Jan 18th, 2015
MLP Market Post
What a week! The Alerian MLP Index dropped like a rock to start the week, closing Tuesday at a fresh 52-week low that was 6.0% lower than last Friday. On the back of stabilizing oil prices, MLPs traded better the rest of the week, including a 3.3% pop on Friday, to finish the week down just 1.4%. The Alerian MLP Equal Weight Index (AMZE) declined 3.0%, which highlights how midstream MLPs outperformed, a sign that some risk differentiation might be developing.
It’s been a risk-off year so far, with the broad market down 2%, interest rate on the 10-year are down to 1.82%, and utilities have picked up where they left off up and are up 3.3%. Oil was volatile all week, but rallied after hitting a new low Tuesday to finish the week slightly positive (U.S. oil spot price +0.7% week over week), breaking a streak of 6 straight declining weeks. Oil rallied 6.1% from Tuesday’s close to the end of the week. Natural gas was volatile as well, but finished up 5.1% for the week.
Winners & Losers
Oil stabilizing didn’t help upstream MLPs much this week. 4 of the bottom 5 were upstream MLPs. Only one of the top 5 this week was in the Alerian MLP Index (GEL). FISH popped 14% on the news that its GP was acquired and its growth rate would be accelerated.
Last week, midstream MLPs dominated the bottom five. Not so this week.
It’s still very early on, but a theme is emerging on the downside so far this year (upstream MLPs still weak). On the upside, the names are spread across subsectors, but they are all smaller, more thinly-traded MLPs.
News of the (MLP) World
There were encouraging signs for MLPs from the capital markets this week, as two non-investment grade MLPs successfully raised debt capital. Also, there were positive signs that strategic transaction opportunities for MLPs are beginning to emerge from the volatility. The Azure Midstream acquisition of Marlin Midstream’s GP is a sign of things to come. Azure was going to go public, but saw the opportunity to avoid the capital markets and get public quicker. There will be more transactions that would have otherwise been IPOs. Whether that’s producers shedding assets to MLPs when last year they would have gone IPO, or MLPs buying MLPs.
- Targa Resources (NGLS) priced $1.1bn of 5.0% senior notes due 2018 at par (press release)
- NGLS will use the proceeds from the offering to fund tender offers for bonds outstanding at Atlas Pipeline Partners (APL – gathering & processing MLP), in connection with and conditioned upon the proposed merger between NGLS and APL
- Offering was upsized from $800mm initially offered
- Positive indication of the ability for other MLPs to access the debt capital markets
- SunCoke Energy Partners (SXCP) priced $200mm of 7.375% senior notes due 2020 at 102% of par (press release)
- Proceeds from the offering will be used to partially finance the acquisition of a 75% interest in a cokemaking facility in Illinois owned by its sponsor
M&A / Growth Projects
- Marlin Midstream (FISH) announced the sale of its general partner and 90% of its incentive distribution rights to private company Azure Midstream Energy, LLC (press release)
- As part of the transaction, FISH will acquire Azure’s Legacy gathering system in East Texas and northern Louisiana for $162.5mm
- Azure will retain additional assets to sell down to FISH over time
- Azure (owned by private equity firm Energy Spectrum) had been planning an MLP IPO of these assets, but this is a short cut
- The Legacy acquisition and the future drop-down acquisitions combine to raise FISH’s distribution growth profile, and FISH’s stock price reflected that re-rating this week
- Bloomberg reports that three large MLPs were among the bidders for a large pool of midstream assets owned by Pioneer Natural Resources (Bloomberg)
- The assets are said to be worth as much as $3bn, and include natural gas and condensate infrastructure in the Eagle Ford Shale in South Texas
- The MLPs were Williams Partners (WPZ), Enterprise Products Partners (EPD) and Energy Transfer Partners (ETP)
- Enlink Midstream (ENLK) announced acquisition of oil logistics company for $100mm (press release)
- ENLK continues to execute its plan to use its investment grade balance sheet and debt capacity to make accretive acquisitions
- SunCoke Energy (SXCP) announced $245mm drop-down acquisition of interest in a cokemaking facility (press release)
Jan 10th, 2015
MLP Market Post
MLPs tumbled this week after 3 straight positive weeks. The Alerian MLP Index (AMZ) had rallied 11.6% off of 12/15 lows through last Friday, but gave around half of that back this week. The equal weight version (AMZE) held up better, as some of the commodity sensitive and smaller MLPs have caught a bid, while the biggest MLP EPD dropped 6.8% this week. MLPs under-performed the broader market by quite a bit this week, continuing the trend from last year.
