MLP Market Update

MLP Market Update
Commentary on Master Limited Partnerships

Published
Sep 14th, 2014

Category:
MLP Market Post

Week Thoughts: MLPs Fall Back

MLPs held up for most of the week, and were flat heading into Friday, when they fell sharply, along with the rest of the energy sector (the S&P 500 Energy Index -1.5% Friday and -3.7% for the week).  Lower crude oil prices appear to be the culprit when it comes to weak energy stock performance.  Rising interest rates hit utilities hard (UTY -1.8% Friday and -3.1% for the week).   MLPs, susceptible to both rising rates and lower commodity prices, outperformed energy stocks and utilities (MLP Index -1.8% for the week).

Weekly MLP Review_9-12-14

The interest rate on US 10 year Treasuries rose 15 basis points this week, including 8 basis points Friday.  The 10 yr rate is now 2.61%, the highest it has been since July 7th.  That July 7th high came immediately after a week when the rate rose 12 basis points, and marked the beginning of the worst July ever for the MLP Index (-3.6%).

Oil continued its slide this week, with WTI closing at $92.30/bbl, down 1.1% for the week.  Brent crude oil closed below $100/bbl for the first time in 17 months this week, on the strength of supply growth in the U.S. it appears.

2% Down Days

The MLP Index was down more than 2.5% intraday on Friday, and was more than 2% down for most of the day.  I knew it had been a while since the index closed down more than 2% in a single day, so I started tallying up such events over the last 7.5 years.  It hasn’t happened since June of 2013, and it is happening with much less frequency in recent years, as shown below.  MLPs rallied in the final hour of trading to keep 2014 free of 2% down days.

2 percent amz declines

The shallower nature of intra-day MLP selloffs these days may be attributable to the increase in institutional capital monitoring the sector.  When MLPs seems to be so well-positioned fundamentally, and when stock prices continue to show strength, new money has a hard time finding an entry point into MLPs.  In that environment, dips get bought sooner than before.  Does that mean we won’t have a 2% down day this year at all?  I guess it’s possible, but it would be a first for the MLP Index.  On the other hand, we probably won’t see 26 such days in a single year any time soon.

Winners & Losers

Each of the top 5 performing MLPs this week is not a member of the Alerian MLP Index, which may have helped them avoid the sector-wide downdraft Friday.  OILT led all MLPs with a 5.3% gain for the week, making it 2 weeks in a row for OILT in the top 5.  TEP’s announcements around distribution growth surprised the market a bit, sending units higher.  There was no other news around the top 5 MLPs.

On the downside, VLP’s strength earlier in the year makes it susceptible to selling at these levels, same with EQM.  None of the bottom five had any company-specific news and each one was from a different MLP sub-sector.

Top5Bottom5_9-12-14

Top5Bottom5_9-12-14_chart

In terms of year to date total returns, SUSP climbed into the top 5, displacing EQM.  OILT leapfrogged TEP into 3rd place, while the bottom 5 saw no changes in ranking or constituents.  Each of the bottom 5 were down for the week.

Top5Bottom5_9-12-14_YTD

Top5Bottom5_9-12-14_YTD_chart

MLP News

A lot happened this week outside of MLPs.  Fall weather has returned to the Northeast, Apple launched a campaign to make smart watches cool and using plastic credit cards uncool, Ray Rice jerseys are no longer fit to wear in public, and Alibaba’s IPO price range makes it likely to be the largest US IPO ever.

In MLP land, on the other hand, not much happened, especially compared with last week’s flurry of pipeline announcements and equity deals.  A preferred offering, two debt deals, one growth project and one tiny acquisition is all there was.

News-of-the-World

Equity

  • Vanguard Natural Resources (VNR) prices public offering of 4.0mm series C preferred units at $25.00/unit, raising $100mm in gross proceeds (press release)
    • Cumulative redeemable perpetual preferred units with a 7.75% coupon
  • Scorpio Tankers, Inc. and International Paper Company are (separately) exploring MLP IPOs (Bloomberg)

Debt

  • Buckeye Partners (BPL) prices $600mm of senior notes (press release)
    • $300mm worth of 4.35% senior notes due 2024 at 99.825% of par
    • $300mm worth of 5.6% senior notes due 2044 at 99.876% of par
  • Dynagas LNG (DLNG) prices $250mm of 6.25% senior notes due 2019 (press release)

