common units (prospectus)
- Expected to price July 31st
- 5.25% midpoint yield, 1.1x distribution coverage, 1099 filer
- VTTI will own 36% in VTTI Operating, which owns 6 refined products and crude terminals around the globe with aggregate storage capacity of 35.5 mmbbls, contracted with parent Vitol and third party customers for a weighted average remaining contract life of 4 years
- VTTI will grow by migrating the remaining 64% interest in VTTI Operating and other terminals from parents Vitol and MISC to VTTI over time
- VTTI will also be active either at the MLP or sponsor level in developing and acquiring additional terminals in the global market, which VTTI describes as much more fragmented than in the U.S.
- Tallgrass Energy Partners (TEP) prices public offering of 7.0mm common units at $41.07/unit, raising $287.5mm in gross proceeds (press release)
- Compressco Partners (GSJK) prices public offering of 15.3mm common units at $23.50/unit, raising $351.4mm in gross proceeds (press release)
- Marketed offering, with file-to-price decline of 10.3%
- Offering proceeds will be used to partially finance the accretive $850mm acquisition announced earlier this week
- GreenHunter Resources (NYSE: GRH) announces plans to form MLP (press release)
- Has submitted PLR request for business of handling of fluid storage, treatment and disposal services, frac tank rental, water monitoring services, and environmental remediation services that constitute part of the exploration, developmental, mining, processing, refining and transportation of natural resources.
- Regency Energy (RGP) files S-3 to register 2.8mm units owned by Eagle Rock Energy (EROC) (filing)
- Regency Energy (RGP) prices offering of $700mm of 5.0% senior notes due 2022 at 99.158% to yield 5.04% (press release)
- Upsized from $500mm originally offered
M&A / Growth Projects
- Breitburn Energy (BBEP) announces acquisition of QR Energy (QRE) in an all-stock transaction that values QRE at approximately $3.0bn (press release)
- Each QRE unitholder will receive 0.9856 units of BBEP per QRE unit
- Transaction values QRE at $22.48/unit, a 19% premium to the prior day’s closing price
- Expected to close in late 2014 or early 2015
- This will mean a change for the Alerian MLP Index, as QRE will come out, probably not to be replaced by another upstream MLP
- ONEOK Partners (OKS) announces $365-$470mm of growth projects in the SCOOP play in Oklahoma (press release)
- OKS plans to build a 200 MMcf/d processing plant and related natural gas infrastructure in Grady and Stephens County, OK
- Project backed by producer acreage dedications to OKS in the area
- Management expects returns 5-7x EBITDA for the project
- Tallgrass Energy (TEP) announces opportunity to buy 1/3rd interest in Tallgrass Pony Express Pipeline for $600mm (press release)
- TEP has received an offer, pursuant to its right of first offer, a 33.3% interest in Pony Express from its sponsor, Tallgrass Development
- Compressco (GSJK) announces acquisition of Midland-based Compressor Systems, Inc. for $825mm (press release)
- Acquisition increases GSJK’s compression capacity from 187,000 to 1,045,000+ and expands range of compression services to customers
- Acquired business had $82.3mm in EBITDA over the last 12 months (10x multiple), but GSJK expects to realize $5-10mm in annual synergies from the transaction
- GSJK expects to raise distributions 12-14% for 4Q 2014, while maintaining 1.2x distribution coverage
- Capital Products Partners (CPLP) announces drop down acquisitions from Capital Maritime and a reset of its incentive distribution rights (press release)
- CPLP will acquire 3 containerships and 2 product tankers for total of $311.5mm
- The acquisitions are contingent upon a revision to the IDRs to lower the threshold for IDR payments, but also to cap the top tier at 35% (including 2% GP interest)
- Mid-Con Energy (MCEP) announces $56.5mm acquisition of reserves in Oklahoma from an affiliate (press release)
- Transaction include 2.6 mmboe of proved reserves that are 88% PDP and 90% oil, and that carry a 17.5 year reserve life
- U.S. department of transportation proposed a 2-year phase out period to replace or refurbish more than 100,000 tank cars that transport crude to meet more stringent standards (Wall Street Journal)
- Proposals include stronger tank cars and speed limits of 40 mph
- Will pressure MLPs that own rail cars that do not meet the guidelines, but if regulation were to decrease price competitiveness of rail vs. pipe, it might make pipeline projects more viable in certain regions, which will help certain MLPs
Jul 20th, 2014
MLP Market Post
MLPs drifted higher this week, with a slight pause on Thursday when the broad market sold off, sending the volatility index (VIX) up 32% from Wednesday to Thursday. For the week, the MLP Index finished up 0.9%, slightly ahead of the market (S&P 500 +0.5%), and well ahead of utilities, which were down slightly. Natural gas prices have declined substantially of late (hitting a seven month low this week) as the coolness of the summer is making natural gas storage levels refill faster than the market was expecting entering injection season. Balancing the decline in natural gas was a 2.2% increase in WTI crude oil futures price, probably the result of escalating tension between Russia and the rest of the world. The Hope of Lower Slope
Kinder Morgan announced second quarter results this week that failed to meet market expectations. On the conference call that followed the release, KMP announced new projects to be added to the ever-growing backlog of projects that stands at around $17bn. But KMP’s high cost of capital will consume large portions of the returns from those projects, unless KMP can do figure a way to reduce its cost of capital. I spent a lot of time in airports this week. So it’s no surprise that this KMP conundrum brings to mind a vivid and all too familiar airport image: the moving walkway.
