Jun 15th, 2014
MLP Market Post
MLPs stumbled this week (Alerian MLP Index: -0.3%), tripped up by weakness in the broader stock market (S&P 500: -0.7%) and utilities (UTY: -1.5%). Midstream MLPs (particularly high growth ones) were hit harder than others in the index (Cushing 30 MLP Index – equal weight and limited to midstream MLPs – was down 1.5%), while upstream MLPs outperformed, helped by oil prices inflated from the latest situation in Iraq.
The last few weeks (until this week), a general lack of MLP news helped continue a steady upward trend for the sector. In the weak trading environment this week, it was MLPs with positive news announcements that were able to outperform, including OILT, EQM, NGL, SMLP.
And (no surprise) MLPs that were announced as MLP index additions outperformed on Friday, especially EQM, which was added to the AMZI index (tracked by the largest MLP ETF).
Poll Question: Loco for Yieldco’s
Yieldco’s are all the rage in the utilities space these days. Unlike MLPs, yieldco’s are one of those “I know it when I see it” things, like pornography or a sports dynasty. The basic parameters for yieldco’s: corporations (or partnerships taxed as corporations) that own renewable utility assets, pay a high dividend yield, and have a big pool of NOLs to reduce tax liability for the entities. What distinguishes them from other utilities is each one’s stated intention to be a yieldco, to have a high payout ratio, to operate a contracted portfolio of utility assets, and to grow through a series of acquisitions.
In the last 12 months, we’ve had three clear cases of yieldco’s, including the latest one (Abengoa Yield – ABY) that priced its IPO this week. ABY priced above its IPO range, and closed its first trading day up 27.6%. It was a very strong IPO in a week that saw stocks, utilities and MLPs sell off for the first time in a while. Below is a chart with some info on the recent yieldco’s.
In addition to these yieldco’s, a few others have filed and talked about filing for yieldco IPOs, including NextEra Energy Partners and TerraForm Power (SunEdison).
The yieldco trend is set to continue. The market seems to like it, and from what I can tell, the breakdown of buyers includes some MLP investors, but also utility and income investors who have looked at MLPs longingly and now have a faux-MLP group of companies to gorge themselves on. My question below attempts to gauge how much you MLP-focused readers care about yieldco’s.
Winners & Losers
SXE beat all other MLPs by a bunch this week after announcing a transformative transaction with TexStar. High growth MLPs that avoided a draw down this week included EQM, announced open season for a new pipeline project and was added to the AMZI index, and OILT, which announced a new growth project.
On the downside, TLP gets a new, likely much more aggressive, general partner and it sells off hard, down 9.8% this week. The acquirer, NGL, traded up on deal announcement and further as analysts blessed it as a good deal. Perhaps the expectation for TLP’s sale process was that the buyer (whoever it ended up being) would be buying out all TLP units at some premium rather than just taking control of the MLP via a transaction at the G.P. level. APU was down on the secondary sale of units owned by ETE.
EQM made the top 5 for the second straight week, no other repeats in the top or bottom 5 week over week.
OILT and GLOP moved into the top 5 for YTD returns, displacing TLLP and SRLP. No constituent changes among the bottom 5 this week, but of the 3 MLPs to cut distributions this year, NRP jumped up to third worst in front of BWP and EROC.
News of the (MLP) World
- Dynagas LNG (DLNG) prices public offering of 4.8mm common units at $22.79/unit, raising $109.4mm in gross proceeds (press release)
- One-day marketed offering, with file-to-price to decline of 6.6%
- DLNG traded up 2.1% in the trading session following pricing
- Amerigas (APU) prices public secondary offering of 8.5mm units owned by Energy Transfer Equity (ETE) at $45.80/unit, raising $389.3mm in gross proceeds to the seller (press release)
- Overnight offering, priced at 3.8% discount to prior close, traded down 2.0% in the next trading session after pricing
- Foresight Energy Partners (FELP) launches MLP IPO of 17.5mm common units (13.5% L.P. interest) with a midpoint price of $20.00/unit, to raise $350mm of gross proceeds (filing)
- 6.75% midpoint IPO yield based on minimum quarterly distribution of $0.3375
- Expected to price June 17th
- FELP will be by far the largest IPO of a coal MLP ever in terms of gross proceeds raised
- FELP’s S-1 says FELP is the lowest cost and highest margin thermal coal producer in the U.S.