M&A / Growth Projects

  • Sprague Resources (SRLP) announces $22mm acquisition of natural gas and electricity marketing business for $22mm from New Jersey-based Metromedia Gas & Power, Inc. (press release)
  • Boardwalk Pipeline (BWP) announces open season for natural gas transportation project to serve Freeport LNG’s planned liquefaction terminal (press release)
    • Gulf South Pipeline, a subsidiary of BWP, has entered into a 20-year firm transportation agreement with shippers to transport 1.4 bcf/d of natural gas to serve the first two trains of the Freeport LNG terminal
    • Gulf South will construct a 65-mile pipeline supply header to serve the LNG terminal
    • Open season is seeking binding commitments for additional capacity above 1.4 bcf/d
    • Expected to be in-service by 2018

Other MLP News

  • Alerian announces Hi-Crush Partners (HCLP) to replace Martin Midstream (MMLP) in the Alerian MLP Index (press release)
    • MMLP has roughly a 0.37% weight in the index right now, so not a huge change, but this is just the beginning of a series of changes coming to the MLP Index in the next 6 months once the KMI/KMP/EPB and WPZ/ACMP deals close
    • Alerian made no changes to the Alerian MLP Infrastructure Index that is tracked by the largest sector ETF
  • Tallgrass Energy (TEP) announces intent to increase the next 2 quarterly distribution/unit to result in aggregate distribution increase of $0.40/unit on an annualized basis (press release)
    • Announcement was part of press release announcing close of acquisition of 33% interest in Pony Express Pipeline, LLC for $600mm total consideration

Industry

  • The US Department of Energy (DOE) announces final approval of Sempra Energy’s Cameron LNG facility for shipments to non-FTA countries (press release)
    • $10bn project is expected to commence operations in 2018
    • First final authorizations for non-FTA countries since 2012 when Cheniere Energy’s Sabine Pass received DOE clearance
  • Larry Summers outlines the case for crude oil exports: “I don’t understand the opposition.” (Fuel Fix)
  • 17% increase in US exports of refined products year over year, according to EIA, driven by Gulf Coast refinery output (Fuel Fix)

Published
Sep 7th, 2014

Category:
MLP Market Post

MLP Week Thoughts: Expanding Pipeline of Pipelines

MLPs pulled backed this week in a flat broader stock market (MLP Index -0.8% compared with +0.2% for the S&P 500).  Falling oil & natural gas prices, a large number of MLP equity offerings and general profit taking were probably a larger contributor to MLP weakness than rising interest rates.  Utilities were up this week, despite a rising 10-year US Treasury yield.

Weekly MLP Review_9-5-14

See the extensive news section for details on the numerous M&A and pipeline announcements, and on the more than $1.2bn of equity offerings this week.

I listened to many upstream company presentations this week at a conference in New York, and a clear theme I heard (particularly for northeast producers) was their need to have access to firm transportation capacity out of their operating regions.  In an environment where supply is plentiful and regional demand is scarce, producers are stepping up to support pipeline projects to reach viable markets.  Utilities have taken notice of the bottlenecks as and are capitalizing on the opportunity to secure long-term supply access at attractive rates by signing up for pipelines as well.  Companies building the pipelines (MLPs or companies that will eventually drop pipelines into an MLP) are the clear winners.

Winners & Losers

Not much rhyme or reason to the moves at high end of the MLP sector this week.  WLKP led all MLPs with a 9.8% pop this week, making its total return since IPO 39%.  High growth MLPs OILT and MPLX, and low growth high yielders EEP and NMM round out the top 5.

On the downside, notoriously volatile sand MLPs were hit particularly hard this week.  HCLP was down 8.1% (after being up 12.0% last week) and EMES (not pictured below) was down 11.4%.  NSLP announced last Friday afternoon that its Chairman was resigning from the board to spend time growing his other companies, which probably contributed to the drop this week.

It is notable that none of the 4 MLPs that executed public offerings made the bottom 5. SUSP and GLOP made the bottom 5 for the second straight week.

Top5Bottom5_9-5-14

Top5Bottom5_9-5-14_chart

YTD, SUSP dropped out of the top five, replaced by OILT.  PSXP was down 5.1% this week, but maintained its top position, given that numbers 2 and 3 were down big as well.  It seems like a fair amount of profit taking happened this week at the top end of the sector.

Top5Bottom5_9-5-14_YTD

Also, each one of the bottom 5 declined, which could also have been profit taking in names like BWP and NRP that have bounced off the bottoms they hit early in 2014.

Top5Bottom5_9-5-14_YTD_chart

News of the (MLP) World

MLPs came out of summer with their press release guns blazin’.  There were 4 new pipelines announced and 2 binding open seasons on previously announced pipelines.  With the exception of NGL’s smaller crude pipeline announcement, each of the potential pipelines represents multi-billion dollar investments for the companies involved.  The competition for pipeline commitments from these various regions will be fierce and fascinating.

