MLP Market Update

MLP Market Update
Commentary on Master Limited Partnerships

Published
Jun 8th, 2014

Category:
MLP Market Post

MLP Week Thoughts: Trade the Model

MLPs and the markets were on cruise control this week, with the MLP Index up 4 of 5 days and closing at an all-time high for the second consecutive week.  Stocks and utilities were up this week as well, helped by moves from the European Central Bank and by U.S. data points like the May unemployment report.  The CBOE volatility index (VIX) closed at 10.7, its lowest level since early 2007.  The 10-year treasury yield was up 12 basis points to close at 2.60%.

Weekly MLP Review_6-6-14

In commodities, front month natural gas futures rose 4.1%, while spot propane prices at Mt. Belvieu declined 3.3% and remain the only major energy commodity that is down for the year.  Lower propane prices generally lead to higher propane exports in the spot market along the Gulf Coast, but clearly not enough to self-correct this week.

Fund Flows

According to our Bloomberg-fed database, fund flows into MLP funds (including open end funds, ETFs, and ETNs) in May totaled $2.1bn, the most in a month since November of last year, and up from $1.9bn in April. The biggest flows were into the Alerian MLP ETF, but close behind were two large actively-managed mutual funds.

Let’s say that you knew fresh investible cash would flow into the MLP sector at near record rates for several months to start the year.  Let’s also say you had a choice of investing in (1) smaller, more recently-IPOed MLPs that are either not in the MLP index or carry a small weight; or (2) large-cap MLPs with sector leading trading volumes and index weights.  The conditions seem tailor made for MLPs in the latter group to see greater than average fund flows, leading to outperformance.

It turns out that across every time period since the beginning of the year (except this week), the largest, most-liquid, most-heavily weighted, most diversified MLPs have underperformed (on average) the MLP Index. Below is a chart of the top ten highest-weighted MLPs in the Alerian MLP Index that shows just that (with a few exceptions: MMP all year, RGP and KMP recently).

Big Cap Performance

What does it mean? The ETFs receiving flows pump it into these top 10 names above other MLPs, generally.  However, the actively-managed funds that are getting fresh capital would rather invest that capital in names outside of the top ten, or names not included in the index (GPs, IPOs, newer MLPs).  Capital flows are supportive of the sector overall, but as other MLPs outside the top ten achieve liquidity levels that make them investable for large funds, those MLPs appear to be preferred by institutions.

Actively-managed fund flows of this magnitude are still a new phenomenon in the MLP space.  Large mutual funds generally have a model portfolio with a list of positions and target weights within the portfolio.  When such a fund gets a consistent stream of inflows, the manager can choose to direct those funds strategically and change the model portfolio as he goes, or he can choose to “trade the model”, which (in our firm at least) means to take that new capital and spread it around to the existing portfolio positions based on the model portfolio weights.

In the absence of much MLP-specific news, follow-on equity offerings or IPOs, and with a very low volatility stock market generally, there is no compelling reason for a fund manager to change the model, unless the manager has a view on valuations.  Also, the rise of at-the-market equity programs allow institutional investors to pick up large blocks of primary MLP units without disrupting the market too much.

I think that’s what’s been happening the last few months, but seemed more apparent this week with limited news flow.  Things may change if marketed equity issuance picks up and disrupts the long-leaning, low volatility equilibrium.  For this week at least, what has worked all year continued to work.

Winners & Losers

The top performing MLP so far this year (PSXP) was up the most this week at 11.3%.  Other high growth drop down MLPs were favored as well (RRMS, EQM and GLOP).  On the downside, CQP had an institutional seller execute a large block trade that pressured its unit price this week.  ENBL announced an acquisition funded with additional units issued to its sponsor, which may have led to its decline.

Top5Bottom5_6-6-14

No repeats on either the positive or negative sides this week.

Top5Bottom5_6-6-14_Chart

PSXP separated itself from the pack even further this week.  The order and composition of the bottom 5 remained intact week over week. TLLP and SRLP popped into the top 5 this week, displacing OILT and SUSP.

Top5Bottom5_6-6-14_YTD

Top5Bottom5_6-6-14_YTD_chart

News of the (MLP) World

Another quiet news week in MLP land.  Some M&A and growth projects, no public equity or debt offerings.  We did have analysts days from PAA and MWE this week that sounded well attended on the webcasts. PAA management tone was interesting, as management balanced discussing its large growth project backlog ($7.5bn focused on the big 6 north American basins and Canada), while also outlining how drastically North American production could be impacted just a modest decrease in well completion activity (due to increasing underlying decline rates).

