Jul 18th, 2015
MLP Market Post
MLPs declined 2.7% this week, hurt by weaker oil prices and two equity deals that proved particularly hard for the market to digest. The back half of the week was brutal, with the index declining 4.4% over the last 3 days of the week, each day more than 1% negative. Any M&A read through to other MLPs created Monday with the MWE/MPLX merger was gone by Wednesday. The equal weight version of the AMZ was down much more than the AMZ as the MWE and MPLX price movements balance themselves out in an equal weight index and the few remaining upstream MLPs were sharply negative impacting the equal weight index more than the market cap weighted AMZ.
We were off the lows last week, but this week, the MLP Index established a fresh 52-week low with Friday’s close. The MLP Index is 27.9% below (24.6% including distributions) its all-time peak at the end of August last year, 25.1% (20.7% with distributions) below 12 months ago, and 14.1% below its recent peak in May.
Oil was 3.6% lower, grinding lower throughout the week, with the Iran deal most often cited as the reason for the weakness. But, dollar strength relative to European and Canadian currency didn’t help oil prices. The rig count released Friday indicated a week over week decline for the US, which helped stem the tide on weak oil.
The MLP market did its best to choke down more equity issuance this week, in the face of fund outflows and what appears to be short selling. The MLP market is finding it increasingly difficult to digest equity of almost any size, and given a lack of new money flowing in, dedicated MLP institutions are having to sell existing MLP positions to fund purchases in offerings, weighing on the entire sector.
In a post published in March of last year, I compared the MLP market to the calf scramble at the Houston Livestock Show and Rodeo. At the time, there was more money than MLP ideas, and certain stocks were chased higher than they probably should have been.
Fast forward to today and I’m struck by another meat-related image. The current market can be compared with a competitive eater in the final minutes of the Nathan’s Hot Dog eating contest, trying to squeeze a few last hot dogs into his already stuffed mouth without gagging.
The balance of fund flows and equity issuance has been a challenge for the sector over the years. The MLP sector could not have grown as much as it has over the years without growing its investor base. But there have been brief times when MLPs have issued so much equity in a short period of time that the market gets off balance. In the calf scramble post, it seemed like the balance had swung too far in the direction of fund flows and MLP prices climbed higher. We’ve now tipped way in the other direction as limited new investor activity in the face of equity issuance is pressuring prices lower.
Poll Question Recap
Last week, we asked readers to choose which type of MLP they’d want to own in a rising rate environment. The high-growth MLP with a 2% yield was the winner with 44% of the vote, but was closely followed by the 6% yield, 6% growth MLP that garnered 42% of the votes. The highest yield MLP with no growth came in a distant third place with 11%. In the real world this week, the answer was none of the above.
Winners & Losers
The most relevant MLPs on the chart below are the biggest winner, MWE, and the biggest midstream loser, MPLX. The remaining top and bottom 5 MLPs are just noise, with pockets of strength among small cap MLPs and another haircut to upstream MLPs on the downside.
On the year to date chart, DKL dropped from the top spot and TLP dropped from the top 5 altogether, replaced by USAC.
General Partner Holding Companies
In the aftermath of the MWE/MPLX merger announcement, long-rumored potential takeout candidate OKE caught a bid along with other M&A targets SEMG and TRGP. Not surprisingly, their subsidiary MLPs caught no such bid. Overall, GPs were ugly this week, and while the median performance was better than the Alerian MLP Index, a cap-weighted average would be much worse, given the biggest GP (ETE) was down the most.
News of the (MLP) World
A staggering amount of news this week, and MLP earnings season hasn’t even really started yet. M&A activity is clearly ramping up, with nearly $25bn worth of M&A announced this week. To help finance all that, equity deals had to be executed, and in a market as weak as this, the $600mm of MLP equity issued weighed on the sector like only billions of dollars of equity would have in better times. Some MLPs that announced better than expected distribution growth saw positive price performance (TEP and CNNX), but the effects were temporary or muted by sector-wide selling.
