Feb 15th, 2015
MLP Market Post
The MLP Index stumbled this week, but the index remains up 2.8% for the month so far, on track to post its first positive month since August. The index has produced negative 13.9% total return since the end of August, but has rallied 9.4% (including distributions) since January 15th. Performance was balanced across the sector as midstream MLP earnings reports helped them gain traction, while upstream and oilfield services MLPs continued higher with oil prices starting mid-week.
The S&P 500 posted a second consecutive positive week up 2.0% to new highs, while utilities declined for the second straight week and finished down 3.4%. Oil prices were volatile but climbed higher Thursday and Friday and 2.1% for the week, making it three positive weeks in a row. Natural gas spot price rebounded 6.8% this week after 3 straight weeks of declines, with expected cold weather in the northeastern U.S. the likely driver.
In the upcoming week, some very large and active MLPs are set to report earnings, including: ETP/ETE/SXL, WPZ, and ENLK.
What is Top Tier?
Top tier growth is oft alluded to in the MLP sector, and the more hyper growth drop-down MLPs that go public, the higher the hurdle rate is for making it into the top tier club. But when an MLP guides to “top-tier” distribution growth, what does that mean? Below I’ve gathered some data on the top 20 MLPs that have paid at least a year’s worth of distributions, so several of the self-proclaimed top-tier MLPs (e.g. DM, SHLX, CPPL, etc) are not included.
The top 20 fastest distribution growth MLPs over the last year have increased their distributions by an average of 26.9%, while the top 5 averaged 44.8% growth. On a 3 year CAGR (or shorter if the MLP has not traded for 3 full years), the top 20 fastest growing MLPs have grown distributions at an annual rate of 22%, with 31.5% average for the top 5.
Of the 100 or so MLPs included in this analysis, it’s pretty incredible that 20% of them have grown distributions more than 15% annually over the last few years. With new high-growth MLPs and with consolidation of smaller MLPs, the top tier looks like it will push higher for the next few years, and a quarter of all MLPs may grow 15% or more. Visibility into that kind of growth from sponsor-driven distribution growth helps mitigate impact of commodity prices, at least for a little while until the drop-downs slow down for some of these MLPs.
What about GPs? There are only 11 (for now) pure play or nearly pure play GPs that I track. The average growth rate of those over the last year is 30.5%, and 24.4% over 3 years. The top 5 have grown even faster, with average YOY growth of 45.5% and 33% over 3 years.
Next week, I’ll come back with some analysis of how the “top-tier” annual distribution growth rate has changed over time. MLPs may have achieved growth rates this high, but driven by third party acquisitions (which were much less competitive back then). No MLPs publicly-guided to 20%+ distribution growth a decade ago.
Winners & Losers
MLPs in the same subsector went in different directions this week, a symptom of the volatility we’re seeing week to week. Coal MLP RNO rallied 11.4% while coal MLP NRP declined 12%. Upstream MLP NSLP led all MLPs with a 23.9% gain, while upstream MLPs BBEP and EVEP each made the bottom five.
3 of the bottom 5 were up 25%+ last week, so a selloff was understandable for BBEP, JPEP and EVEP.
For the year overall, CCLP has claimed the top spot from LINE, while FISH, NSLP and LRE join the top 5.
NRP replaced TOO in the bottom 5 this week.
News of the (MLP) World
This week we got the first follow-on equity offering to trade up after pricing so far this year. Not a bad indicator for the state of the capital markets. We got another couple of third party acquisitions and a sizeable drop-down. Also, as has become almost as routine as MLP IPOs, we got another Alerian MLP Index constituent change.