In MWE’s analyst day, management maintained distribution growth guidance in 2015 and 2016, and highlighted a long term distribution growth rate expectation of 10%+ once the multi-year buildout in the Marcellus and Utica shales.  Management also highlighted the need for NGL takeaway out of the northeast, and how critical the Mariner East project will be to balancing the market.  Growing condensate production was a topic for both PAA (out of Eagle Ford and Permian) and MWE (Utica).

News-of-the-World

Equity

  • Regency Energy (RGP) announces private sale of 14.4mm units for $400mm (~$27.78/unit) to a subsidiary of its GP, Energy Transfer Equity (press release)
  • Institutional shareholder sells down Cheniere Energy (LNG) and Cheniere Energy Partners (CQP) positions in block trades
    • CQP holder sells 9mm units at $33.50/unit, for proceeds to seller of approximately $300mm
    • LNG holder sells 1.2mm shares at $66.15, for proceeds to seller of approximately $80mm
  • No MLP IPO news, but there was some IPO action  just beyond MLP borders

M&A / Growth

  • Rose Rock Midstream (RRMS) announces acquisition of crude oil trucking assets from Chesapeake Energy Corp. for an undisclosed purchase price (press release)
    • Acquisition includes 124 trucks, 122 trailers operating in Texas, Oklahoma and Ohio
  • MarkWest Energy (MWE) and the Energy Minerals Group announce plans to add additional capacity at fractionation and marketing complex in Harrison County, Ohio (press release)
    • Expansion will double the propane and heavier fractionation capacity at the complex to 120,000 bbls/d when it comes online in 1Q 2015
  • Enable Midstream (ENBL) announces acquisition of additional interest in Southeast Supply Header (SESH) from Centerpoint Energy (press release)
    • ENBL to acquire an additional 25% of SESH, bringing total interest owned by ENBL to 49.9%
    • Funded with 6.3mm units issued to sponsor, for approximate value of $157.5mm
    • Acquisition adds $8-9mm in distributable cash flow
    • SESH is a 286-mile interstate pipeline that originates at the Perryville, LA hub and terminates in southeastern Alabama near the Gulf Coast
  • Summit Midstream (GP of Summit Midstream Partners) announces it has exercised its option to acquire a 40% equity interest in Ohio Gathering Company, LLC and Ohio Condensate Company, LLC from MarkWest and EMG (press release)
    • Summit reimbursed EMG and MWE $377mm, which represents 40% of all capital the JV has spent to date
    • The JV is expected to develop over $3.0bn of gas gathering and condensate stabilization infrastructure for its customers in the area

Other

  • Natural Resource (NRP) announces President & COO Nick Carter will retire on 9/1/14 (press release)
    • Nick’s personality and his deft commentary on the coal markets will be missed on conference calls and at MLP conferences
    • I spent a few days in August 2005 with Nick and the executive team at NRP (all of which are still there) during the marketing of a unique MLP equity offering, when Lehman Brothers helped First Reserve execute the public sale of its subordinated unit position in NRP
    • The subordinated units traded under their own ticker (NSP) and traded at a discount to the common units  that remained meaningfully wide up until the day the subordinated units converted into common units

Published
Jun 1st, 2014

Category:
MLP Market Post

MLP Week Thoughts: Liquefaction Action

MLPs traded sideways for most of the week, before buyers showed up Friday to push the MLP Index to a brand new all-time high to close out the week.  The MLP Index finished the short week up 0.7%, but trailed the S&P 500 (+1.2%) and utilities (UTY +2.3%).  The 10 year treasury yield is now closer to 2.0% than it is to 3.0%, and is now down 56 basis points since the beginning of the year.

Weekly MLP Review_5-30-14

Oil futures were back down, but remain well above $100/bbl.  Natural gas and ethane were both up more than 2.5%, and propane was down 1.1%.  Year over year, energy commodities are up across the board, and are at values that generally result in attractive economics for producers (bottlenecks notwithstanding), continued drilling, and growth in supply.  Domestic demand growth isn’t keeping pace, and even with midstream development that gets that supply to the Gulf Coast, the industry is looking ahead to a glut of hydrocarbons on the coast.  Crude remains backwardated as a result, even as the crude oil exports discussion grows louder by the week.

