Mar 14th, 2015
MLP Market Post
MLPs sold off sharply this week, trading down 4 out of the 5 days. The Alerian MLP Index (AMZ) closed down 4.3% for the week, and is down 8.1% over the last 3 weeks. Lower oil prices were the primary driver of the sell off this week, and despite a much lower inventory build this week, oil storage building is the primary concern within the sector right now.
Piling on top of those fundamental issues were 5 equity offerings for nearly $2bn worth of new MLP paper that was not easily absorbed this week. There is not much to get excited about after the last three weeks, although there probably won’t be 5 equity offerings next week, so there is that. With earnings season in the rearview mirror, expect commodity prices to dominate price action in the near-term, with M&A as the only potential slump-buster for now.
The S&P 500 declined -0.9%, while utilities outperformed (+0.3%) on lower interest rates week over week. Oil price declined 9.2% in the spot market week over week, making it 4 straight negative weeks for oil prices. A strong dollar and seasonally weak refinery demand leading to inventory builds have the biggest contributors to negative sentiment. Natural gas prices reversed gains from last week, down 6.6% in the spot market.
Since oil prices climbed above $50/bbl a few weeks ago, there has been a rush to raise capital across the energy sector (beyond just MLPs). Total equity raised by U.S. energy companies so far this year has been more than $10.0bn already ($6.3bn from E&P corporations, $3.7bn by MLPs). That new supply of equity, combined with lower commodity prices has sent MLPs lower.
Winners & Losers
No trends on the upside this week, except that each of the top 5 did not issue equity this week. FISH led all MLPs On the downside, commodity price sensitivity was the prevailing theme. All 5 were upstream focused MLPs, 4 E&P and 1 oilfield services.
There was no real consistency week over week, as shown below. BBEP went from top 5 to bottom 5, but no other recurring names.
Year to date MLPs have declined 7.7%, but there are a few that have escaped the vortex of falling oil prices. None of the top five MLPs are in the Alerian MLP Index, and they are generally more thinly traded than other MLPs, which I think helped push a few of them lower than most MLPs in 4Q 2014, so when things first stabilized back in mid-January, they bounced hard. Upstream MLPs bounced hard in January as well on oil price optimism, but have collapsed with oil the last few weeks, such that several of them are now among the bottom 5. 4 of the bottom 5 are in the Alerian MLP Index (for now).
Recent volatility is highlighted in the below chart that shows week over week changes in the YTD winners and losers. EVEP and TOO remain at the bottom, but SDLP and ARP dropped in the bottom five this week. On the positive side, CLMT and MEMP dropped out of the top 5, FISH and CELP jumped into the top 5, while MMLP went from first overall down to fifth.
News of the (MLP) World
In a continuing theme over the last few weeks, MLPs are rushing to get equity deals done while they can, as the general consensus is that oil prices will be lower in the near-term, given storage builds. There were 5 equity offerings by MLPs for total gross proceeds of more than $1.9bn, bringing the total equity issued by MLPs through public offerings to $3.9bn in the last month.
Only one of the five offerings this week was accompanied by an acquisition announcement, proceeds from the remainder of the offerings will be used to fund previously announced 2015 capital expenditures related to development projects, which made after-market trading pretty sloppy.