- Rose Rock Midstream (RRMS) priced public offering of 2.0mm units at $40.32/unit, raising $80.6mm in gross proceeds (press release)
- Overnight offering, priced at 4.0% discount to prior close
- RRMS traded up 2.9% in the session following pricing
- As previously discussed by EQT Corp, EQT GP Holdings, LP (EQGP) filed an initial prospectus to raise up to $300mm in an IPO (filing)
- EQGP will own 34.4% L.P. interest, the 2.0% G.P. interest and all of the incentive distribution rights of EQT Midstream Partners (EQM)
- IPO is expected to be for approximately 18-20% of the outstanding units
- Structured as a partnership
- Sol-Wind Renewable Power LP (SLWD) postponed IPO (The Deal)
- A yieldco in an MLP wrapper, SLWD was attempting to raise $174mm at $20/unit (6.5%)
- Price talk trended lower and the deal was pulled on weak demand, a stark contrast from the largest ever MLP IPO (CPPL) that priced above the price range last week
- Suburban Propane (SPH) priced $250mm of 5.75% senior notes due 2025 at par (press release)
- SPH will use the proceeds to fund a cash tender for $250mm of its outstanding 7.375% senior notes due 2020
M&A / Growth Projects
- Rose Rock Midstream (RRMS) announced drop-down acquisition from SemGroup (SEMG) for $325mm (press release)
- Assets acquired include the Wattenburg Oil Trunkline System and SemGroup’s 50% interest in the Glass Mountain Pipeline
- Purchase price will be funded with 1.75mm units issued to SEMG, cash and net proceeds from the above equity offering
- Wattenburg Oil Trunkline is a 75-mile oil pipeline in the DJ Basin, which transports production from Noble Energy to the White Cliffs Pipeline
- Glass Mountain is a 210-mile oil pipeline system that comprises two lateral pipelines originating in the Granite Wash and Mississippi Lime plays
- Kinder Morgan (KMI) announced the acquisition of three terminals and one undeveloped site from Royal Vopak for approximately $158mm (press release)
- Assets include a storage complex in Galena Park, TX, two terminals on the coast of North Carolina and an undeveloped site at Perth Amboy, NJ
- Galena Park assets are adjacent to KMI’s Galena Park complex
- NGL Energy (NGL) announced $280mm acquisition of Magnum NGLs, LLC from Haddington Ventures, LLC (press release)
- Magnum owns and operates a NGL storage facility with potential capacity of more than 10mm barrels
- Facility is located southwest of Salt Lake City, Utah with rail and truck access to Western US market
- NGL will finance the transaction with $80mm in cash and $200mm worth of units issued to the seller
- Transaction represents a 7.1x multiple of 2017 estimated EBITDA, and is expected to be neutral to distributable cash flow per unit initially, and accretive thereafter
- Alerian announced EXLP to be added to the Alerian MLP Index and Alerian MLP Equal Weight Index, replacing OILT (press release)
- Cushing announces changes to the Cushing MLP High Income Index and the Cushing 30 MLP Index to replace Atlas Pipeline Partners (APL) (press release)
- CCLP to join the Cushing MLP High Income Index
- BWP to join the Cushing 30 MLP Index
- Changes will be effective 2/23/15, assuming the Targa / Atlas deals are all approved
- Williams Partners announces Geismer back on line (press release)
Feb 8th, 2015
MLP Market Post
MLPs traded well this week, helped by firming crude oil prices, outperforming the broader stock market and utilities for the second straight week. The Alerian MLP Index (AMZ) increased 3.7% (including distributions) and the Alerian MLP Equal Weight Index (AMZE) was up 6.1%. Strong price performance by upstream MLPs helped AMZE post positive performance. The AMZE has now produced 12.9% total return in 17 days, while AMZ has produced 10.3% return. The S&P 500 rebounded 3.0%, while utilities finished down 4.1%. Oil prices finished 7.9% higher this week, making it two positive weeks in a row for oil prices. Natural gas spot price continued to slide, down 4.1% to a new 52-week low.
MLP earnings season continues this week (and for a few more weeks after that) with several interesting MLPs to report, including NGLS, TLLP and BWP.
MLPs are a bit like the New England Patriots. More specifically, they are like the Patriots of Week 5 of this NFL season. After more than a decade of sustained success, 5 Super Bowl appearances and 3 wins, the Patriots started the season 2-2. The sports media began questioning the Patriots. Was this the year they falter and Brady loses the ability to lead his team to victories? Would Belichick ever be able to win a Super Bowl without cheating?
The Patriots responded, winning 9 games in a row, getting the top seed in the playoffs, and capping the season by winning the Super Bowl in dramatic fashion. In doing so they became the youngest team to win a super bowl ever. Only 2 current players were on the team the last time the Patriots won the Super Bowl. This year’s outperformance was made possible by younger players like Edelman, Gronkowski and Malcolm Butler.
MLPs have produced exceptional returns for investors for decades, providing income and growth, through good times and bad times. But over the last 5 months, MLPs have struggled, and many are questioning their ability to continue to produce market beating returns going forward.
As earnings have been released and it has become clear that MLPs will continue to grow distributions in this environment, MLPs have begun to rally over the last few weeks. Obviously oil prices rallying 16.2% in 7 days helps. But after more than 60 MLP IPOs in 5 years, there are now more MLPs under 5 years old than over 5 years old, and the average age of all MLPs is around 6.6 years (3.6 years median). The youth movement in MLPs positions the sector for revitalized growth. Like the Patriots, the drivers of outperformance in the MLP sector going forward will be the younger players, MLPs that were not on the team the last time MLPs outperformed the S&P 500 (4 years ago!).
