Oct 18th, 2015
MLP Market Post
Like the Governor of the great state of Texas and his premature tweet congratulating the Houston Astros, MLPs got a bit ahead of themselves the last few weeks. MLPs were due for a pause after the miraculous bounce off the bottom and oil-fueled follow-through last week. Unlike the Astros, however, MLPs regrouped from the 2 day pause and resumed their climb upward to finish the week down just 0.5%.
MLPs outperformed commodity price changes, including a big drop in propane prices after the recent rally had put propane prices above year-end 2014 levels last week. The S&P 500 and Utilities were both higher this week, creating a broader risk-on environment (ex-commodities) that helped MLPs catch a bid on the dip.
MLP news flow remained stagnant, with just a few small M&A transactions, a few distribution announcements, and one preliminary guidance announcement. Operational data points will emerge at an increasing pace in the coming weeks as the first of the MLPs begin releasing 3Q results late this week. In the absence of negative news and equity issuance, MLPs had a pretty boring week overall, with exception of some social media drama.
Poll Question: Kinder’s Next Move
Given what appears to be a prolonged downturn in oil prices, leading to reduced expectations for drilling and completions, several MLPs have reduced expectations and are choosing (or being forced to choose) lower distribution growth to build up coverage. Kinder Morgan, Inc. has maintained its 10% dividend growth guidance. Given leverage and project delays, speculation in the market is that KMI may have to adjust expectations. What do you think?
In other news of a premature nature, GEL had a volatile week when an independent research firm announced Monday that GEL was added to its Best Ideas as a short and that its energy analyst would walk through their short case on GEL three days later. The pending short case reveal was a good enough reason for some investors to get out of the way and take profits Monday, given GEL’s outperformance year to date. Then, when the actual bear case was presumably revealed Thursday to subscribers, GEL rallied 8%, but still finished the week down more than 5%.
I am not a subscriber to the firm’s research, and therefore haven’t seen their presentation on GEL, and I don’t know the specific issues raised regarding GEL’s prospects and valuation. However, every MLP has risks; that’s why they carry yields significantly higher than treasuries, and trade at much lower multiples than this time last year. MLP institutions, have well-funded in-house research teams that work hard to assess risks of their MLP positions. Different analysts can have different assessments of those risks relative to an MLP’s valuation and total return prospects.
Given what I believe to be a fairly efficient MLP market, it is unfortunate that the MLP market can be influenced enough by the announcement of a pending analyst’s opinion that it can send a multi-billion dollar MLP’s unit price into a tailspin. But if nothing changed with the fundamentals of the business, and you believe in your analysis and opinion on a given MLP, these volatile, internet-fueled moves can be welcome buying opportunities.
It was encouraging to see GEL bounce back so quickly. I took it as a positive indicator of where MLP sentiment is today compared with where it was at the middle of last month when a much less well known Twitter prognosticator called the MLP model into question. Like San Francisco 49ers QB Colin Kaepernick is finding out this year, it’s much harder to be successful once the league has adjusted to your game plan. The MLP market sent a message similar to the one Bernie Sanders sent at this week’s Democratic debate when he said: “The American people are sick and tired of hearing about your damn emails.”
Winners & Losers
There was no specific news among the winners this week, although positive guidance from Antero Midstream probably helped RMP’s unit price this week. AZUR continues to trade with extreme volatility, this time up 20% in a week with no news and lower commodity prices.
MMLP replaced VLP among the top 5, not much else changed, although it is noteworthy that HCLP is now down more than 75% so far this year, worst among MLPs that are paying distributions.
GPs under-performed MLPs this week. The last two weeks, GPs are acting as they should, as levered plays on underlying MLPs. MLPs up last week, GPs were up more. MLPs down this week, and GPs were down more. Maybe that’s an indication that MLPs have reached some sort of relative equilibrium. ETE and WMB underperformed other GPs again this week, as the merger hangover continues to linger.
News of the (MLP) World
There was limited and mostly fringe MLP transaction news this week. Distribution announcements continue to trickle out. Expect earnings and distribution announcements to dominate headlines the next several weeks.
- American Midstream (AMID) files equity distribution agreement to sell up to $100mm worth of common units at-the-market (filing)
- Enbridge Income Fund (ENF on Canadian Exchange) priced public offering of 21.5mm shares at $32.60/unit, raising $700.1mm in gross proceeds (press release)
- Not an MLP, but a positive indication of capital access for Canadian midstream players
- Bought deal, priced at 5.0% discount to prior closing price, and closed the next session down 0.6% (much better aftermarket support than we’ve recently seen in the U.S.)
