MLP Market Update

MLP Market Update
Commentary on Master Limited Partnerships

Published
Dec 21st, 2014

Category:
MLP Market Post

MLP Week Thoughts: Sigh of Relief

Relief of a potential floor in oil’s decline sparked a rally in MLPs this week. After three straight declining weeks capped by the worst week of the year, the Alerian MLP Index bounced 4.6%. MLPs beat the S&P 500, but they have fallen way behind for the year. 2014 will extend the MLP losing streak vs. the S&P 500 to two years, which has never happened before in 19 years of data.

Weekly Review_12-19-14

Oil prices were volatile again this week, but did have some bright spots, including a sharp rally Friday afternoon that left its price basically flat week over week. Natural gas dropped 9% to below $3.50/mcf on mild weather.   NGLs rallied this week, with propane and ethane both up after hovering near decade lows in prior weeks.

With holiday volume and limited news flow, volatility should continue through the New Year, and we may see MLPs trading up or down with oil, but with some upward pressure from investors trying to get in front of the January effect.

Winners & Losers

Even though oil prices had a couple of positive days and upstream MLPs traded well, only 1 of the top 5 this week was an upstream MLP (VNR). The others were MLPs that had been dropped precipitously in prior weeks, despite not carrying as much commodity price exposure, like SMLP and NGL. NGL and NKA were in the bottom 5 last week, and swung hard the other way this week on no news. There was no pattern among the bottom five, other than they are all midstream MLPs and only one of them is in the Alerian MLP Index (TCP).

Top5Bottom5_12-19-14

Top5Bottom5_12-19-14_chart

Year to date, TCP dropped out of the top five this week, while upstream MLPs and those who have cut their distributions dominate the bottom 5.

Top5Bottom5_12-19-14_YTD

Top5Bottom5_12-19-14_YTD-chart

News of the (MLP) World

News-of-the-World

This week, we got the final IPO of 2014. The final tally was 18 MLP IPOs this year (not counting NextEra Energy Partners, which is a yieldco and Landmark Infrastructure Partners, which I view as a real estate/financial MLP), 1 shy of the record from last year of 19.   Also, 2014 ended the streak of 4 straight years of at least 1 GP IPO. Expect more than one GP IPO next year, but more on that in a few weeks when we release the 2015 prop bet lines.

IPOs_2014

Equity

  • Rice Midstream Partners (RMP) priced MLP IPO of 25.0mm units at $16.50/unit, raising $412.5mm in gross proceeds at a 4.55% yield (press release)
    • Priced well below the range, representative of the extremely challenging market environment (Alerian MLP Index declined 10.1% during RMP’s roadshow)
    • RMP opened at $15.79, traded as high as $16.48, before closing at $16.30, down 1.2% in its first trading session
    • RMP traded better Thursday and finished the week up 3.9% from IPO price
    • 55% yield is much higher than recent MLP spin offs (AM – 2.66%, CNNX – 3.34%), but it would have been a record low yield as recently as July 2013 (right before PSXP’s IPO)
    • Worst environment ever for an MLP IPO to price in
  • Regency Energy (RGP) filed S-3 to register up to $1.0bn worth of common units (filing)

M&A / Growth Projects

  • Dominion Resources, Inc. announced acquisition of Carolina Gas Transmission for $429.1mm, and expects to sell it down to Dominion Midstream (DM) by mid-2015 (press release)
    • Dominion expects the contribution to DM will be immediately accretive to distributable cash flow per unit
  • Golar LNG Partners (GMLP) announced acquisition of a floating storage regasification unit from sponsor Golar LNG Limited for $390mm (press release)
    • Will be financed with cash on hand, a new $222.0mm loan from Golar LNG Limited and the assumption of bank debt associated with the vessel
  • Summit Midstream Partners, LLC, the privately held sponsor of Summit Midstream Partners, L.P. (SMLP) announced a natural gas gathering agreement with XTO Energy (press release)
    • Summit will develop and operate a new natural gas gathering system servicing XTO’s natural gas production from Belmont and Monroe counties in southeastern Ohio
    • Summit expects to spend $400mm over the next few years to support the agreement
    • The transaction increases the development backlog of assets that the sponsor will eventually sell to SMLP to more than $2.0bn
  • CrossAmerica (CAPL) announced acquisition with CST Brands of 22 stores from Landmark Stores (press release)
    • CAPL will acquire all of the 22 fee sites as well as certain wholesale fuel distribution assets for $43.5mm
  • World Point Terminals (WPT) announced $29.4mm drop down acquisition of a North Carolina terminal (press release)
    • Assets are expected to generate $3.2mm in annual EBITDA (9.2x EBITDA)
  • Teekay Offshore Partners (TOO) announced a contract with Queiroz Galvao Exploracao e Producao SA (QGEP) to provide floating production, storage and offloading (FPSO) vessel under a 5 year charter beginning in 2016 (press release)
    • TOO will acquire a vessel from Teekay Corp and upgrade the vessel for a total capital outlay of $240mm to service the contract