There were also 4 follow on equity offerings for a total of $1.2bn issued this week.  The last few years, the time period between Labor Day and Christmas has seen much heavier MLP equity issuance than other time periods, so I expect this won’t be the last $1.0bn+ equity week in the next few months.

News-of-the-World

Equity

  • Summit Midstream (SMLP) prices public offering of 4.3mm units owned by Summit Midstream Partners Holdings, LLC at $53.88/unit, raising $234.3mm in gross proceeds for selling unitholders (none for SMLP) (press release)
    • Offering upsized from 4.0mm units to 4.3mm units
    • Overnight offering, priced at 4.0% discount to prior closing price
  • Memorial Production (MEMP) prices public offering of 13.0mm units at $22.29/unit, raising $289.8mm in gross proceeds (press release)
    • Overnight offering, priced at 3.75% discount to prior closing price
  • Buckeye Partners (BPL) prices public offering of 6.75mm units at $80.00/unit, raising $540.0mm in gross proceeds (press release)
    • One-day marketed offering, traded up 1.2% from filing to pricing
    • Offering upsized from 5.0mm units originally offered
    • Proceeds to be used to partially fund acquisition of 80% of Trafigura assets
    • Second offering in a month from BPL, following $199.2mm offering priced on 8/12/14 at $76.60/unit
  • Capital Products (CPLP) prices public offering of 15.0mm common units at $10.53/unit, raising $158.0mm in gross proceeds (press release)
    • Overnight offering, priced at 3.92% discount to prior closing price
  • Sunoco Logistics (SXL) files S-3 registration statement to register up to $1.0bn of common units (filing)
  • DCP Midstream (DPM) files equity distribution agreement to sell up to $500mm of common units at-the-market (filing)

Debt

  • Plains All American (PAA) prices $750.0mm of 3.60% senior notes due 2024 at 99.842% (filing)

M&A / Growth Projects

  • Buckeye Partners (BPL) announces acquisition of Trafigura’s South Texas coastal terminal complex for $860mm (press release)
    • BPL to form Buckeye Texas Partners (BTP), which will be 80% owned by BPL and 20% owned by Trafigura
    • Assets of BTP will include: a deep-water, high volume marine terminal located on the Corpus Christi Ship Channel, a condensate splitter and LPG storage complex in Corpus Christi, and three crude oil and condensate gathering facilities in the Eagle Ford Shale
    • Assets supported by 7-10 year minimum volume throughput, storage and tolling agreements with Trafigura
    • BTP will invest $240mm to $270mm through 1Q 2016 on growth projects related to the assets
    • BPL expects the acquisition will reflect an 8.5x EBITDA multiple in 2016, after completion of growth projects
  • Enable Midstream (ENBL) announces $200mm natural gas processing plant in SCOOP play (press release)
    • ENBL will construct a second new 200 mmcf/d natural gas processing facility in the rich gas region of Oklahoma known as the South Central Oklahoma Oil Province (SCOOP), near ENBL’s under construction Bradley Plant
    • Expands overall ENBL processing capacity in the Anadarko Basin to 1.685 Bcf/d
    • Plant is contracted with Continental Resources and other producer customers in the region based on existing acreage dedications
  • Boardwalk Pipeline (BWP) announces $295mm acquisition of ethylene from Chevron (press release)
    • The Evangeline ethylene pipeline system is a 176-mile interstate pipeline capable of transporting ~2.6 billion pounds of ethylene/year and is supported by long-term, fee-based contracts
    • Transports ethylene between Port Neches, TX and Baton Rouge, LA where it interconnects with the BLM ethylene distribution system
  • LRR Energy (LRE) announces $38.0mm acquisition of mature oil and natural gas properties in Oklahoma (press release)
    • Properties are located in Lincoln and Creek Counties in Oklahoma
    • 2.5 MMBoe of proved reserves acquired, 83% proved developed producing (89%)
    • Average net production of 275 Boe/d for last 6 months (through 6/30), with 4% annual decline rate expected
  • Ferrellgas (FGP) expands Eagle Ford midstream operations with acquisition of two additional saltwater disposal facilities from C&E Production, LLC (press release)