M&A / Growth Projects
- USD Partners (USDP) announced $225mm acquisition of crude by rail terminal in Casper, Wyoming (press release)
- Sellers include: Stonepeak Infrastructure Partners, Cogent Energy Solutions and Granit Peak Group
- Acquisition financed with combination of $208.3mm in cash and $16.7mm in units issued to sellers
- Purchase price represents 8.7x multiple of expected 2016 EBITDA of $26mm
- Cash flow is supported by take-or-pay contracts with weighted average maturity of approximately 3 years
- Knot Offshore (KNOP) announced acquisition of Ingrid Knutsen shuttle tanker from sponsor for $115mm (press release)
- The Ingrid Knutsen is operating in the North Sea under a 10-year time charter with a subsidiary of ExxonMobil that expires in 2024
- KNOP expects the vessel to produce $11.5mm in EBITDA in 2016 (10x multiple)
- KNOP also announced that its sponsor extended the charter of another vessel (Carmen Knutsen) for an additional 5 years to 2023, but the extension reduces the average charter rate on the vessel by 6.2%
Distributions Increases (quarter over quarter)
- AM +7.9%
- VLP +5.1%
- KNOP +2.0%
- OCIR +1.2%
Oct 11th, 2015
MLP Market Post
The MLP Index posted a 6.1% gain this week, its best week in more than 2 years, best since the first week of 2013. Investor fears are tentatively melting away, but they haven’t yet been replaced by greed. Since the bottom on 9/29, MLPs have been positive 7 out of 8 days, rising 24.1% over that span. But, the Index would need to rally 46.4% from here to reach 2014 peak levels.
Last week’s bounce saw money flow into the highly-liquid large cap MLPs in a reversal of negative sector sentiment. This week saw small cap MLPs catching up (Equal Weight version of Alerian up more than 200 bps more than cap-weighted AMZ). That’s what you would expect to happen when the market is in the later stages of stabilizing. Maybe next we’ll see further differentiation based on fundamentals, just in time for earnings season, which kicks off with KMI this upcoming week.
While MLPs have bounced, most analysts are calling for more volatility through year-end, based on still looming headwinds, whether its equity issuance, the old standby “tax-loss selling”, oil fundamentals and seasonal refinery slowdown, E&P borrowing base, or the potential lack of clarity on 2016 expectations during 3Q earnings. Despite those headwinds, MLPs have popped back above their 50-day moving average and held that level late this week, which is generally a good sign if you put stock into such things.
Winners & Losers
Week after week in the charts below, we pull from a database of around 100 MLPs that are (a) paying a distribution and (b) are not variable distribution MLPs (i.e. they are committed to trying to continue to pay flat or increasing distributions). Of all of those MLPs, amazingly only two were negative this week: WPZ and PAA. On the upside, upstream and small cap MLPs with commodity prices led the way. Not pictured below, gathering & processing MLPs were particularly strong performers this week (AM +21.5%, , MEP +19.1%, SMLP +18.5%).
MMLP fell out of the top 5 this week, replaced by USAC. On the downside, now that CEQP has completed its merger with CMLP, CEQP is now included in the bottom 5.
General Partner Holding Companies
GPs of midstream MLPs were universally higher this week, and the group outpaced the MLP Index after trailing last week. EXH’s separation transaction appears to be moving forward, which sent EXH higher this week. Targa updated guidance this week proved to be a positive for TRGP more so than for NGLS, as NGLS appear to be sacrificing coverage to maintain TRGP growth, and that was reflected in TRGP stock this week. CPGX and EQGP bounced back after last week’s declines.
News of the (MLP) World
Light MLP news week. Distribution announcements are starting to trickle in, and small growth capital projects on the processing side continue to get announced, but more often in JVs with producers these days. There was a preferred deal that went well. Also, there are reports of ETE/WMB/WPZ plans to sell WPZ’s 50% stake in a major natural gas pipeline that runs under the Gulf Coast to Florida.