- EQT Midstream (EQM) priced public offering of 8.25mm common units at $76.00/unit, raising $627.0mm in gross proceeds (press release)
- One day marketed offering, with a file-to-price decline of 5.54%
- Proceeds to be used to partially fund drop-down acquisition announced this week
- Sunoco Logistics (SXL) priced public offering of 13.5mm at $41.76/unit, raising $563.8mm in gross proceeds (press release)
- Overnight offering, priced at 3.24% discount to prior closing price
- SXL traded down another 4.0% from pricing in the next session
- Calumet Specialty Products (CLMT) priced public offering of 6.0mm units at $26.75/unit, raising $160.5mm in gross proceeds (press release)
- Overnight offering, priced at 3.9% discount to prior closing price
- Enbridge Energy Partners (EEP) priced public offering of 8.0mm common units at $36.70/unit, raising $293.6mm in gross proceeds (press release)
- Overnight offering, priced at 3.2% discount to prior closing price
- Targa Resources Corp (TRGP) priced public offering of 3.25mm shares at $91.00/share, raising $295.8mm in gross proceeds (press release)
- Overnight offering, priced at 3.6% discount to prior closing price
- Traded up 0.2% from pricing on a negative day for MLPs
- Western Gas Partners (WES) filed updated equity distribution agreement to sell up to $500mm of equity at-the-market (filing)
- Crestwood Midstream (CMLP) priced $700mm of 6.25% senior notes due 2023 (press release)
- CMLP will use the proceeds to redeem all outstanding 7.75% senior notes due 2019 and to pay down borrowings outstanding on its revolving credit facility
M&A / Growth Projects
- EQT Midstream (EQM) announced a $1.05bn acquisition of natural gas gathering pipeline assets from its sponsor EQT Corp (press release)
- EQM is acquiring the Northern West Virginia Marcellus Gathering System, which gathers natural gas production in the Marcellus Shale, and a 30-mile natural gas pipeline that connects the gathering system to a major processing hub
- As part of the transaction, EQM entered into a 10-year contract with EQT that eliminates volume and commodity price exposure
- Alerian announced quarterly rebalancing (press release), removing 3 upstream MLPs from the Alerian MLP Index, and adding the following MLPs:
- Summit Midstream Partners (SMLP)
- Capital Products Partners (CPLP)
- Sunoco LP (SUN)
Mar 7th, 2015
MLP Market Post
MLPs were volatile this week, trading in a different direction each of the five trading days. Down Monday, up Tuesday, down Wednesday, up Thursday, and down Friday. The price action reflects commodity price uncertainty that is leading to growth capex uncertainty. Growth capex has been the principal driver of distribution growth the last few years (outside of the drop down set of MLPs). The Alerian MLP Index (AMZ) traded down 2.5% for the week, and is down 3.9% over the last 2 weeks.
The S&P 500 (-1.6%) and utilities (-4.3%) were each lower this week for a second consecutive week. Oil price was flat this week, although it trended lower in the final two sessions of the week (-3.7% during that time). Natural gas prices recovered this week, but remains below $3.00 in the near-term futures market. NGLs fell back after rallying the last few weeks. The 10-year U.S. treasury rate rose 25 basis points this week, which didn’t help MLPs or utilities, and seemed to have a strong effect on the top tier growth MLPs on Friday.
Oil Storage Threat Level Rising
Prominent MLP management teams, sell-side research analysts, commodity consultants and even the Wall Street Journal (see here) are all discussing the level of storage in the Cushing, the U.S. overall and the world. The idea is that if we keep adding oil to storage, eventually we will run out of oil storage, leading to another leg down in oil prices.
Running out of storage has quickly become a consensus opinion, but the oil price has not yet collapsed, which indicates that there is a clear chance that we don’t reach capacity. The storage issues is a complicated triangulation between capacity limits, supply that is trying to slow down (but not fast enough), and demand growth (refinery downtime and strikes not helping).
Below is a snapshot of the U.S. storage picture as we sit today. If we continue to build storage at the same rate we’ve built the last three weeks, the U.S. will run out of capacity in 9 weeks, or early May.
Some caveats are necessary, however. One, the capacity listed on this chart is as of 9/30 per EIA.gov. This data gets updated every 6 months, and in the 6 months prior to 9/30, the U.S. added 13 mmbbls of storage, including around 3 mmbbls in Cushing and around 8 mmbbls on the Gulf Coast. So, there is probably some additional storage that has come online since 9/30, which may add a week or two to the countdown. Also, now that pipeline capacity has been built out between storage hubs, any one area of the overall U.S. storage picture (e.g. Cushing) is less important than it once was. Finally, in each of the last 5 years, during the 9 week period we are entering now, there has been at least one week where there was a draw (rather than a build) in oil from storage. So, it’s unlikely that the current pace of storage builds will continue for the next 9 weeks.
Winners & Losers
MMLP took the top spot for the week, as the market continues to gain comfort around MMLP’s distribution, which was oddly in question the last few months (at least based on their 11%+ yield at some point). SXE’s earnings this week struck a positive chord with investors. NGL led all MLPs to the downside, after it piled onto itself with an equity deal at the end of an already bad week of trading.
CNNX made the bottom 5 for the second straight week, as investors continue to vote with their feet after 2015 guidance redefined top tier distribution growth as sub 20%. No repeats among the top 5, as it continues to be difficult to maintain price momentum in this market.