- Sunoco LP (SUN) priced public offering of 5.5mm units at $40.10/unit, raising $220.6mm in gross proceeds (press release)
- One day marketed offering, with a file-to-price decline of 7.9%, but SUN did outperform in the next session, falling just 0.5% vs. the MLP Index down 1.2%
- Proceeds to be used to partially fund acquisition of retail assets from ETP (see below)
- SUN also priced $600mm offering of 5.5% senior notes due 2020
- Genesis Energy (GEL) priced public offering of 9.0mm units at $43.77/unit, raising $393.9mm in gross proceeds (press release)
- One day marketed offering, with a file-to-price decline of 5.85%
- Proceeds to be used to partially fund the acquisition of offshore oil pipeline assets from EPD (see below)
- GEL also priced $750mm offering of 6.75% senior notes due 2022
M&A / Growth Projects
- MPLX (MPLX) and MarkWest Energy (MWE) announce $20bn merger (press release)
- MWE will become a subsidiary of MPLX via a unit-for-unit transaction, plus a one-time cash payment to MWE unitholders
- MWE unitholders will receive 1.09 MPLX units for each MWE plus a one-time cash payment of $3.37/unit
- Purchase price (prior to price movements) represented 32% premium for MWE
- Agreement includes a $675mm breakup fee, which should limit potential topping bids, despite the lower implied premium after MPLX units sold off after the announcement
- MPLX reiterated 29% 2015 distribution growth, announced 25% annual distribution growth through 2017 and “peer-leading growth profile thereafter”
- Transaction is expected to close in 4Q2015
- Genesis Energy (GEL) announced acquisition of offshore oil business from Enterprise Products (EPD) for $1.5bn (press release)
- Acquired assets include 36% interest in the Poseidon Oil Pipeline System, a 50% interest in Southeast Keathley Canyon Oil Pipeline System (SEKCO) and a 50% interest in Cameron Highway Oil Pipeline System (CHOPS)
- The acquisition consolidated ownership of the pipelines, as prior to the acquisition, GEL owns 28% of Poseidon, 50% of SEKCO and 50% of CHOPS
- GEL management indicated the assets will produce $200mm in EBITDA, implying a 7.5x forward multiple
- Acquisition is expected to close in July 2015
- Sunoco LP (SUN) announced the acquisition of 100% of Susser Holdings Corp for $1.94bn from sponsor Energy Transfer Partners (ETP) (press release)
- SUN will pay $970mm in cash and will issue approximately 22mm units to ETP
- The acquired assets consist primarily of retail operations of convenience stores in Texas, New Mexico and Oklahoma under the Stripes brand name
- All income from the acquired assets is non-qualifying and therefore the assets will be contributed to SUN’s corporate subsidiary PropCo.
- According to management, the acquisition is breakeven to distributable cash flow for SUN in 2015 and significantly accretive thereafter
- Energy Transfer Equity (ETE) and Energy Transfer (ETP) announced $1.2bn exchange of Sunoco LP (SUN) IDRs (press release)
- ETE will acquire 100% of the IDRs of SUN in exchange for retiring 21mm ETP common units and an extension of $35mm annual IDR subsidiary for an additional 2 years (through 2017)
- ETP to realize cash flow accretion of more than $0.30/unit, while ETE acquires IDRs at an attractive multiple relative
- Arc Logistics (ARCX) announced the acquisition of UET Midstream, LLC from two private companies for $76.6mm (press release)
- To be funded with $44.3mm in cash, $32.3mm in units issued to sellers at $18.50/unit
- Assets include the Pawnee crude oil terminal (200,000 bbls of storage capacity) and nearby development property in Weld County, Colorado
- The terminal produces contracted annual EBITDA of $9.0-9.5mm, implying an 9.5x multiple including $11mm in capex
- Kinder Morgan (KMI) announced acquisition of remaining 49% interest in Elba Liquefaction Company from Shell for $630mm (press release)
- Shell subscribes to 100% of the LNG offtake capacity (planned at 2.5 million tons) of the facility, which is yet to be constructed and awaits non-FTA approval for LNG exports
- Overall project cost expected to be $2.1bn, with initial production expected in late 2017
- Kinder Morgan (KMI) announced plans to move forward with Northeast Energy Direct pipeline project (press release)
- KMI announced board approval to proceed with $3.3bn pipeline investment to supply natural gas to natural gas and electric utilities in New England
- KMI has contracted for roughly half of the expected 1.3bcf/d capacity on the pipeline and expects to continue to sign up customers as the project progresses
- Energy Transfer Equity (ETE) disclosed that it has indeed signed a confidentiality agreement to join the WMB sale process (Bloomberg)
- The CA does not have a standstill provision, and apparently the confidentiality part does not extend to talking about the confidentiality agreement
- Distribution increases: TEP +11.5%, DM +7.1%, WGP +6.2%, AM +5.6%, CNNX +3.5%, WES +3.4%, KMI +2.1%, OCIP +1.2%
Jul 11th, 2015
MLP Market Post
MLPs defied falling oil prices and rising rates to finish this week higher than last week. The Alerian MLP Index ended its 7 week negative streak with a bounce this week, despite dual headwinds of falling oil prices and rising interest rates. The bounce comes just in time for distribution and earnings season to kick off next week, raising hope for follow through based on MLPs showing that cash flows are more stable than stock price action would imply.