- Targa Resources (NGLS) priced offering of 4.4mm Series A fixed-to-floating preferred units at $25/unit, raising $110mm in gross proceeds (press release)
- The units will pay a 9% distribution per year through 2020, and thereafter will pay LIBOR plus a 7.71% spread
- Redeemable starting five years from now at $25/unit
- The transaction was successfully marketed with substantial interest beyond the original offer of around $75mm
- Given the success of this transaction and the challenges of the traditional equity capital market, expect more midstream MLPs to pursue similar transactions going forward
M&A / Growth Projects
- Exterran Holdings (EXH), sponsor of MLP Exterran Partners (EXLP) announced financing to enable previously-announced spin-off of international services and global fabrication business (press release)
- EXH has secured financing with Exterran Corporation and Archrock, Inc. that enables EXH to move forward with its previously announced separation transaction, now slated to occur in 4Q15
- The separation transaction will separate the international and fabrication operations from U.S. compression assets, leaving EXH as the pure-play general partner holding company of EXLP
- EXH will be renamed Archrock, Inc. post spin-off
- Rice Energy (RICE), sponsor of MLP Rice Midstream Partners (RMP), announced midstream joint venture in Utica Shale with Gulfport (press release)
- Gulfport and RICE will jointly develop natural gas gathering and water services assets to support Gulfport’s dry gas Utica Shale development
- JV will be supported by long-term, fee-based service agreements with Gulfport
- RICE will own 75% of the JV and will operate the assets
- Targa Resources (NGLS) announced joint venture agreement with Sanchez Energy Corp to construct a 200 mmcf/d processing plant and 45 miles of pipeline in South Texas (press release)
- NGLS expects to contribute $125mm for their 50% ownership interest in the plant and pipeline assets, both expected to be in-service by early 2017 and to be supported by long-term fee-based contracts
- Bloomberg reports Williams Companies (WMB) is planning to sell 50% stake in Gulfstream pipeline (Bloomberg)
- Williams Partners (WPZ) is the actual owner of the 50% interest in Gulfstream, with the other 50% owned by Spectra Energy Partners (SEP)
- The sale would likely be required in order to satisfy FTC requirements for the merger between ETE and WMB
- Spectra was mentioned as a potential buyer, but hard to see how they make it work from FTC perspective, given Sabal Trail and the other 50% of Gulfstrea already
Distributions / Other
- House approves repeal of oil export ban, Senate approval and Obama veto still loom as major roadblocks
- Distribution announcements
- GEL (+2.4% quarter over quarter), PAA (+0.7%), PAGP (+1.8%), TEGP (+8.3%), TEP (+3.4%) announced distribution increases
- LINE/LNCO suspend distributions officially
Oct 4th, 2015
MLP Market Post
After the dust settled on the craziest week of MLP price action since late 2008, the Alerian MLP Index finished the week up 3.9%, breaking a four week losing streak.
Each day of the week saw the index move more than 3.5%. It opened with two 5%+ decline days; only the third time ever the index has fallen 5%+ on consecutive days. That was followed by the best day ever for the index that didn’t happen in Fall 2008, and the third best day of all-time overall. MLPs followed through on that bounce with two consecutive top-30 all-time days. The index finished the week 17.0% higher than Tuesday’s close, but remains 35.6% (on total return basis) below the August 2014 peak.
The rally was concentrated among the larger MLPs, perhaps an indication of short covering for the few large MLPs that can be shorted. Big cap MLPs EPD (+8.9%), PAA (+13.0%), and MMP (+8.9%) fall into that category. The Alerian MLP Equal Weight Index trailed the cap-weighted Alerian MLP Index by 180 basis points this week. Smaller MLPs participated on the downside along with large caps, but have some catching up to do if the rally continues.
MLPs outperformed utilities and the S&P 500, which both had strong weeks, helped by Friday’s huge positive reversal after the weaker than expected jobs report pushed stocks lower on the open. The U.S. 10-year rate closed below 2%, down 17 basis points on the week.
MLP businesses are sustainable, but is the MLP rally sustainable?
Everyone is hesitant to call the bottom, because it’s been a losing proposition the last year (see below for the head fakes the index has thrown). However, none of the lower lows this year had the volume and extremes of this week’s action, which was very similar to the action we saw in late 2008 when MLPs hit their ultimate bottom. But even after the ultimate bottom in November 2008, MLPs remained volatile for several months before starting their sustained recovery in March 2009.
The post I published earlier this week was well received both here and at Barron’s where it ran on Thursday. Thanks to everyone who read the post, and thanks for all the positive feedback. There were a number of readers who initiated the post by asking for a response. It seems like the original negative post on MLPs did incite real market moving fear among individual MLP investors, evidenced by the number of buy side firms with responses of their own, likely the result of many inquiries to them as well.
It is interesting how easily conviction can wane when faced with sharply declining stock prices. The questions I heard from individuals early in the week carried with them a heavy dose of fear: “Oh, I know that guy doesn’t know what he’s talking about…but is he right? How many of my MLPs are going to be able to keep paying distributions?”