On the natural gas side, LNG exports appear to be the solution, and they grabbed all the headlines this week.   The U.S. Department of Energy announced a proposal to change the process of reviewing LNG export applications such that the DOE will review an application only after a project has received final environmental approval from FERC (read more details in this Reuters article).

The FERC review process is much costlier (reportedly up to $100mm) than the DOE’s review.  This change shakes up the approval order, because it will favor those projects that are well-capitalized and commercially viable over those that got in line first.  Some have linked the timing of this pro-natural gas announcement to the Obama administration’s efforts to reduce carbon emissions from coal-fired power plants via the Environmental Protection Agency (Forbes).  Politics are always a factor when Washington is involved.

Take a Number

There are still questions as to how many of the 25 projects currently in various stages of development would be built even if they were all approved today, so line jumping can make a huge difference.  LNG export development is a rich company’s game, akin to reaching the front of the line to buy an expansion sports franchise (as opposed to grabbing an existing franchise for 4x the previous record price, like Steve Ballmer did this week).  If you get to the front of the line and get approved, you earn the right to spend a bunch of money, and hopefully earn a return.

I got a taste of what can feel like an endless queue this weekend.  On Friday night, I attended an elementary school talent show.  It was 2 hours of loosely choreographed dance routines, interspersed with the occasional gymnastics or musical instrument display.  The most depressing part, after learning that there were 30 acts, was learning that my daughter’s act (a costumed group dance to the Frozen song “Let it Go”) was listed in the program as the 25th act.  And there was nothing I could do to move her up in line.  I may not have been willing to pay $100mm, but by the 3rd different dance routine set to Pharrell’s “Happy”, I would have emptied my wallet to jump the line.  I will spare you my hard-fought home video of the performance…

Cheniere Energy, Inc. seemed to be the biggest immediate beneficiary of the proposed change.  Cheniere’s stock price was up 17% this week on the news of the DOE proposal, but also on the announcement of another commercial agreement, this time to provide LNG to Spanish utility Iberdrola from train 1 and train 2 of Cheniere’s planned Corpus Christi facility (press release).

Monthly Update

Back in MLP land, the month of May is in the books, and for the first time in 5 years, May was positive for the Alerian MLP Index.  As shown in the chart below, it was the third straight positive month for the index.  Looking ahead, June has been positive in each of the last 4 years, and 12 of the last 18 years.  In each of the last 4 years, June offered the chance for the index to bounce back from weakness in May.  The last 3 times that we had a positive May, it was followed by a negative June.  In other words, it’s been 9 years since both May and June were positive.  With 1Q earnings and the NAPTP conference behind us and digested this week, catalysts for the sector will likely be M&A announcements and macro factors.

Monthly Review_5-30

 

Winners & Losers

There were no traditional midstream MLPs among the top 5 this week, with EROC leading the way. On the downside, sector darling OILT led the sector lower with a 5.6% decline week over week, with volatile trading throughout the week that seemed to be sparked by some analyst indications that valuation was stretched.  OILT is not alone with its high-multiple valuation, but the sell-off didn’t extend to those names, for now.  DPM drifted lower all week, before turning positive Friday.  The two most prominent compression MLPs, USAC and EXLP, were both down as well.

Top5Bottom5_5-30-14

WPT bounced back from leading the sector on the negative side last week. OCIR made it two straight weeks in the top 5, while EXLP made it two straight weeks in the bottom 5.

Top5Bottom5_5-30-14_Chart

On the year to date winners and losers, OILT dropped one spot while EXLP joined the bottom 5.  PSXP is still the leader among MLPs that have a minimum quarterly distribution.  Variable distribution MLP EMES was up 8.2% this week and has produced a total return of 122.6% year to date.  EMES has a change to be at the top of the MLP sector performance table for two straight years, unheard of in recent years.  Frack sand is an important component of drilling and completion, and EMES is the purest way to play that booming market.

Top5Bottom5_5-30-14_YTD

Top5Bottom5_5-30-14_YTD_Chart

News of the (MLP) World

Very quiet week for MLP news, which is probably due to the short week and the NAPTP conference having just happened.  In recent years, however, there is usually at least one MLP that is mum on equity issuance at the conference and then launches an equity offering immediately after the conference. Not so this year.  We did get some M&A news, however, as Petrologistics agreed to be acquired for a cash price less than its IPO price of 2 years ago.  Also, the rumor mill for potential TLP acquirers received a little press.  The TLP sale process hasn’t garnered much enthusiasm within the MLP community, but seems to be progressing a bit.