Other

  • Memorial Production Partners (MEMP) announced that its board has authorized a common unit repurchase plan for MEMP to repurchase up to $150mm of its units (press release)

Published
Dec 14th, 2014

Category:
MLP Market Post

Week Thoughts: Bidless Oil Leaves MLPs Wounded

MLPs made it 3 straight weeks of declines this week and has now declined 7 out of 11 trading days since the OPEC meeting.  The MLP Index was down 9.4% this week, and is now negative for the year after peaking at +21.4% YTD total return at the end of August.  Just like last week, MLPs were crushed Monday and rallied Tuesday, but unlike last week, that rally lasted only 1 day, and MLPs were down each day the rest of the week.  The Equal Weight Alerian MLP Index was down 10.7% this week, and is now down 10.2% YTD including distributions.

Weekly MLP Review_12-12

Oil prices declined another 12.2% to fresh lows this week, while natural gas rallied Friday to finish close to flat on the week.  The broader stock market was down 3.3% this week and interest rates were down as well, which helped utilities outperform everything.  The financial media and the whole world is watching oil’s decline, which this week seemed to only hasten its decline.

A few statistics to put the recent MLP crash in historical context:

  • 4% decline was the 6th worst week ever for the MLP Index, with the other 5 weeks consisting of 4 weeks during the financial crisis of 2008/2009, and then the week of 9/11/2001
  • 7% decline so far this month would rank as the 3rd worst month in the history of the MLP Index, behind only 9/08 and 11/08
  • 0% decline so far this quarter (including distributions) would rank as the 3rd worst quarterly decline ever for the MLP Index, behind only 9/30/08 and 12/31/08
  • Monday’s decline of 5.4% was the 13th worst single day decline ever for the MLP Index, and the worst since March 2009

It’s always darkest before the dawn they say, and once the bottom in oil prices is finally reached and MLPs bottom, history says MLPs should have a lengthy recovery.  After the 2 worst quarters in MLP history that ended on 12/31/08, MLPs went on a 5 year run that produced annual returns of 29.5%.

There was more differentiation in MLP trading the last few days, however, which was likely partially due to MLP management teams meeting with investors at the Wells Fargo Conference in New York this week and getting a chance to defend their fee-based cash flows and growth expectations. That differentiation indicates some investors are selectively buying names that have been oversold.

Winners & Losers

None of the top performing MLPs this week are in the Alerian MLP Index.  When you aren’t in the index, you have a better chance of fighting negative sentiment, because there isn’t a wave of ETF and mutual funds selling of your stock as a result of redemptions.  The bottom 5 is dominated by upstream MLPs, as you would expect, but NGL was crushed this week as well.

Top5Bottom5_12-12-14

CELP’s big move this week offset its bottom 5 showing last week.  There were no other repeats in the top or bottom 5, as volatility whips MLP prices around week to week.

Top5Bottom5MLPs_12-12_14_chart

The updated YTD returns rankings below just all kind of shifted lower.  Every single name in the chart below was down this week, PSXP maintains a narrow edge on the upside, while NKA and RNO are battling for last place with just 12 more trading days left this year.

Top5Bottom5_12-12-14_YTD

Top5Bottom5MLPs_12-12_14_YTD_chart

News of the (MLP) World

As you would expect with the wild swings in unit prices, there were no follow-on equity offerings this week.  MLPs that were hoping to raise equity in December to fund capital projects in 2015 will need to either borrow to fund capex, issue equity at these much lower levels in January, or find alternative forms of equity.  Maybe we’ll see a few PIPEs.