Interest rates dropped another 15 basis points to below 2% again. Oil prices dropped another 8.4%, but did pause late in the week to finish the week around $48/bbl. Natural gas prices declined week over week, despite bitter cold in the Northeast. With commodity prices still declining, the January effect has not happened for MLPs so far this year.
A 3.2% decline in the first 6 days of the year is the worst start on record for the AMZ in 20 years of data. The most the index has ever declined in January is 1.4% in 2004, and we haven’t seen a negative January in 7 years.
There is not much positive to say about MLPs at the moment, except maybe that there is no tax loss selling pressure (at least for a few months). Trading volume is lighter than it has been, as it seems MLPs are being ignored or dismissed to some extent.
MLP earnings kick off in a few weeks, and we’ve started to see distribution announcement already. Absent company-specific news or a turnaround in commodity prices, MLP trading should continue to be choppy.
Stay tuned next week for the 2015 MLP Over Unders, our 4th annual look at expectations for various data points in the MLP sector.
Slippery When Wet
I watched Home Alone a few times over the holidays. Among the many sight gags in that move, there is one where Joe Pesci’s character slips on the iced front steps of the house, falls flat on his back, struggles his way up again only to fall back on his back again. That’s kind of what the MLP sector feels like right now, slippery.
Winners & Losers
NMM announced an acquisition that sparked its big rally. NKA popped 22.9% on no company-specific news. HCLP bounced back from last week’s bottom 5 finish. GLP may have been helped by cold weather, given its heating oil business and strength in gasoline margins. On the downside, there were some very large downward moves. Two Marcellus-focused midstream companies made the bottom 5 this week: AM declined around 15% on an analyst downgrade, which appeared to drag down MWE as well. Upstream MLPs are notably absent from the bottom five this week, despite two distribution cuts from that group late last week.
The YTD numbers so far aren’t that different given then include just one extra day, but some marine transportation names creep into the bottom five on a YTD basis.
News of the (MLP) World
GLNG tested the MLP equity waters this week by selling some of its GMLP units in a public offering. They found offering underwriting to be in line with normal times (3.9% discount), but in the aftermarket GMLP units were slammed another 7.3%. It may be some time before we see another MLP try to launch a marketed equity offering, without attaching it to an M&A or growth project announcement. In this market, we may see more creative solutions like LINE did with Blackstone, or like we’ve seen in the space before with private equity infrastructure funds providing capital to MLPs. Or we may see some weaker MLPs welcome the warm embrace of a merger/ acquisition by a large-cap investment-grade MLP.
- Golar LNG Partners (GMLP) priced public offering of 7.17mm units at $29.90/unit, raising $214.4mm in gross proceeds to the selling unitholder (press release)
- 100% secondary offering, no new units issued
- Selling unitholder is GLNG, GP of GMLP
- Priced at 3.9% discount to prior closing price, traded down another 7.3% in the next trading session
- Proceeds to be used to fund development of FLNG assets to sell down to GMLP in the future
- Regency Energy (RGP) filed equity distribution agreement to raise up to $1.0bn in equity proceeds at-the-market (filing)
M&A / Growth Projects
- NuStar Energy (NS) announced the acquisition of the remaining 50% interest in Linden, NJ refined products terminal for $142.5mm (press release)
- Acquired interest is expected to generate $20mm of incremental EBITDA in 2015 (7.125x multiple)
- The Linden terminal has 4.3mm bbls of refined products storage capacity, primarily storing gasoline, jet fuel and fuel oils
- The terminal has inbound connections to the Colonial and Sun pipelines and an outbound connection to the Buckeye Pipeline
- Delek Logistics (DKL) announced new agreements for the Paline Pipeline (press release)
- Under the new pipeline agreements, DKL will receive a fixed monthly fee over the course of the next 18 months