Fears over demand weakness from China and Greece fallout seem to be less important factors to oil’s recent decline than supply, which globally still faces headwinds. U.S. supply continues to level off, but oil in storage has grown the last two weeks. The Iran trade deal has the potential to unleash another significant OPEC member’s oil onto the global market, adding to already maxed out supply from others in OPEC.
Poll Question Recap
Last week, we asked readers to predict where MLPs will finish 2015 after the worst first half in the sector’s history. There were 3 choices: lower from here, slightly higher from here and much higher from here. The runaway winner at 67% of respondents was that MLPs would finish higher than the June 30th closing price (-11.0% return YTD), but still below 0.0% total return for 2015 overall. 21% of respondents were expecting a large rally that would see MLP total returns finish 2015 positive overall, and just 11% expected MLPs to continue their downtrend lower from here.
Given that readers of an MLP blog are likely invested in or are in some way involved with the MLP sector, it’s no surprise that optimism would outweigh pessimism. If enough of those readers put their money where their mouse clicks are, maybe positive MLP performance becomes self-fulfilling. My sense is that investors not currently invested MLPs need to notice value in MLPs and flow some of their funds into or back into the sector to get a sustained rally from here.
Poll Question: Pick Your Poison
With broad macro volatility from Greece and China issues subsiding somewhat late in the week, expect broader market focus to return to when and how fast U.S. interest rates rise from here. I read several research reports published this week on which MLP categories outperformed in a rising rate environment. Generally, higher growth, lower yielding MLPs have outperformed in the past, based on their growth visibility.
The counter to that is a 50 basis points backup in yield for an MLP yielding 2.0% is much more impactful to stock price than 50 basis points backup for a 7.0% yielding MLP. This week’s question puts the decision of which is better to own on you (note: email subscribers can click through to mlpguy.com to see and participate in the poll question).
If all MLP yields were to increase equally over the next 12 months by 100 basis points, then the obvious choice is to own the highest yielding MLP (see math below). However, if you believe some level of growth premium will remain even in a rising rate environment, it makes sense to bet on growth.
Like with most things, the right answer is probably somewhere in the middle, because the highest-yielding MLPs tend to have cash flow issues that led to the higher yields, and the lowest yielders have much higher sensitivity to yield changes.
Winners & Losers
LGCY’s acquisition and development company agreement with TPG drove it from worst performing last week to best performing this week. WLKP made it two straight weeks in the top 5. Small cap G&P MLPs AZUR and SXE shot higher as investors started to bid up G&P names across the sector this week. On the downside, MLPs with coal exposure, sand exposure and E&P exposure continue to get crushed.
No changes among the top 5 constituents this week, but we do have a new YTD leader in DKL. On the downside, FELP’s terrible weak put the coal MLP in the bottom 5 along with other coal-exposed MLPs NRP and ARLP.
GP Holding Companies
GPs underperformed the broader MLP market this week, with no GP gaining more than 2%. ATLS and EXH continue to fall. PAGP led the way after a few rough weeks, and seemed to trade better after its dividend announcement.
News of the (MLP) World
Upstream MLPs finalized equity partnerships with private equity firms for development and acquisition vehicles this week, and there were a few other minor announcements, but nothing major announced this week. Also, the ETE/WMB saga looks like it is no closer to resolution. No capital markets activity this week probably helped MLP performance a bit.
M&A / Growth Projects
- Enterprise Products (EPD) announced propylene pipeline conversions and expansions to serve petrochemical customers in South Texas (press release)
- EPD did not disclose the expected capital outlay for these growth projects
- Williams Partners (WPZ) announced that its Transco subsidiary filed an application with FERC for its New York Bay Expansion Project to deliver natural gas to NYC in 2017/2018 (press release)
- Legacy Reserves (LGCY) announced $440mm acquisition of E&P and midstream assets in East Texas from Anadarko and Western Gas (press release)
- Upstream assets consist of gas production of 70mmcf/d and reserves of 420 bcf on 89,000 net acres
- Midstream assets consist of 567 miles of gathering lines and a 502 mmcf/d processing 1plant (20% of volumes come from third parties)
- LGCY also announced agreement with TPG Special Situations Partners to fund development of certain LGCY Permian acreage (press release)
- Alliance Resource (ARLP) announced acquisition of remaining White Oak Equity interests for $50mm (press release)
- ARLP estimates cost synergies by operating the White Oak mine of $12-18mm annually, beginning next year
- Linn Energy (LINE) announced finalization of strategic partnerships:
- Exterran Partners (EXLP) will change its name to Archrock Partners following spin off of non-U.S. business lines from parent company (press release)
- Energy Transfer Equity (ETE) reiterated its bid for WMB, despite not participating in whatever sales process is being run to sell WMB (press release)
Jul 5th, 2015
MLP Market Post
The MLP Index fell an additional 2.4% this week, making it 7 straight negative weeks for the AMZ, during which time the AMZ has fallen 10.8%. Interest rates reverted a bit this week, down 9 basis points, which helped utilities outperform the S&P 500, but it didn’t help MLPs much. Oil prices were down on Greece fears and a weak oil storage report, as far as I can tell. Oil prices and quarter-end window-undressing to be the main drivers of MLP weakness during this short week.