Because MLPs pay out most (and sometimes more than all) of their cash flow, they must constantly replenish capital in order to move distribution growth forward. It’s like walking against the flow on one of those gigantic airport treadmills. For KMP and other mature MLPs with high IDR payments, the cost of capital burden is like adding an incline or upward grade to the walkway. Absent the incline, the same effort (high return projects) would result in a faster trip down the growth walkway. KMP would love to find some magical switch on the endless treadmill to reduce its incline. But KMI is standing in the adjacent lane being moved along with the belt’s flow. A reduction in the incline of KMP’s track will probably necessitate a decline in KMI’s growth rate, and that’s the rub. The great thing about the stock market is you can place a bet on whether or not KMP can find such a cost of capital reduction transaction. The alternative is for Kinder to accept its station as a mega-cap MLP, and keep plodding along at the high incline, executing mid-teens IRR projects that result in maybe 4-5% annual distribution growth with tight coverage and elevated leverage. There is no simple solution that immediately benefits all parties involved, otherwise we’d have seen it already.
Winners & Losers
Refined products logistics drop down MLPs dominated the bottom 5 this week, continuing weakness from last week (VLP and WNRL made the bottom 5 for the second straight week). The price action of the losers this week seems to have been driven by profit taking and valuation concerns, while the top 5 seem to have been driven by news. SDLP announced a drop down acquisition, HCLP announced a distribution, EXLP announced an acquisition, and BWP caught some favorable PR via Jim Cramer’s Mad Money.
There were no changes among the top 5 constituents this week, although HCLP reclaimed the number 2 spot,a nd the gap between number 1 (PSXP) and number 2 has narrowed considerably. The real action was among the bottom 5, which saw: (1) BWP edge closer to escaping the cellar, (2) EROC and CMLP move up a spot each, and (3) EXLP climb out of the bottom 5 entirely.
News of the (MLP) World
This week the market chatter was all about Kinder Morgan’s earnings release, which tends to happen each quarter because KMP is such a bellweather MLP and because it reports first. However, there were several interesting equity and M&A transactions announced by other MLPs as well. Institutional investors stepped up for a big private placement into AMID tied to an acquisition, akin to those 2006-2007 PIPE deals we used to see, but with a larger number of participants. There was also a big block trade from an institutional seller of NGL (not listed below) that moved NGL’s stock price on Thursday. Institutional capital will continue to drive growth in block trades, PIPEs and ATM transactions. Equity
- Teekay LNG (TGP) prices public offering of 2.8mm units at $45.05/unit, raising $126.1mm in gross proceeds (press release)
- Overnight offering, priced at 4.1% discount to prior close
- American Midstream (AMID) announces private placement of 7.6mm common units at $26.27/unit, raising $200mm in gross proceeds from institutional investors (press release, unit purchase agreement)
- Memorial Production (MEMP) prices $500mm of 6.875% senior notes due 2022 at 98.485%, to yield 7.0% to maturity (press release)
M&A / Growth Projects
- American Midstream (AMID) announces $115mm acquisition and distribution increase (press release)
- Onshore natural gas processing, offshore natural gas processing and transportation, and oil gathering assets acquired from DCP Midstream, LLC
- Assets complement AMID’s High Point system in Southeast Louisiana
- Price represents 8.5x next 12 months EBITDA, 6.5x 2015 EBITDA, according to management
- AMID plans to recommend 3-5% distribution increase in 4Q 2014 as a result of the acquisition
- Seadrill Partners (SDLP) announces acquisition of additional 28% interest in Seadrill Operating LP for $373mm (press release)
- SDLP will own 58% following this transaction
- Exterran Partners (EXLP) announces acquisition from MidCon Compression for $135mm (press release)
- Adds 110,000 horsepower, the majority of which is operating under 5-year contracts
- Transaction immediately accretive, and EXLP expects to increase distribution by $0.005/unit next quarter ($0.02 annualized)
- Acquisition expected to close in 3Q 2014
Jul 13th, 2014
MLP Market Post
Between the end of last week and the beginning of this week, the Alerian MLP Index had 4 straight negative trading days where it declined 3.0%. The index recovered 1.0% Wednesday to Friday, to finish the week down 0.6%, slightly ahead of the S&P 500. The Equal Weight MLP Index was down twice as much as the MLP Index, which means smaller MLPs on average underperformed this week.