For the year so far, MLPs that at some late last year had their distribution sustainability questions are leading the way to the upside. MMLP wasn’t even in the top 5 last week, but finds itself sitting atop of the sector at this point.
CNNX’s fall the last two weeks put it into the bottom 5 for the year overall. DPM’s fall from investment grade has landed it in the bottom five as well. SXE and CAPL popped out of the bottom 5 this week.
Light news week, but we had a second consecutive week of an MLP doing an equity deal without a clear transaction to use the proceeds for. The offerings help lockup financing for 2015 capex, but doing so now after the selloff the last few months speaks to the bearishness of MLP management teams on the outlook for a sustained rally in MLPs.
- NGL Energy (NGL) priced public offering of 6.25mm units at $27.57/unit, raising $172.3mm in gross proceeds (press release)
- Overnight bought deal transaction, priced at 4.9% discount to prior closing price
- Proceeds to be used to repay revolver borrowings and to fund capex
- Energy Transfer (ETP) priced $2.5bn of senior notes, including (press release):
- $1.0bn of 4.05% senior notes due 2025 at 99.918% of par
- $500mm of 4.9% senior notes due 2035 at 99.81% of par
- $1.0bn of 5.15% senior notes due 2045 at 99.772% of par
M&A / Growth Projects
- NGL Energy (NGL) announced acquisition of 3 saltwater disposal wells (8-K filing)
- Consideration of 1.3mm common units issued to seller, implying approximately $37mm purchase price
- Western Gas (WES) announced IOU acquisition of 50% interest in the Delaware Basin JV gathering system from Anadarko (press release)
- WES will pay nothing at closing, but has written an IOU to Anadarko whereby they agree to make a payment in 2020 equal to 8x the average EBITDA from 2018 and 2019 (purchase price expected to be $283mm)
- WES expects to receive $15-25mm EBITDA from this acquisition in 2015
- Creative structure enables WES to maintain its 15% distribution growth target for 2015, and highlights the value of a truly supportive sponsor
- TEP closed acquisition and announced recommendation to board of 15% distribution growth over the next 2 quarters (press release)
Mar 1st, 2015
MLP Market Post
After a positive week last week, MLPs declined 1.4% this week. The MLP Index has been unable to string together two consecutive positive weeks in more than 2 months. The market was (understandably) unable to soak up $1.7bn of new MLP equity this week without MLP prices declining. It didn’t help that PAA, which represents 7.5% of the index, was down 3.1% this week after executing a $1.1bn equity offering (its first marketed equity offering in more than 3 years).
MLP trading lately has reminded me of a toddler who is just beginning to try to walk. He takes a step, teeters, takes another step, loses his balance and falls on his butt. Ultimately he either learns to walk or breaks down crying after one too many failed attempts.
Similarly, MLPs trade up, seem to be getting momentum, but quickly lose their balance and fall back again. The challenge for MLPs is that the floor keeps tilting back and forth with changes in commodity prices, de-stabilizing equity offerings, and other risks like producer distress. Ultimately, with time, MLPs should emerge from this lengthy correction with reset expectations, positioned to produce attractive total returns off a lower base.
Despite ongoing choppiness for MLP stock prices, MLPs did manage to post positive monthly performance, breaking the longest streak of negative months (5) in the 20 year history of the MLP Index. Despite the positive month, MLPs remain 14.6% below their end-of-August peak. MLPs are still down so far in 2015, but with another positive month, MLPs may still close 1Q in positive territory.
Winners & Losers
RRMS, CMLP and DKL all reported 4Q results this week that pleased the market. RRMS’s beat and 3 year top tier distribution guidance sent it 8.7% higher on Friday. CMLP rebounded this week after resetting expectations for growth, but also calming the market with respect to maintaining its distribution. DKL put up another strong quarter of results and reiterated its almost top tier growth trajectory.
On the downside, TEP’s equity offering and GP IPO filing sent its stock price reeling. CNNX re-defined top tier growth a bit lower than we did here the last two weeks, and that was not well received by the market on Thursday and Friday, despite very strong quarterly results.
TEP and CMLP flip flopped vs. last week, but no other repeats in a very inconsistent MLP market so far in 2015.