News-of-the-World

We’ve now seen a few MLPs issue press releases confirming and defending 2015 expectations. This week it was Targa.  Starting next week as the holidays draw closer, expect radio silence from MLPs and limited projects or acquisitions announced.  Absent company-specific news, MLPs might trade even more with the price of oil during the last few trading days of the year.

One MLP was brave enough to launch an IPO this week: Rice Midstream.  It doesn’t have the same buzz that it probably would have at $90/bbl oil and $4.50/mcf gas, so we’ll see how it trades next Wednesday.

Equity

  • Rice Midstream Partners (RMP) launches MLP IPO to raise up to $500mm with a 3.75% yield at the midpoint of the filing range (prospectus)
    • A spinoff of Rice Energy, Inc, publicly-traded Marcellus and Utica producer, RMP provides fee-based gathering services to Rice and third parties
    • Very impressive well results and drilling inventory on just 63,000 acres in the Marcellus are expected to drive top tier distribution growth for several years
  • EQT Corp announces plans to file registration statement for IPO of its GP interests in EQM (press release)
    • GP holding company will own the GP of EQM and 21.3mm L.P. units
    • EQT expects to retain around 80% of the holding company
    • If equity market conditions normalize, don’t expect this to be the only GP IPO in 2015

M&A / Growth Projects

  • CrossAmerica Partners (CAPL) announces $85mm third party acquisition (press release)
    • CAPL to acquire Erickson Oil Products
    • Erickson operates 64 convenience stores in Minnesota, Michigan, Wisconsin and South Dakota, primarily under the Freedom Valu brand
  • Kinder Morgan (KMI) announces long-term transportation and storage agreement with Cheniere (press release)
    • KMI entered into a 15-year agreement with Cheniere to provide 550,000 dekatherms per day of firm natural gas transportation service as well as 3 bcf/d of natural gas storage capacity for use at the Corpus Christi LNG terminal
    • KMI will spend $187mm to expand its pipeline and storage facilities
  • Enterprise Products (EPD) decides not to pursue Bakken to Cushing pipeline
    • EPD had already indicated in a conference call that in a weaker oil environment, this pipeline would probably not be needed, especially when there are two other large pipelines being built already by ETP and EEP

Other

  • Targa Resources Partners (NGLS) reiterated 11-13% distribution growth guidance and distribution coverage above 1.0x (press release)
  • Rentech Nitrogen Partners (RNF) CEO resigns to pursue other opportunities (press release)
  • Alerian announces addition of Enable Midstream (ENBL) to the Alerian MLP Index as part of its normal December rebalancing (press release)
    • EXLP will be removed from the index
    • Alerian made no changes to the Alerian MLP Infrastructure Index

Published
Dec 7th, 2014

Category:
MLP Market Post

Week Thoughts: MLPs Processing a Crude Reality

MLPs recorded their second straight week of declines, with the Alerian MLP Index (AMZ) down 1.5% this week after last week’s 6.0% decline.  Following a 4.4% washout Monday, MLPs bounced higher in each of the next three trading sessions to claw back to flat for the week, but then reversed on Friday when the index was down 1.6%.  Despite the drama, the MLP Index remains 6.4% higher on a total return basis than its 10/14 low.

Weekly MLP Review_12-5

Volatility in both directions should continue at least through the end of the year as investors balance the new commodity price reality with company-specific exposure to that new reality.  Each passing week of declining commodity prices forces ongoing iterations of the re-evaluation process.  This week, many MLPs are presenting at the Wells Fargo conference.  It will be very interesting to see how they address the commodity issue, beyond saying that producers haven’t slowed activity in their regions so far.

The Equal Weight MLP Index is down 5.7% on a price basis this year, but is still up 0.5% for the year on a total return basis, nearly 900 basis points behind AMZ.  AMZ has never beaten its equal weight cousin by more than 800 basis points.  Given the wide performance disparity among growth MLPs vs. commodity sensitive MLPs, it’s no surprise that we’d set that record this year.

Commodity Prices Fall Further

Oil prices continue to dominate the conversation, but milder weather contributed to a bearish natural gas storage report and a 7.2% decline this week, a much bigger decline than oil this week.  Propane and Ethane didn’t trade last Friday, so the big week over week drops were largely a catch up from last Friday’s 10%+ oil price drop.  Ethane prices reached a multi-year low of $0.15/gallon on Wednesday, and current ethane price is much lower than its lowest point during the financial crisis in 2008.  Propane hasn’t reached financial crisis levels yet, but it set a 52-week low this week as well.

