Jul 20th, 2013
MLP Market Post
The S&P 500 inched up 0.7% this week to close at a fresh all-time high. Crude futures closed at a fresh 52-week high at just above $108/bbl. Propane closed at its highest price in more than 2 months, up more than 9% week over week, and natural gas was up 3.8%. Treasuries were up (sending rates slightly lower). Hell, even ethane and gold were up.
You would think this commodity rally, interest rate tightening and peaking stock market would push MLPs higher. But there was a lot of MLP paper printed this week, with two follow-on equity offerings and two MLP IPOs on the road, and that seemed to weigh on the sector. The Alerian MLP Index was down 0.7% for the week.
For the year, MLPs are up 23.3%. Publicly-traded MLP GPs are up 29.1% for the year, despite all GPs except ATLS being down for the week, led by 4.2% drop from ETE. Variable distribution MLPs are lagging, but were up this week, led by EMES up 8.3% after its distribution announcement.
Kinder Morgan’s family of public companies reported earnings this week that were largely in line on overall EBITDA, but came in light on DCF/unit and distribution coverage compared with consensus expectations. Distribution coverage was lower than 1.0x, but Kinder reminded the conference call crowd that it expected lower coverage this quarter would be balanced by higher coverage in future quarters and for the whole year. Kinder also mentioned that KMP has $14bn in organic growth projects in the hopper, including $5.4bn in KM Canada.
In the coming week, we’ll have more distribution announcements, and earnings season really kicks off week next week. When earnings season starts, the focus will be on upstream MLPs after all the buzz they’ve received, and on a few MLPs that might be in trouble with persistently low NGL prices and growing oversupply of condensate in certain areas.
The big thing to watch in the coming week is the latest household brand-name, refined products MLP (Phillips 66 Partners), which is priced (at the midpoint filing range) like a GP at 23x distributions (4.25% yield), and I guess it better grow like one to keep up its premium valuation. It will be the first MLP IPO since Tallgrass a few months ago, but it will be the 8th MLP IPO of the year.
The 9th MLP IPO, Marlin Midstream (FISH), is also expected to price next week at 7% midpoint yield, which is lower than similar smaller gathering / processing MLPs to price recently (SXE and SMLP both had 8% yields in their 2012 IPOs).
We didn’t get our 9th MLP IPO last year until late October, and at this time last year we had only seen 2 MLP IPOs price. So, we could be headed for a record IPO year. Below is a quick list of MLP IPOs since beginning of 2012 and their IPO yields.
Winners & Losers
LINE continued its recovery and led the entire sector in performance since last Friday. The sellers are harder to find, both in the market and online. But you also won’t find research analysts pounding their chests on Twitter about how the shorts have been wrong this week. Some analysts would probably like to, but FINRA wouldn’t like that too much.
Speaking of chest pounding, USAC was up 5.9% this week and closed the week at a fresh all-time high, and ARP was in the top 5 for the second straight week… High-distribution growth MLPs GEL and TLLP were at the bottom of the heap this week, which is rare for them (although it was 2nd week in a row that TLLP was in bottom 5). GEL announced a 2.5% distribution bump last week and TLLP announced a 4.1% distribution bump, but it seems like one household name-brand refined products MLP (TLLP) may be getting traded in for a new one in the IPO market this week (PSXP). Interesting stuff.
For the year, the bottom five list didn’t change constituents, but LRE and LINE both hopped up one spot. On the upside, HCLP rejoined the top five, displacing EXLP.
In other news, the Tigers’ city is officially broke and Tiger is in contention (as I write) at the Open Championship, and its still swamp-ass hot here in Austin… Have a good week.