Winners & Losers
NKA suspending its distribution sent the stock down 58.8% this week. No other MLP was down double digits this week. On the upside, there were many double digit performing MLPs this week, including the top five, which were all up more than 25% each, and for the second straight week they were mostly upstream MLPs. LGCY and BBEP each made the top 5 for consecutive weeks.
LINE has taken the lead among MLP returns for the year so far, joined by JPEP and NMM, two small cap MLPs that have had positive company-specific announcements in recent weeks. On the downside, DPM recovered a bit, but remains the worst performing MLP this year among those with more than a $3bn market cap.
Quite a bit of movement week over week for YTD return leaders and laggards. NKA went from first to worst, EVEP bounced all the way from last place to out of the bottom 5. Not a single member of the top 5 YTD as of last week, remains in the bottom 5. Wild swings.
News of the (MLP) World
The week was highlighted by the first MLP IPO of the year, Columbia Pipeline Partners (CPPL – Natural Gas Pipeline & Storage MLP), which was successful by any measure. The offering was upsized, was priced $2/unit above the offering price range and traded up 16.5% on its first trading day. In the end it was the second largest MLP IPO ever at $1.1bn.
- Columbia Pipeline Partners (CPPL) priced initial public offering of 46.8mm common units at $23.00/unit, raising $1.1bn in gross proceeds (final prospectus)
- Initial yield of 2.91%, based on a minimum quarterly distribution of $0.1675 ($0.67 annualized), which is the third lowest IPO yield ever for an MLP
- Offering was upsized from initial offering of 40.0mm units
- $1.1bn is the second largest MLP IPO ever
- CPPL owns a 14.6% interest in the natural gas pipeline business assets of publicly-traded utility company NiSource
- CPPL expects to be able to grow distributions more than 20% for the next 5 years based on $4.9bn of development projects it will be participating in as part of its 14.6% interest
- Navios Maritime (NMM) priced public offering of 4.0mm common units at $52.4mm in gross proceeds (press release)
- Offering was priced at a 4.5% discount to the prior closing price, and traded down another 1.1% from pricing the following day
- Western Refining Logistics (WNRL) priced $300mm of 7.5% senior notes due 2023 at par (press release)
M&A / Growth Projects
- EnLink Midstream (ENLK) announced $600mm acquisition of Permian Basin gathering & processing operator Coronado Midstream Holdings LLC (press release)
- Coronado operates 3 natural gas processing plants and a 270-mile natural gas gathering pipeline system
- Coronado was owned by a group of Permian producers that includes Diamondback Energy, Inc., Reliance Energy, Inc. and RSP Permian, Inc.
- ENLK expects that acquisition to reflect a 7-8x EBITDA multiple over the next few years after ENLK spends an additional $400-$600mm to build out the system
- Plains All American Pipeline (PAA) announced two new pipeline projects (press release)
- PAA plans to build pipelines to transport oil and condensate from the Delaware Basin, and additional Permian Basin pipeline expansions
- These pipeline expansions and additions are expected to be in-service at various points in late 2015 and early 2016
- No cost estimates were announced, just part of the general plumbing necessary in the basins in which PAA operates and part of PAA’s $1.85bn 2015 capital budget
- JP Energy Partners (JPEP) announced new oil gathering agreement in Midland Basin, and $36mm in capital spending in 2015 to support the agreement (press release)
- 10-year fee-based gathering agreement with Discovery Natural Resources, LLC to construct and operate an extension of its Silver Dollar Pipeline gathering system
- Project expected to be in-service by second half of 2015
Feb 1st, 2015
MLP Market Post
MLPs were mixed this week, but outperformed the broader stock market and utilities. The Alerian MLP Index (AMZ) capped the worst January ever recorded by the MLP index with a 1.5% decline (including distributions) this week. It wasn’t all bad, as strong price performance by upstream MLPs helped the AMZE post a positive week.
The S&P 500 finished down 2.8% for the week, while utilities finished down 1.8% even with a significantly lower yield on U.S. 10 year treasuries. Oil prices finished 6.7% higher this week, including an 8.3% rally on Friday. Natural gas spot price continued to slide, down 9.5% this week to a new 52-week low on general oversupply.
The MLP Index has never before had 5 straight negative months, but that’s where we are now, with the index having declined each month and 16.3% overall since the end of August. MLPs finished down for the month of January for the first time since 2008, breaking a streak of 6 consecutive years. 2 of the other 3 times when January was negative, the MLP Index was negative for the full year (2002 and 2008).