- 100% of FELP’s operations are in the Illinois Basin, where the company controls 3bn+ tons of coal
- FELP is backed by Riverstone (30% of G.P.) and the Cline Group (70% of G.P.)
- FELP is structured with full incentive distribution rights tiers (up to 50%)
- FELP will have an enterprise value of $3.9bn at IPO, including $1.3bn of net debt
- $412.9mm EBITDA projected in next 12 months (per S-1) implies 8.5x EV/EBITDA multiple
- 1.3x coverage for next 12 months, appropriately higher than most midstream IPOs
- Viper Energy Partners (VNOM) launches MLP IPO of 5.0mm common units (7% L.P. interest) with a midpoint price of $20.00/unit, to raise $100mm of gross proceeds (filing)
- IPO is a spin off from Nasdaq-listed Diamondback Energy (FANG), which was 100% owned by Wexford Capital prior to FANG’s IPO in 2012
- Variable distribution MLP with 1.0x distribution coverage expected
- Expected distributions of $1.0994/unit in the next 12 months, implying a 5.50% yield
- $83.8mm EBITDA projected in next 12 months (per S-1) implies 18.2x EV/EBITDA multiple
- Assets include minerals interests in the Permian Basin, and royalty payments are expected to increase as Diamondback increases production in the region
- Noble Energy Inc. and Consol Energy form midstream partnership (Cone Gathering) and file midstream MLP registration statement confidentially for MLP IPO (press release)
- Midstream assets owned by the partnership will provide gathering services for production from the sponsors’ jointly owned acreage in the Marcellus Shale
- Legacy Reserves (LGCY) prices public offering of 7.0mm 8.0% Series B fixed-to-floating rate cumulative redeemable preferred units at fixed price of $25.00/unit, raising $175.0mm in gross proceeds (press release)
M&A / Growth
- Bloomberg reports that Williams (WMB) is in late-stage negotiations to acquire the remaining 50% of the G.P. of Access Midstream (ACMP) from Global Infrastructure Partners for $3bn (Bloomberg)
- NGL Energy (NGL) announces acquisition of Transmontaigne Inc., the G.P. of Transmontaigne Partners (TLP) for $200mm (press release)
- Acquisition includes 100% of the G.P. & IDRs of TLP, and 19.7% of outstanding L.P. units of TLP
- Backing out the value of the TLP common units, the G.P. & IDR take was purchased for around $50mm, which implies around a 6.0x multiple for the G.P. & IDR cash flow
- As mentioned above, interesting trading in TLP implies the market expected more (either a transaction that included a takeout of TLP units owned by the public, or a transaction that provided a new sponsor with drop downs)
- Southcross Energy (SXE) combines with TexStar Midstream (press release)
- SXE backed by Charlesbank Capital (original backers of Regency)
- TexStar backed by EIG Global Energy and Tailwater
- 3 sponsors will each own around 1/3rd of the GP, with EIG owning the largest portion (36%)
- EQT Midstream (EQM) and NextEra (NEE) announce JV to build Mountain Valley Pipeline, a large (2 bcf/d) natural gas pipeline that will extend 330 miles south from Wetzel County, WV to Pittsylvania, VA (press release)
- Oiltanking (OILT) announces $340mm crude terminal expansion in Beaumont (press release)
- Multi-stage project will have ultimate capacity of 6.2mm bbls
- Initial phase has been fully committed
- More details to emerge on OILT’s June 24th analyst day
- Enterprise Products (EPD) announces location of previously-announced ethane export facility will be the Houston Ship Channel (press release)
- EPD will build pipeline from Mt. Belvieu to supply the terminal, just like EPD’s propane connectivity from Belvieu to its LPG export terminal at the Houston Ship Channel
- Summit Midstream (GP/sponsor of SMLP) announces $300mm worth of new Bakken Shale crude, water and gas gathering projects at the GP level (press release)
- EQM to be added to the Alerian MLP Infrastructure Index (press release)
- SDLP to be added to the AMZ (press release)
- Cushing 30 MLP Index to be rebalanced to equal weights effective post close on June 20th. Additions to index include: CMLP,DPM, EQM, NGL, PSXP, RGP, SPH. Removed from the index are: AHGP, BPL, CEQP, GEL, MWE, NSH and SEP (press release)
Jun 8th, 2014
MLP Market Post
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%.
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.
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).
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.
No repeats on either the positive or negative sides this week.
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.
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).
- 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
- 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
Jun 1st, 2014
MLP Market Post
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.
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.
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).
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.
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.
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.
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.
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.
- 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)
- 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