Interest rates were down, perhaps helping the defensive trade of utilities to outperform. MLPs had the tailwind of lower rates and the headwind of dropping natural gas and oil prices. Heading into earnings season, investor focus should shift back to fundamentals (including commodity prices), and maybe that contributed to MLP underperformance relative to utilities.
The last time the index had 4+ days of declines was the 5 days in a row of declines from March 6 to 13th of this year, so it’s been a while, but it tends to happen at least every few months, even in very strong years for MLPs.
Pullbacks for MLPs have been rare the last several years, and it seems like the sector’s investor base has expanded substantially in between each new pullback, so it’s always interesting to see which MLPs outperform in a sell-off. Below is a chart of the bottom 10 and top 10 performers during the 4 day selloff.
It’s quite a mix in both columns, but of the top ten, I see them as skewing smaller in terms of trading liquidity and public float. Names like NGLS, OKS, EPB, and EEP in the bottom 10 column all have more trading volume and liquidity than any of the top 10 performing MLPs, with the possible exception of BWP. In an increasingly institutional market, when selling happens en masse, names that institutions can sell easily probably get sold first. Food for thought as you build your MLP portfolio.
My readers aren’t fazed by the recent very short pullback, and remain optimistic. 84% of all respondents to my poll question last week responded yes to the question: “Will the Alerian MLP Index make another new all-time high before the year is over?” Given that we sit just 2.1% away from the all-time high, a new high point is certainly possible this year, this quarter and this month even.
Winners & Losers:
VLP went from first last week to worst this week, dropping 7.5% to take the bottom spot. Other high flying sand MLP HCLP and drop-down growth stories GLOP and WNRL took a tumble this week as well, as it seemed the market was quick to sell winners. Buyers opted for higher-yielding MLPs like CMLP and NS, and less high flying drop-down growth stories ENLK and SUSP, all of which made the top 5 this week. Also, the market seemed to like GLP’s foray into Texas with its JV with KSU for a new terminal.
PSXP is still way out in front for the year, followed closely by 4 other high distribution growth MLPs. GLOP dropped out of the top 5, and HCLP dropped two spots, pushing TEP and EQM up the ranks, and making room for OILT to rejoin the top five. On the downside, EROC dropped to second worst performing MLP, and CMLP inched higher.
News of the (MLP) World
Another fairly quiet week of MLP news, as is to be expected heading into earnings season. The Kinder Morgan complex kicks it off on Wednesday. We got a few early distribution announcements this week, and those will pick up their frequency next week as well.
- Memorial Production (MEMP) prices public offering of 8.6mm common units at $22.50/unit, raising $193.5mm in gross proceeds (press release)
- Overnight block trade, priced at 5.9% discount to prior close
- Summit Midstream (SMLP) prices public offering of $300mm of 5.5% senior notes due 2022 at par (press release)
M&A / Growth
- NGL Energy (NGL) announces offer to acquire outstanding units of TransMontaigne Partners (TLP) in transaction valued at $564mm (press release)
- NGL already owns 20% of TLP units as a result of the acquisition of TLP’s G.P. last month
- Offer is to exchange TLP units for NGL units on a 1:1 basis
- NGL Energy (NGL) announces development of 5 salt water disposal facilities in the Eagle Ford and Permian Basins (press release)
- New facilities include 6 recently completed disposal wells for combined cost of $83mm, located in the Eagle Ford shale and Permian Basin
- Facilities are expected to produce $16mm in annual EBITDA, implying a multiple of 5.2x, appropriate for quick payback, low barriers to entry assets like this
- Global Partners (GLP) and railroad operator Kansas City Southern announce plans to jointly develop a unit train terminal in Port Arthur, TX (press release)
- The waterborne terminal will serve initially as a destination for heavy crude from Western Canada utilizing 340,000 barrels of initial storage capacity
- Facility will have an initial capacity of 2 unit trains per day
- Teekay LNG Partners (TGP) announces acquisition of interests in 4 LNG carriers to be constructed and delivered between late 2017 and early 2019 (press release)
- Each vessel will have 174,000 cubic meters of LNG carrying capacity
- Interests acquired from BG Group
- Vessels will operate under 20-year contracts with a subsidiary of BG Group
- BridgeTex Pipeline, a JV between Magellan Midstream (MMP) and Occidental Petroleum Corp, announces supplemental open season for additional transportation commitments (press release)
Industry / Other
- Andrew Atterbury joins the board of Western Refining Logistics (WNRL) (press release)
- Former Inergy executive (with impeccable timing), and an mlpguy.com reader
- Crestwood Midstream (CMLP) has underground pipeline leak of an estimated 24,000 barrels of saltwater and condensate mix on a reservation in North Dakota (Fuel Fix)
- Spill apparently had gone undetected for several days