MLPs are overdue for a bounce that sustains itself long enough for a positive month, but that’s been elusive in a steadily declining commodity price environment. Since the OPEC meeting in November, however, the individual MLP news flow has been relatively light.
Over the next few weeks, we will be overwhelmed by MLP earnings releases and 2015 guidance releases that has a chance to highlight the resiliency of MLP cash flows in the face of falling commodity prices. We have started to see some differentiation creep back into the MLP sector as distribution announcements and earnings releases have started rolling in.
Winners & Losers
Upstream MLPs bounced back in a big way this week, well before oil prices snapped back on Friday, and they occupy 4 of the top 5 spots. VLP made it two straight weeks in the top 5 after its sponsor announced a faster drop down pace, which apparently was news to the market. After announcing its role as the white knight to RGP’s distressed valuation, ETP’s price declined. Another large-cap MLP DPM made the bottom five on deteriorating processing economics for its sponsor DCP Midstream, LLC, which carries the commodity price exposure for DPM. TOO made it two straight weeks in the bottom five.
DPM’s poor week lands it on the bottom five YTD list this week. Rallies in upstream (see above) helped most upstream MLP escape the bottom five (EVEP was left behind). SDLP was flat week over week, but drops into the bottom five YTD by standing still. On the upside, FISH continued higher and jumped from 5th place to 2nd place.
News of the (MLP) World
We got some more big M&A this week, but it was more of a cost of capital clean-up trade than strategic M&A activity. We did get another positive indicator in the face of the bleak commodity price environment when the first MLP IPO of the year launched. The dark side of lower NGL prices showed itself this week as well, as DPM’s sponsor announced a 20% workforce reduction.
- Columbia Pipeline Partners (CPPL) launched MLP IPO of 40.0mm units, expected to raise $800mm at the midpoint of the filing range of $20.00/unit (filing)
- IPO yield of 3.35% at the midpoint
- Will be the 3rd largest ever MLP IPO
- CPPL is selling 42.6% of total units in the offering. If the underwriters overallotment is exercised, the public will hold almost all of the common units of CPPL, with NiSource retaining the subordinated units
- CPPL will own 14.6% of Columbia Pipeline Group, the opco that will house all of NiSource’s midstream assets, which consist primarily of natural gas pipelines serving the Northeast region of the U.S., and a substantial backlog of development projects
- CPPL will have $250mm of net debt on its balance sheet, a departure from recent hyper-growth MLP spin offs which have gone public with no debt and cash on the balance sheet to enable accretion from drop downs easily without needing to issue equity
- Tallgrass Energy (TEP) announced plans for its sponsor to file for GP IPO (press release)
- Tallgrass GP Holdings, which owns L.P. and G.P. interests in TEP, plans to file registration statement for IPO
- This is the second GP IPO plan that has been announced in the last few months (EQM’s sponsor is planning a GP IPO as well)
M&A / Growth Projects
- Energy Transfer Partners (ETP) announced the acquisition of Regency Energy Partners (RGP) in a transaction valued at $18bn, including assumed debt (press release)
- ETP will acquire RGP in a stock for stock transaction whereby RGP unitholders will receive 0.4066 ETP units and a cash payment of $0.32 for each RGP unit
- Energy Transfer Equity (ETE), which owns the general partner and 100% of the incentive distribution rights (IDRs) of both ETP and RGP, has agreed to reduce the IDR payments it receives from ETP by a total of $320mm over a 5 year period
- Acquisition price represented a 13% premium to the prior closing price of RGP
- The transaction makes ETP the second largest MLP
- The transaction is accretive to ETE distributions per unit immediately and to ETP distributions per unit in 2016 and beyond
- Magellan Midstream (MMP) extends open season for Saddlehorn oil pipeline another month to the end of February (press release)
- The Saddlehorn pipeline project is designed to be a 600-mile, 20-inch diameter pipeline capable of transporting up to 400,000 barrels/day of oil from Colorado to Cushing Oklahoma
- MMP has already received binding commitments from Anadarko Petroleum and Noble Energy
- Alerian announced changes to AMZ and AMZE Indexes to reflect the merger between WPZ and ACMP (press release)
- WPZ will be removed from AMZ and AMZE
- TEP will be added to AMZ and AMZE
- DCP Midstream, LLC, the private sponsor of DCP Midstream Partners (DPM) announced restructuring, Oklahoma City office closure, and layoffs (press release)
- DCP Midstream is a 50-50 JV between Spectra Energy (SE) and Phillips 66 (PSX)