There are other factors at play in the MLP space other than oil price.  Interest rates rose this week, which sent utilities lower this week.  A good jobs report helped to confirm the U.S. economic story.  Also, the US Dollar is dominating the world currency market, which doesn’t help oil prices.  See the chart below for what looks like strong inverse correlation that OPEC can’t do much about.

DXY_WTI

Winners & Losers

RIGP bounced hard this week, up 20.4%, but it remains 14.2% below its July 31 IPO price.  RIGP’s IPO could not have been timed better (WTI oil had just crossed below $100/bbl).  Two other 2014 IPOs (DM and GLOP) were the next best performers.  GLOP held an analyst day this week, where it outlined its plan to grow the combined fleet of GLOP and its sponsor to 40 vessels by the end of 2017.

Each of the bottom 5 MLPs this week have substantial commodity price exposure in their businesses.  Not one of them had any news, which generally is necessary to drive 20%+ negative movements, especially after several of them were down big last week.

Top5Bottom5_12-5-14

MCEP is down 45% in two weeks, and is the only repeat member of the bottom 5.  GLOP led all MLPs last week and was second best performer this week.

Top5Bottom5_12-5-14_chart

As MLPs limp into the final weeks of the year, the divergence among MLP performance is as wide as it has ever been.  Choosing the right MLPs among the 120+ names out there has really matter.  This week, DM popped back into the top 5, while each one of the bottom 5 declined this week.

Top5Bottom5_12-5-14_YTD

Top5Bottom5_12-5-14_YTD_chart

News of the (MLP) World

There were a few brave MLPs that issued equity this week.  Perhaps at some point before the end of the year, one of the 13 MLP IPOs that have filed will be brave enough to try to get an IPO done.  Since the Thanksgiving Massacre of last Friday and Monday, KMI and OKS have issued 2015 guidance, each was upbeat about their growth prospects even in a $65/barrel oil price (and <$0.60/gallon NGL price) world.

OKS is counting on significantly higher than $0.60/gallon NGL price to achieve its guidance, but even taken with a grain of salt, OKS guidance implies MLP businesses are strong enough to endure a slowdown in upstream activity in 2015.  Resilience and stability in the face of turmoil is what you would expect from MLPs, despite the market’s increasing focus on growth in recent years.

News-of-the-World

Equity

  • MPLX priced public offering of 3.0mm units at $66.68/unit, raising $200.0mm in gross proceeds (press release)
    • Overnight offering, priced at 4.0% discount to prior close
  • Global Partners (GLP) priced public offering of 3.56mm units at $40.24/unit, raising $143.3mm in gross proceeds (press release)
    • Overnight offering, priced at 3.9% discount to prior close

M&A / Growth Projects

  • PBF Logsitics (PBFX) announced $150mm drop-down acquisition (press release)
    • PBFX to acquire the Toledo Storage Facility, which consists of 3.9mm barrels of feedstock and product storage capacity at PBF Energy’s Toledo Refinery
    • Sponsor PBF will enter into a 10-year terminalling agreement with minimum volume commitments
    • PBFX expects $15.1mm of annual EBITDA (10.0x multiple)
    • PBFX will borrow $105mm, use $30mm of cash and issue $15mm of units to PBF to fund the transaction
  • Enbridge (ENB) announced evaluation of drop-down strategy, provided clarity on its plans with its Canadian income fund subsidiary, and increased payout ratio (press release)
  • Constitution Pipeline Company (41% owned by Williams Partners) received approval for construction of the Constitution Pipeline (press release)
    • Constitution is a 124-mile, 30-inch diameter pipeline designed to transport natural gas from supply areas in northeast Pennsylvania to interconnects with existing pipelines in Southern New York
    • Expected to be in-service by the winter of 2015
  • NGL Energy (NGL) disclosed purchase price of Grand Mesa pipeline stake (Form 8-K)
    • $310mm in cash is what NGL agreed to pay for the remaining 50% stake in the constructed Grand Mesa Pipeline, scheduled to be in-service in Q4 2016