- Based on these agreements, annual distributable cash flow is expected to increase $13.6mm (or approximately $1.00/bbl) over 2014
- Separately, DKL announced a $12mm ac quisition that is expected to generate $2.4mm of EBITDA (5.0x multiple)
- Tallgrass Energy (TEP) offered additional 33.3% interest in Pony Express Pipeline by sponsor (press release)
- TEP acquired 33.3% of the Pony Express Pipeline, LLC in 2014
- Pony Express is a 690-mile crude oil pipeline commencing in Guernsey, Wyoming and terminating in Cushing, OK that was placed into service in 2014
- Navios Maritime (NMM) announced $147.8mm acquisition of a drybulk vessel (press release)
- The acquired vessel has been chartered under a 12-year agreement that is expected to generate $18.4mm in annual EBITDA (7.0x multiple)
Distribution announcements have been in-line with expectations for the most part (with the exception of upstream MLPs), but it’s still early in distribution season. Distribution announcements this week:
- TEP: +18.3% qoq, +54% yoy
- PAGP: +6.4% qoq, +27% yoy
- GEL: +2.6% qoq, +11.2% yoy
- PAA: +2.3% qoq, +9.8% yoy
- EPD: +1.4% qoq, +5.7% yoy
- APL: $0.64/unit, unchanged from last quarter
Jan 4th, 2015
MLP Market Post
MLPs limped to the finish line of 2014. The Alerian MLP Index (AMZ) closed out the year with a third straight negative month and the worst month (-5.6%) since May 2012 (-7.5%). AMZ finished down 12.3% for the fourth quarter, its worst quarter since 4Q08 and the third worst quarter ever recorded by AMZ. MLPs rebounded a bit in the last 2 weeks of the year, averting what could have been a much worse month. That late burst gave AMZ a positive total return for 2014 overall, but a much lower return than the S&P 500 or utilities in 2014.
All the talk in 2013 was about interest rates, despite the MLP Index producing 27.6% total return in a year that saw the interest rate on the 10yr treasury rise by 127 basis points. This past year, interest rates fell 86 basis points, and MLPs had a much worse year. It would appear any correlation to interest rates has been more recently overwhelmed by a correlation to commodity prices, which were the catalyst for the selloff in MLPs since the end of August. Below is a summary of the changes from the end of 2013 to the end of 2014.
Last year, oil and natural gas prices were up solidly, interest rates rose 127 basis points, the S&P 500 was up nearly 30% and MLPs were up nearly 28%. Each one of those items reversed course in 2014, with the exception of the S&P 500. Investors can hope for a rebound in commodity prices, fund flows into MLPs, and M&A activity to lift MLP spirits and stock prices in 2015.
2014 By the Numbers
- MLP IPOs: 18, no GP IPOs
- Equity Issuance In Marketed Equity Offerings (including IPOs): $26.5bn (not counting ATMs)
- Debt Issuance: $35.0bn
- Total Announced M&A Value: $100bn+
Below is a recap of where the Alerian MLP Index returns stand relative to recent time periods:
- December: -5.6%, fourth straight negative month, longest streak since 1999
- November: -2.6%
- October: -4.6%
- September: -1.6%%
- August: +8.2%
- 4Q 2014: -12.3%, worst quarter since 4Q 2008, third worst quarter in recorded MLP history
- 3Q 2014: +2.7%
- 2Q 2014: +14.2%
- 1Q 2014: +1.9%
- 4Q 2012: 5.3%
- 2014: +4.8%, six straight positive years, longest streak in recorded MLP history
- 2013: +27.6%
- 2012: +4.8%
- 2011: +13.9%
- 2010: +35.9%
- 2009: +76.4%
Review of 2014 Proposition Lines
At the beginning of last year, I published the third annual post (read it here) where I set pretend gambling lines for certain MLP events and made my guess as to whether the actual event would be above or below that line. Below is my review of those guesses compared with the actual results of these MLP “prop bets” (proposition bets, like you see for major championship sporting events).
1. MLP Returns vs. S&P 500
- Line: pick ‘em
- My Pick: Over
- Actual Result: Under by almost 900 basis points (Alerian MLP Index: +4.8%, S&P 500: +13.7%)
2014 marked an unprecedented three years in a row of MLPs losing to the S&P 500, after a string of more than a decade of MLPs outperforming the stock market. Outside of this losing streak, MLPs have never underperformed for more than one year in a row. This year’s underperformance was impacted by the energy-specific commodity price declines.