New Large Scale Natural Gas Pipeline Projects

  • Williams Partners (WPZ) announces open-season for new Western Marcellus Pipeline Project (press release)
    • New pipeline project would expand Transco interstate pipeline to provide incremental firm natural gas transportation capacity to growing markets in the Mid-Atlantic and southeastern U.S. by late 2018
    • Designed for 1-2 bcf/d of capacity from Western Marcellus and Utica supply receipt points, connecting to Transco at compressor station 165
  • Dominion, Duke Energy, Piedmont Natural Gas and AGL Resources announce JV for new $4.5-5.0bn Atlantic Coast Natural Gas Pipeline (press release)
    • Pipeline would extend 550 miles from Harrison County, WV through Virginia with an extension to Chesapeake, VA and then south through central North Carolina to Robeson County
    • The JV would be owned 45% by Dominion, 40% by Duke Energy, 10% by Piedmont and 5% by AGL Resources
    • All 4 partners plan to be customers of the pipeline under 20-year contracts, along with one additional customer, PSNC Energy
    • Initial capacity is expected to be 1.5 bcf/d, with an in-service date of 2018
    • Project could end up being 2.0 bcf/d or more with additional customer demand

Open Seasons for Previously Announced Pipeline Projects

  • EQT Corporation (EQT, GP of EQM) and NextEra Energy announce binding open season for capacity on Mountain Valley Pipeline project joint venture (press release)
    • Mountain Valley Pipeline project will connect EQM’s Equitrans Pipeline system in West Virginia to Transco pipeline at compressor station 165 (yes, the same connection point as the WPZ pipeline above)
    • 1.5 bcf/d of capacity on the pipeline has been secured already, but EQT is seeking additional commitments for the pipeline, which is expected to have at least 2.0 bcf/d of capacity
    • This pipeline looks like it will run basically alongside the Williams Western Marcellus Pipeline discussed above
  • Kinder Morgan (KMP) announces binding open-season for previously announced UTOPIA (Utica-to-Ontario Pipeline Access) NGL pipeline project (press release)
    • 240-mile, 12” pipeline from Ohio to Windsor, Ontario, Canada
    • Pipeline will initially have capacity to transport 50,000 bbls/d of ethane and ethane-propane mix
    • Expected to be in-service by early 2018

New Oil Pipelines Out of Niobrara

  • NGL Energy Partners (NGL) announces binding open season on joint venture crude oil pipeline called the Grand Mesa Pipeline with initial capacity of more than 130,000 bbls/d (press release)
    • Pipeline will originate in Weld County, Colorado and will terminate at NGL’s Cushing, OK terminal
  • Enterprise Products (EPD) announces binding open season for proposed new pipeline from the Bakken through the DJ Basin in Colorado down to Cushing (press release)
    • 30-inch diameter pipeline would run 1,200 miles to the Cushing hub in Oklahoma
    • Initial capacity of 340,000 bbls/d, expandable to 700,000 bbls/d, with the capability to transport up to 6 grades of crude oil and products, including condensate
    • If demand is there for the pipeline, it would be built in stages, with the DJ Basin to Cushing section coming online in 4Q 2016, with the rest of it in service by 3Q 2017

Published
Aug 31st, 2014

Category:
MLP Market Post

Week Thoughts: MLPs in Mid-Season Form

The MLP Index was up each day this week, and 2.3% overall, capping a record-setting August with a fourth straight positive week.  In total, the MLP Index produced 8.1% total return in August, the best August on record for the MLP Index.  This came after the worst July ever for the index at -3.6%.  In case the extremes continue into September, the worst September ever was 2008 (-17.2%), while the best was 2000 (+9.1%), FYI.

Weekly MLP Review_8-29-14

MLP returns were well ahead of the S&P 500 (+0.7%) and utilities (+1.7%) this week.  Commodity prices recovered across the board, with oil up 2.4% and natural gas front month futures breaking through $4.00/mcf (+5.0% week over week).

The MLP Index yield hit a fresh all-time low of 5.14% on Friday.  With the US 10 year down to 2.34%, the MLP Index spread is 280 basis points, much wider than the all-time low spread of 42 basis points (on 7/15/07), but inside of the 15 year average of 320 basis points.

With the NFL (and fantasy football) season kicking off this week, we are likely to hear at least one announcer use the phrase “mid-season form” to describe a player or team that performs well this week.  That phrase came to mind when thinking about recent MLP dealmaking and price performance as we head into the fall capital markets season.

It will be interesting to see if we look back on this recent outperformance as MLPs “peaking too soon”, to borrow another sports phrase.  The MLP Index made a new all-time peak value each of the 5 days this week, bringing the total to 49 new peak days this year, compared with 40 for all of last year.