The MLP collapse over the last year hasn’t been driven by blogs (in either direction, as much as we’d love to take credit for the back half of the week). Its been driven by uncertainty around 3 important factors that drive an MLP’s ability to grow distributions:
- Return on capital
- Returns for existing and under construction assets in an environment of slowing activity have been in question, gaining momentum with the contract restructuring WPZ and CHK announced in early September.
- Capital opportunities
- Concerns over capital deployment opportunities have been stoked by PAA management and by mainstream articles about over-piping in certain areas.
- Cost to deploy that capital
- USAC and AMID’s challenging equity raises early in September made it clear that capital access will be challenged for MLPs for some time.
The length of the commodity selloff has brought us here. In a v-shaped commodity price recovery (sort of what it looked like through 6/30 this year), there would have been concerns in the short term over returns on capital based on commodity exposure, and names with exposure to that would get sold off (upstream, oilfield services, processing MLPs). But the other two factors (capital opportunities and cost of capital) generally would have remained benign, and the correction would have been shallower.
MLPs will find it challenging to grow if the current environment persist, but the rally this week is a sign that the market overshot to the downside in trying to reflect those challenges in stock prices.
It seems so long ago after the mid-week recovery, but let’s revisit September quickly and tally up where we stand at the end of three quarters. MLPs finished September down 15.3%, the 3rd worst month ever (behind September and November 2008). This was the 5th straight negative month for MLPs, tied for the longest streak ever (set earlier this year). The other 5 month losing streak (-16.3% total return) was mild in comparison with the current one (-31.1%). MLPs finished 3Q down 22.1%, the worst quarter ever for the index. At the end of September, MLPs were down 30.7% for 2015 (but by Friday down just 25.4%).
Looking forward, October has been one of the most consistently positive of all months for MLPs over the years, due to the tailwind ahead of 3Q distribution payments. Given how fat MLP yields have grown in the recent slaughter, I expect some of the October buying we’ve already seen is in anticipation of that next quarterly payout.
Winners & Losers
There was significant disparity among the top and bottom performers this week. JPEP bounced back from last week’s appearance in the bottom five to claim the top spot. RRMS and SHLX, both dropdown growth vehicles rebounded from significant recent underperformance to make the top five. The bottom five consisted of MLPs with non-traditional assets with the only common thread being coal MLPs FELP and CNXC. HCLP showed up in the bottom five for the second week in a row as frac sand fundamentals continue to deteriorate.
VLP joined the top five performers for the YTD period replacing FGP while the bottom five names remained unchanged, although HCLP took over the bottom spot from LINE.
General Partner Holding Companies
GPs underperformed MLPs this week and didn’t get the bounce some MLPs had. EXH was the top performing GP this week on no news. Among the bottom five, CPGX and EQGP made the list two consecutive weeks while AHGP was down perhaps in sympathy with weakness in coal MLPs.
News of the (MLP) World
MLP distribution announcements for 3Q have already started. EPD’s distribution announcement and continued insider support were likely a factor in its positive performance this week. Some mild capital markets activity was announced. We also got the formal announcement of a new MLP joining Energy Transfer’s flying circus of MLPs, bringing the total number of tickers for the Energy Transfer complex to 6. After the wild ride for the market, this blockbuster deal is almost an afterthought.
- NuStar Energy (NS) filed equity distribution agreement to sell up to $500mm of common units at the market (filing)
- VTTI Energy (VTTI) priced of $245mm of senior notes of varying maturities (10 year weighted average) for average coupon of 3.9% (press release)
- Enbridge Energy (EEP) priced of $1.6bn senior notes, including:
- $500mm of 4.375% senior notes due 2020
- $500mm of 5.875% senior notes due 2025
- $600mm of 7.375% senior notes due 2045
M&A / Growth Projects
- Kinder Morgan (KMI) announced additional commitments for Northeast Direct natural gas pipeline development (press release)
- Energy Transfer Equity (ETE) and Williams Companies (WMB) announced merger agreement (press release)
- No change to the value of the deal, as priced in ETE units, but ETE added some cash to the deal
- Large cost and commercial synergies expected by ETE, but limited details on those synergies was announced
- Enterprise Products (EPD) announced quarterly distribution of $0.385, an increase of 1.3% quarter over quarter, or 5.5% year over year (press release)
- 45th consecutive distribution increase, has increased distribution every quarter since the middle of 2004
- Additionally, the Duncan family, through ownership of EPCO, EPD’s G.P., has agreed to purchase $50mm EPD units through the company’s distribution reinvestment program
- This brings the total to $200mm invested by EPCO in EPD through the reinvestment program so far this year
- TOO announced 4% distribution increase
- This is TOO’s first distribution increase in 7 quarters