News of the (MLP) World
- TransMontaigne (TLP) prices offering of 1.45mm common units at $43.32/unit, raising $62.8mm in gross proceeds (press release)
- Marlin Midstream (FISH) launches $125mm MLP IPO (prospectus)
- Expected to price after the market closes on 7/25/13
- Midpoint price of $20.00/unit implies IPO yield of 7.00% and gross proceeds of $125.0mm
- FISH’s assets consists of natural gas gathering, transportation, treating and processing services and NGL transportation services (midstream natural gas business) and a crude oil transloading business (crude oil logistics business)
- EQT Midstream (EQM) prices upsized equity offering at $43.50/unit (press release)
- 11.0mm unit offering (upsized from 10.0mm) raises $478.5mm in gross proceeds to be used to partially fund announced drop-down acquisition (see below)
- One day marketing period, 6.3% file-to-price decline, traded up 5.1% in the session following pricing
- Phillips 66 Partners (PSXP) launches $300mm MLP IPO
- Expected to price after the market closes on 7/22/13
- Midpoint price of $20.00/unit implies IPO yield of 4.25% and gross proceeds of $300.0mm
- PSXP owns three crude and refined products systems (Clifton Ridge crude system, Sweeny to Pasadena products system, and Hartford Connector products system)
- Access Midstream (ACMP) files S-3 to register up to $300mm of common units
M&A / Growth Projects
- Memorial Production (MEMP) announces acquisition of 3 asset packages of oil and natural gas properties totaling 275 Bcfe of proved reserves for $606mm (press release)
- Atlas Pipeline (APL) announces plans to build new processing plant in Permian Basin (press release)
- EQT Midstream (EQM) announces acquisition of Sunrise Pipeline, LLC for $540mm from EQT corporation (press release)
- EQM to acquire Sunrise Pipeline, LLC from parent EQT Corporation (EQT) for $507.5mm in cash and $32.5mm of common and GP units issued to EQT
- EQM also agreed to pay additional consideration of $110mm to EQT upon effectiveness of new transportation agreement with a third party that EQM expects to be effective post-closing
- Sunrise assets consist of 41.5 miles of 24-inch diameter FERC-regulated pipeline that parallels and interconnects with the segment of EQM’s transmission and storage system from Wetzel County, WV to Greene County, PA
- Pipeline has existing throughput capacity of approximately 400 BBtu/d, all of which is subscribed under firm transmission contracts with weighted average remaining contract life of approximately 10 years
- Kinder Morgan, Inc. (KMI) announces authorization to repurchase up to $350mm of its Class P common stock of warrants to purchase shares of its Class P common stock
- Distribution Announcements:
- WGP: $0.1975, +10.5% quarter over quarter
- EQM: $0.40, +8.1%
- TRGP: $0.5325, +8.0%
- KMI: $0.40, +5.3%
- NSLP: $0.55, +4.8%
- TLLP: $0.51, +4.1%
- WES: $0.56, +3.8%
- NGLS: $0.715, +2.5%
- TLP: $0.65, +1.6%
- EPB: $0.63, +1.6%
- KMP: $1.32, +1.5%
- LRE: $0.485, +0.5%
- Flat quarter over quarter: HCLP ($0.475), CMLP ($0.51), TEP ($0.1422, pro-rated MQD), MEMP ($0.5125), XTEX ($0.33), XTXI ($0.12)
- Variable: EMES ($0.37 – pro-rated for partial quarter)
Jul 13th, 2013
MLP Market Post
After sinking last week, MLPs (and upstream MLPs in particular) bobbed back this week, up 2.9%. Stocks were euphoric again (S&P 500 up 3.0%), hitting fresh all-time highs Thursday and Friday, which helped MLPs. Interest rates were down slightly, and gold bounced back. Oil hit another 52-week high Wednesday before settling up 2.8% for the week, natural gas was slightly higher and propane was up again in sympathy with oil.
Not much to report this week. We started distribution season with the usual suspects raising distributions (EPD, GEL, PAA) at healthy clips. We had two equity deals this week, another MLP IPO filing and just one M&A deal. I’m hearing that an IPO will launch early this week, probably Phillips 66 Partners. Below is the list of pending MLP IPOs, with those that haven’t filed in a year removed. I believe its just a weird coincidence that we have 2 filed MLPs with OCI in their name, not a ton of thought from a marketing standpoint from either of them, unlike the Marlin Midstream guys with their catchy ticker.
On the M&A front, the combination of rising rates and high multiples paid for recent midstream deals points towards more active M&A in the next few months. From all accounts, there are many assets out there for sale. Rates rising generally lowers what MLPs can pay for assets, given that their cost of debt will be higher. So, we may see M&A pick up going forward.
Winners & Losers
Upstream MLPs clawed back some of their losses from the fireworks show last week. All 5 of the top 5 this week were upstream MLPs, and all upstream MLPs were positive for the week, although LINE became increasingly volatile late in the week, apparently on more negative articles (which LINE probably can’t really respond to while the inquiry is underway and just before earnings). NGL and APU were both in the bottom five owing to their equity offerings, although APU sold no primary units in the secondary offering by ETP. TLLP continues to bounce around, but was down this week.