Big Months

Since 2001, there have only been 6 months of performance higher than 8.1%, and 4 of those came in 2009.  The next month’s return following such massive months are mixed, but 3 of the last 4 occurrences saw negative returns in the following month.  The last 3 times the index was up 8.1%+ in a month, it happened in the month prior to distribution payments (which is historically strong) and the next months are typically weak. This time is different, coming ahead of a seasonally strong month (September).  So, while you would expect some kind of let down following such strength, we are entering a time period that the last 5 years has seen strength relative to the summer months.

Big Months

Winners & Losers

The analyst quiet period ended this week for VTTI and RIGP, and analysts’ positive commentary sent those stock much higher this week.  Other than that, there was little news that showed up on the top 5 and bottom 5 this week.  DKL saw some selling after its 15.4% week last week, but DKL still finished with a remarkable 26.6% total return in August.  As shown below, that was only the 3rd best total return in the sector in August.

Top5Bottom5_8-29-14

Top5Bottom5_8-29-14_chart

Incredibly, KMP’s 19% return for the month put it 7th on the list of MLP total returns for the month, behind all 5 of the names below, and GSJK as well.  If you remove KMP and EPB from the Alerian Index and run the weighted average return of what’s left (based on the Alerian weights), you get 6.9%.  So, KMP and EPB added 1.2% to the MLP Index return this month.  A simple average of August returns for all  MLPs I track excluding KMP and EPB (93 MLPs) is 7.2%, compared with 7.5% with them.  Basically any way you slice it, MLPs had an amazing month.

Upstream MLPs MCEP, EROC and VNR made the bottom 5 for the month, which was likely the result of weak natural gas prices in August.

Top5Bottom5_August_2014

Top5Bottom5_August_2014_chart

Year to date, EQM broke back into the top 5 this week, displacing GLOP.  On the downside, CMLP’s strength this week moved it out of the bottom 5, with MMLP taking its place.  Of note, variable distribution MLP EMES has seen total return of around 225% so far this year.  I don’t put variable distribution MLPs on these charts, because they tend to be more volatile than the traditional MLPs with MQDs.

Top5Bottom5_8-29-14_YTD

Top5Bottom5_8-29-14_YTD_chart

News of the (MLP) World

There were no new M&A deals announced in the MLP space this week, although there were two additional MLPs added to the queue of filed IPOs.

News-of-the-World

Equity

  • USD Partners LP (USDP) files S-1 to raise up to $150mm of gross proceeds in an MLP IPO (filing)
    • USDP was formed by US Development Group, LLC to develop, acquire and operate energy-related rail terminals
    • Initial assets consist primarily of an origination crude-by-rail terminal in Hardisty, Canada and two destination unit train-capable ethanol rail terminals in San Antonio, TX and West Colton, CA
    • Projected next 12 months EBITDA of $38.7mm, with the Hardisty terminal accounting for more than 90% of EBITDA
    • Has full IDRs with a top tier of 50%
  • Cone Midstream Partners (CNNX) files S-1 to raise up to $350mm in an MLP IPO (filing)
    • CNNX was formed by CONSOL Energy, Inc. and Noble Energy, Inc.
    • Initial assets include gathering assets supporting production of both sponsor entities, supported by fee-based, 20 year contracts covering 100% of revenue
    • Next 12 months EBITDA for CNNX is projected to be $67.4mm
    • Has full IDRs with a top tier of 50%
  • Western Gas (WES) files S-3 to register up to $500mm of common units (filing)
  • Atlas Resource (ARP) files equity distribution agreement to sell up to $100mm of common units at-the-market (filing)
  • Boardwalk Pipeline (BWP) priced a large block trade of 1.1mm units at $19.75/unit, according to Factset, raising $21.7mm

M&A / Growth

  • Kinder Morgan (KMI) announces receipt of early termination of the waiting period under the Hart Scott Rodino Anti-Trust Act for its acquisition of KMP and EPB (press release)
    • Given the common control of all of these entities under the KMI umbrella, this isn’t a surprising announcement, the voting process is the much bigger and longer lead-time hurdle to the $70bn deal closing

Other:

  • The Department of Treasury and the IRS issued its 2014-2015 Priority Guidance Plan that provides a list of intended goals for the entities over the next 12 months (PDF here)
    • On pages 21-22, the document discussing publicly-traded partnership and indicates the intention of these government bodies to address the pause in private letter ruling issuance with formal guidance
    • Questions remains as to what the form and the timing of the guidance will be, but its on the to do list
  • Constellation Energy Partners LLC (CEP) announces board approval of a plan to convert to a limited partnership called Sanchez Production Partners (press release)
    • The general partner of the new MLP will be owned by Sanchez Oil & Gas (NYSE: SOG)
    • The proposed conversion will require unitholder approval as well