7 weeks of declines matches the longest streak the MLP Index has had, with the only other streak occurring from March and April 2012. This week the issues seemed more related to the inverse of what is referred to as window dressing. Fund managers tend to sell losers and buy high flying stocks at the end of the quarter, so they don’t have to explain to constituents why they own the losers. MLPs caught the wrong end of that and were down 2.4% the first 2 days of the week leading up to the end of the month and were flat the rest of the week.
Poll Question Recap
Last week, we asked readers to choose the most likely outcome for WPZ as a result of its parent’s decision to seek strategic alternatives. The majority (55%) of readers believe ETE will acquire WMB and WPZ will join the ETE family of MLPs. 30% of readers believe WMB will go through with its acquisition of WPZ as announced in early May. 15% believe something else happens (WMB or WPZ getting acquired by someone other than ETE).
It has been a rough first half of 2015 for MLPs to say the least (more on that below) with -11.0% total return so far. The question this week tries to gauge sentiment on prospects for the rest of the year.
MLPs finished June down 8.3%, a second consecutive negative month. MLPs also capped their third consecutive negative quarter with a -6.1% return in 2Q. For the year, MLPs have produced total return of -11.0% as of June 30.
There have been some dramatic moves on a monthly basis in the MLP space over the years, none more dramatic than during the Fall (with a capital F) of 2008. But, outside of that period, June was the worst month since 2000 for MLPs at -8.3%.
The sliver of hope you can point to coming out of such a bad month is that MLPs have generally rebounded sharply over the next 12 months (especially outside of 2008). Past performance is not indicative of future results, and certainly the MLP market has changed materially over the last 10 years (and last 5 years), but the odds of a rebound are good.
If you broaden the time horizon on the selloff, there have only been 5 years of the last 20 years of AMZ data when the MLP Index finished the first half of the year negative. 2015 registers as the worst of all of them.
Outside of 2008, the second half of a negative year has seen MLPs rebound, so there is some reason for optimism, particularly given how drastic the first half selloff was. What makes this year different is the fund flow headwind that MLPs haven’t had to deal with in the past, as investors exit open-ended MLP products easier than they used to exit individual MLP holdings in prior years.
Winners & Losers
Winners were few and far between. Beaten down MLPs TCP, CAPL and WLKP led the way. On the downside, upstream and commodity sensitive MLPs made up the entire list.
ARP slipped into the bottom 5, and MMLP moved up into the top 5 on a year to date basis. DKL was the only top 5 MLP from last week that didn’t go down this week.
GPs outperformed MLPs last week, but not so much this week. In fact, WMB was the only GP to trade up this week, making it 2 straight weeks at the top. EQGP went from second last week to near the bottom this week, after it fell sharply on light volume to end the week.
News of the (MLP) World
One MLP IPO refused to give up this week. Like the old man playing golf in the thunderstorm in Caddyshack, CNXC pushed forward with its IPO of coal mining assets. The deal was ultimately priced, but only after delaying pricing, reducing price dramatically, and twice reducing the units offered. I don’t think that IPO offers much of a read through to the health of the MLP IPO market for midstream assets, but hopeful MLPs with peripheral assets should take note of how this went down.
- CNX Coal Resources (CNXC) priced MLP IPO of 5.0mm units (revised down again, from 8mm and 10mm prior) at $15.00/unit, raising $75mm in gross proceeds (press release)
- 7% implied yield at IPO
- CNXC opened trading at $15.00, went as high as $15.61 and closed at $15.41/unit (+2.7%)
M&A / Growth Projects
- Enterprise Products (EPD) announced additional customer commitment on Aegis Pipeline (press release)
- Shell Midstream (SHLX) announced drop down acquisition of interest in Poseidon Oil Pipeline for $350mm (press release)
- VTTI Energy (VTTI) announced acquisition of 6.6% interest in VTTI MLP BV (the Opco) for $75mm (press release)
- Cheniere Energy Partners (CQP) issued notice to proceed and commenced construction on Train 5 of the Sabine Pass LNG facility (press release)
- NGL Energy (NGL) announced JV with Meritage Midstream to develop crude oil gathering and water services in the Powder River Basin (press release)