News-of-the-World

Equity

  • EnLink Midstream Partners (ENLK) files equity distribution market to sell up to $75mm worth of common units at-the-market (filing)
  • Oiltanking (OILT) announces 2:1 unit split to go into effect on July 14 (press release)
    • For those keeping score at home, remember to update the IDR tiers in your OILT waterfall and change the historical distribution payouts, because if you accidentally double OILT’s yield in your model from 2.25% to 4.50%, it’s not going to stand out like it used to when a 7% yielding MLP split its units (all part of the brave new lower-yield world)

M&A / Growth Projects

  • Petrologistics (PDH) announces sale to Flint Hills Resources (subsidiary of Koch Industries) for $14.00/unit in cash, or approximately $2.1bn (press release)
    • Flint to pay $14.00/unit to unitholders, but will pay only $12.00/unit for common units held by financial sponsors (Lindsay Goldberg and York Capital) and certain executives
    • Purchase price represents a 5.2% premium to the prior day’s closing price before the announcement
    • Transaction is expected to close by year-end
    • PDH went public on 5/3/12 at an IPO price of $17.00/unit, but never closed above that price
    • PDH has produced a total return of +1.6% from IPO to today’s closing price, if you include distributions
    • Shrinks the variable distribution MLP pool from 9 down to 8
  • TransMontaigne Partners (TLP) has reportedly narrowed list of bidders for its sale (Reuters)
    • List includes NGL Energy (NGL) and Buckeye Partners (BPL)

Industry

  • Crude-by-rail volumes to the West Coast not under the radar anymore, sparking concerns from locals (Fuel Fix)
  • Discussion of LNG market dynamics after China-Russia gas accord (Fuel Fix)
    • Reduces China’s need for LNG import, increasing China’s negotiating power on the LNG it does need

Published
May 25th, 2014

Category:
MLP Market Post

MLP Week Thoughts: All-Time High-Lights

For the 4th straight week, the Alerian MLP Total Return Index was positive, but broke the streak of 3 straight weeks of outperforming the S&P 500, which was up 1.2%.  Interest rates and natural gas prices were basically flat, while oil and NGLs (particularly propane) were up sharply week over week.  The S&P 500 closed at a record high Friday, while the Alerian MLP Total Return Index hit a new all-time high on Thursday.

Weekly MLP Review_5-23-14

All-time highs can be scary, particularly if you have new money to put to work.  No one wants to be the last one in, and it can be hard to overcome the sense that you’ve missed the boat.  That’s why you hear the “what inning are we in?” question so frequently in this sector.  I’ve posted the following table a few times before to show that all-time highs by themselves haven’t signaled a top for the MLP Index, although when a year sees more than 50 new highs, typically the index struggles next year.  We didn’t reach 50+ last year, but we are on pace for 50+ this year.

All-time Highs

Since the beginning of 2009, the MLP Total Return Index has closed at all-time highs on 183 separate days, including 59 in 2010 alone.  During all of that time, however, the all-time low yield for the Index has not gone lower than its 2007 low of 5.4%.  MLP distribution growth is driving the index higher, not valuation alone, at least when looking at the sector as a whole.

NAPTP Conference

The annual NAPTP MLP conference was held this week in Jacksonville, FL.  The conference offer the most MLP management teams at a single conference of any other conference, and it’s not restricted to clients of any single Wall Street firm.  There is typically not much in the way of new news, and institutional investors like me have already met with or seen most of the management teams in the space within the last 6 months.  But, it’s the best conference in terms of hallway conversation and assessing institutional investor sentiment, given the amount of bankers and large investors that show up.

Attendance: According to some, the MLP conference saw record attendance again this year at more than 1,000 registered participants.  See below for one firm’s reported annual attendance figures, with an estimate for this year.  The numbers below may be actual attendance, as opposed to registered participants, because I remember 2013 media reports (like this one) that reported 1,100 registered participants last year.

Attendance

My own sense from looking around was that the conference seemed light on participants other than buy-side investment teams, sell-side analyst teams, bankers, accountants, institutional salesmen, attorneys, and the occasional serious private MLP investor.  There weren’t as many retail brokers, small RIAs or individuals.  Further evidence of the institutionalization of the sector.