2. MLP IPOs
- Line: 12
- My pick: under
- Actual 2014 Results: 18
This was by far the biggest miss of the last two years. I continue to underestimate the ingenuity of MLP bankers and the market’s capacity to absorb MLP IPOs. It feels like the IPO boom may have peaked in 2014. I think we might see half as many MLP IPOs in 2015, but we might see more GP IPOs than we’ve seen in the last 4 years combined (3).
3. Variable Distribution MLP IPOs
- Line: 3
- My pick: under
- Actual 2014 Result: 1
I was expecting 1-2 variable distribution MLP IPOs in 2014 after 3 in each of 2012 and 2013. We got just one royalty upstream play called Viper Energy (VNOM). Another very similar IPO to VNOM is on file, so expect at least one variable distribution MLP IPO, but don’t expect many others. With the success of Westlake Chemical in structuring a variable business into a stable one, I expect to see other businesses that might have gone variable pay go the traditional MLP structure going forward.
4. GP Holding Company IPOs
- Line: 1
- My pick: push
- Actual 2014 Result: 0
I was expecting 1 GP IPO in 2014 but didn’t get any. I think I was just early on this call, and with the announcement from EQT Corp that it would be taking its GP stake in EQM public, we should have at least one GP IPO In 2015.
5. MLP Consolidations / GP Sales
- Line: 4
- My pick: over
- Actual 2014 Result: 11
After the very active 2013 for consolidations at 9, we got a larger number of transactions and a much larger dollar amount the KMI/KMP/KMR/EPB merger. Expect the torrid pace of these transactions to continue in 2015, with the added catalyst of challenging commodity price environment to spur things along.
2014 Mergers or buyouts:
- EPD announced acquisition of remaining OILT units
- NGLS announced acquisition of APL
- KMI bought KMP, EPB and KMR
- BBEP acquired QRE
- Flint Hills acquired PDH
2014 GP Transactions:
- ETP bought SUSS, GP of SUSP (now SUN)
- CST bought GP of LGP (now CAPL)
- EPD bought GP of OILT
- WMB bought remainder of GP of ACMP
- TRGP announced acquisition of ATLS
- NGL acquired GP of TLP
- TLLP acquired GP of QEPM
- OXF’s GP bought by Westmoreland
6. MLP Distribution Cuts
- Line: 1.5
- My pick: over
- Actual 2014 result: 4
BWP, NRP, EROC and RNO all cut distributions in 2014. One day into 2015 and we have had two distribution cuts already (LINE and BBEP). Given the number of MLPs that exist now compared with even last year and the commodity price selloff, 2015 could see a repeat of 2014.
7. MLP Tax Law Changes
- Line: none
- My pick: none
- Actual 2014 result: none
Nothing meaningful on the tax front got passed this year, and there are no negative tax changes on the horizon, for now. The IRS did pause private letter ruling (PLR) issuance and has yet to announce clarification on the PLR process going forward.
8. Equity Issuance in Marketed Offerings
- Line: $27.5bn
- My pick: under
- Actual 2014 result: $30bn
Along with my call on a less robust 2014 IPO market, new MLP equity exceeded my expectations. IPOs traded very well on average in 2014, while follow-on offerings struggled in the aftermarket.
9. MLPs Launching At-The-Market Equity Distribution Programs
- Line: 12.5
- My pick: Over
- Actual 2014 Result: 8 (does not include ATM renewals, truly new ATM programs only)
ATM’s have become the preferred mechanism for MLPs to use to fund ongoing growth capital needs. I expect all MLPs to eventually put ATM programs in place, but I expected fewer new ATM programs in 2014, and that’s what we got when compared with the 17 from 2013.
10. Top Performing Subsector
- My Pick: Gathering & Processing MLPs
- Actual Winner: Natural Gas Pipeline MLPs
Gathering & processing MLPs were caught up in the selloff of commodity prices and ended 2014 as the third worst performing subsector, ahead of marine transportation MLPs and upstream MLPs. Natural gas pipeline MLPs were led by TEP, TCP and EQM, but also helped by EPB’s performance on its buyout. The only negative natural gas pipeline MLP was BWP.
Top 10 Winners & Losers of 2014
Not owning upstream MLPs and owning high growth or drop down MLPs was the winning formula for 2014. Dominion Midstream’s IPO from October has defied the recent gravity of the MLP space, going straight up, while the sector has declined in each of the three months since DM priced its IPO. DM beat all other MLPs in 2014 and fellow October IPO SHLX made the top 10 as well.
Happy New Year, good luck in 2015.