For the year so far, FISH dropped from first last week to off the board this week, replaced by CLMT, EROC and LINE. On the downside, TOO crept up from the bottom spot to 3rd worst, while GMLP replaced fellow shipping MLP TGP in the bottom 5 this week, after falling 8 out of the last 9 days.
News of the (MLP) World
Lots of capital markets action this week, including more than $6bn of bonds and $1.7bn of equity. That’s a lot of paper for an MLP market that is still teetering and lacks the trading volume and daily flows from retail investors that provided tailwinds to the sector the last few years. It’s now an all-out war to attract investors, now that the overall pie isn’t growing quite so fast.
- Tallgrass Energy GP, LP (TEGP) filed initial prospectus for IPO of up to $862mm (filing)
- TEGP will own all of the IDRs of Tallgrass Energy (TEP) and whatever the total amount of “acquired units” ends up being
- Use of proceeds from the offering will be used to purchase TEP units from Tallgrass Development (the “acquired units”)
- TEGP is structured as a partnership, but plans to pay federal taxes and produce a 1099 (like PAGP)
- By comparison, the other filed GP IPO (EQM’s GP) is choosing to be a partnership and to be taxed as a partnership (like WGP)
- Tallgrass Energy (TEP) priced public offering of 10.0mm units at $50.82/unit, raising $508.2mm in gross proceeds (press release)
- Overnight offering, priced at 3.9% discount to prior closing, and traded down an additional 3.7% the next trading session
- Plains All American (PAA) priced public offering of 21.0mm units at $50.00/unit, raising $1.05bn in gross proceeds (press release)
- Overnight bought deal, priced at a 4.9% discount to the prior session’s closing price, and traded down an additional
- Magellan Midstream (MMP) priced $500mm of senior notes (press release):
- $250mm of 3.2% senior notes due 2025 priced at 99.871% of par
- $250mm of 4.2% senior notes due 2045 priced at 99.965% of par
- Cheniere Energy Partners (CQP) announced that Sabine Pass Liquefaction, LLC has priced $2.0bn of 5.625% Senior Secured Notes due 2025 (press release)
- MarkWest Energy (MWE) priced additional $650mm of 4.875% senior notes due 2024, priced at 101.625% (press release)
- Williams Partners (WPZ) priced $3.0bn of senior notes (press release):
- $1.25bn of 3.6% senior notes due 2022
- $750mm of 4.0% senior notes due 2025
- $1bn of 5.1% senior notes due 2045
M&A / Growth Projects
- Valero Energy Partners (VLP) announced $671mm drop-down acquisition from sponsor (press release)
- Purchase priced represents attractive multiple of 9.0x expected EBITDA
- Financed with $211mm in cash, $360mm of debt, and $100mm of equity issued to Valero Energy Corp
- Acquisition includes 2 oil and refined products terminal facilities with combined storage capacity of more than 13mm barrels that support a refinery in Houston and one in Louisiana
- Plains All American (PAA) announced formation of JV with Magellan Midstream (MMP) to construct previously announced Saddlehorn Pipeline project (press release)
- Saddlehorn is a 550-mile pipeline that will transport oil from the DJ Basin to storage facilities at Cushing, OK
- Volumes associated with PAA’s marketing activities in the region are expected to help the pipeline owners realize “meaningful upside to base level returns”
- The pipeline is expected to cost $800-$850mm and to be operational by mid-2016
- Plains All American (PAA) announced acquisition of crude oil terminal in the Bakken that is currently under construction (press release)
- 500,000 barrels of existing storage, but is permitted for up to 2.0mm barrels
- Cypress Energy (CELP) announced $52.6mm drop down acquisition (press release)
- CELP acquired remaining 49.9% interest in Tulsa Inspection Resources entities that it did not previously own from Cypress Energy Holdings, LLC
- Purchase price, expected to be financed with borrowings, represents 7x EBITDA
- Enterprise Products (EPD), MarkWest Energy (MWE), DCP Midstream (DPM) and Anadarko form JV for Panola NGL Pipeline (press release)
- EPD will assign 45% ownership interest in its wholly owned Panola Pipeline Company, LLC to the JV partners, distributed evenly among the three new partners
- The JV will fund an expansion of the pipeline by 50,000 bbls/d by 1Q 2016