Also, the conference wasn’t the spectacle for financial media it was last year, when I met writers from Barron’s and Forbes (there to report on the conference).  Also, Hedgeye didn’t even show up.  Moving the conference away from the greater New York area to Jacksonville, FL makes it cost prohibitive for journalists from major finance publications to attend.  Less financial media exposure is probably a good thing on balance.  Media exposure can shed light on an undervalued sector, but increased attention can lead to unnaturally high valuations.

Venue: As far as the venue, I thought it was pretty great.  Presentation tracks were right next to each other, there was a Starbucks in the hotel, weather was great, ample onsite bar space for networking, dinners were either at golf courses or at the beach, and 1×1 meetings were mostly located in the same general area.  Small issues with the venue include lack of any tables to go with all the chairs in the presentation rooms, and the few 1×1 rooms that were not in the conference area at all.  Overall, the venue was better than any we have seen before.

Signs_NAPTP

Buzz: We came away from the conference with a positive sense of the growth opportunities available to certain MLPs, and a positive sense of the continued growth of institutional ownership of the MLP sector.  Other topics I heard discussed around the conference:

  • Departure of yet another prominent equity research analyst to the buy-side (I believe I had that trend)
  • Surprise over strength of demand for some recent MLP IPOs, given growth prospects and relative asset quality
  • Elevated M&A competitiveness, questions over multiples paid
  • Management bashing by other MLP management teams
    • Will become increasingly prevalent as MLPs compete more directly for capital
  • Up-C structure as it relates to ETE
    • What ETE might do with that new “currency”
  • Strength of BWP trading, speculation over potential acquirers
  • Basin of choice if you have a choice: Permian
  • LINE / XOM asset swap
  • Capital flows into the sector continue, including from Asia (Japan mostly)
  • Exports needed to balance condensate market
  • Rail’s role in moving Canadian oil south
  • Linn Energy asset swap with Exxon

Update of PWC’s MLP Ownership Numbers:  PWC processes the vast majority of K-1s for MLPs, and each year they present their breakdown of MLP unit ownership by entity structure.  Individual ownership of MLPs was down to 34% of total units on the market in 2013, down from 47% in 2005.  Foreign citizens, partnerships and corporations have picked up the slack, accounting for a combined 38%, up from around 15% in 2005.

MLP Ownership

Suggestion for Presenters: It would be helpful for MLPs to include a slide at the end of their NAPTP presentation with the following information, which tends to come up in Q&A:

  • Percentage of distribution tax deferred
  • Unit price
  • Yield
  • ATM status (if you have one or not and the size)
  • IDR status
  • Subordinated unit status
  • Debt status (do you have any and if so, how much)
  • How many units your MLP has

Winners & Losers

BWP’s stock prices continues to march higher, closing week up 12.8% on no news to lead the MLP sector, but the market clearly liked BWP’s NAPTP presentation, which provided a bit more detail and disclosure than usual. Large cap MLP ACMP made the top 5 this week, up 5.1%.  Rounding out the top five were 3 MLPs with non-traditional assets (HCLP, SUSP and OCIR).  WPT (closed at $19.24/unit this week) continued its downward slide, down 15.8% (including its distribution) since reaching its all-time high of $23.20/unit on April 23rd.  WNRL, a consistent feature on the top 5 year to date performers this year, dropped 3.9% this week and is down 4.9% since peaking May 15th.  MLPs with non-traditional assets (KNOP, EXLP, SGU) round out the bottom 5 for the week.

Top5Bottom5_5-23-14

There were no repeats in the top or bottom five this week.

Top5Bottom5_5-23-14_chart

The bottom 4 names for the year didn’t change this week, but if BWP (-29.9%) continues trading up, it may displace EROC (-29.1%) and climb out of the MLP cellar.  The fifth worst performing MLP continues to vary week to week, with LGP taking the spot this week.  WNRL’s recent weakness allowed EQM to bounce back into the top 5 this week.  The top maintained their order, but continued higher for the most part this week, with TEP showing particular strength Friday when it was up 4.9%.

Top5Bottom5_5-24-14_YTD

Top5Bottom5_5-23-14_YTD_chart

News of the (MLP) World

Equity

  • Regency Energy (RGP) files equity distribution agreement to sell up to $400mm worth of common units at-the-market (filing)

Debt

  • Energy Transfer Equity (ETE) prices $700mm add-on offering of 5.875% senior notes due 2024 at 102% of par (press release)

M&A / Growth Projects

  • Linn Energy (LINE) announces agreement to trade a portion of its Permian acreage with Exxon Mobil for operating interests in the Hugoton Basin (press release)