Upstream MLPs lead the losers (not counting OXF, which continues to maintain the bottom spot). EVEP made a big move that jumped it from 2nd worst performing MLP year to date to 3rd worst. On the positive side, EXLP bumped HCLP out of the top five. There are now 36 MLPs with 30%+ returns YTD, 18 MLPs with 40%+ returns, 13 with 50%+ returns. Not much else to report on the chart below, all systems go for most MLPs.
News of the (MLP) World
- Energy Transfer (ETP) prices upsized secondary offering of 7.5mm (up from 6.0mm) AmeriGas (APU) common units at $47.60/unit, raising $357mm in gross proceeds to the selling unitholder (ETP)
- Priced at $47.60/unit, raising $357mm in gross proceeds to ETP
- Overnight marketing offering, priced at 4.4% discount to prior close
- NGL Energy (NGL) prices 9.0mm unit offering at $29.00/unit, raising $261.0mm in equity proceeds ($300.2mm with overallotment option)
- 9.0mm unit offering raises $261.0mm, 1.35mm units sold in overallotment raises total gross proceeds to $300.2mm
- One day marketing period, 7.7% file-to-price decline, traded up 2.1% in the session following pricing
- OCI Resources LP (OCIR) files initial registration statement MLP IPO to raise up to $115mm (SEC Filing)
- OCIR owns a 51% stake in OCI Wyoming, which is one of the largest producers of soda ash in the world, with the other 49% owned by Natural Resource Partners (NRP)
- OCI Wyoming had proved and probable reserves of approximately 267.1mm short tons of trona ore, which is equivalent to 145.5mm short tons of soda ash
- MLP will have incentive distribution rights up to 48%, 50% including 2% G.P.
- PVR Partners (PVR) files S-3 to sell up to $150mm of equity at-the-market (SEC Filing)
M&A / GROWTH PROJECTS
- KNOT Offshore (KNOP) announces $145.0mm acquisition of Knutsen Shuttle Tankers 13 AS, which owns shuttle tanker Carmen Knutsen
- KNOP to acquire Knutsen Shuttle Tankers 13 AS, which owns shuttle tanker Carmen Knutsen
- Acquired from Knutsen NYK Offshore (KNOT), purchase price of $145mm, less $89.1mm of existing bank debt
- Purchase price to be funded with cash payment of $45.4mm, with seller financing from via a $10.5mm loan from KNOT
- Carmen Knutsen is a 157,000 deadweight ton shuttle tanker delivered to KNOT in January 2013, operated under 5 year contract with Repsol
- USA Compression (USAC) announces Bill Manias (most recently CFO of Crestwood Midstream) as new COO, replacing resigning Kevin Bourbonnais
- Direxion files for MLP ETF
- Distribution Announcements
- GEL: $0.51, +2.5% quarter over quarter
- PAA: $0.5875, +2.2%
- EPD: $0.68, +1.5%
- Flat quarter over quarter: PNG ($0.3575), TGP $0.675, TOO ($0.5253)
- Variable: DMLP ($0.395583)
Jul 7th, 2013
MLP Market Post
MLPs were down 1.1% this week, while the S&P 500 was up 1.6%. There were no capital markets deals in the MLP space this week, given the awkward mid-week holiday and short trading day on Wednesday. But there were some big moves in key variables that impact MLPs (we’ll get to LINE below…). Domestic oil prices were up big (WTI +6.9%), widely attributed to the change of control in Egypt. 10 YR US treasury rate was up 24 basis points to close at its highest point (2.72%) since August 2011, widely attributed to strong payroll number Friday and prior month upward revisions. The more than 20 basis points move on Friday didn’t cause a massive selloff in MLPs, but it should be a headwind in the coming months, as the market continues to price in a reduction in Fed support.
Below is a scary chart for MLP investors. I’ve written in the past about how MLPs can and have done well in periods of rising interest rates. My justification for that has always been that the operations of MLPs do better when the economy is doing better, and rising rates are usually a symptom of that circumstance. As rates continue to climb out of the financial crisis bomb shelter they’ve been in, it will be interesting to see how the new MLP market (with more institutional products and capital than ever before) performs.
The Alerian MLP Index’s spread to US 10 YR rate is lower than its been in years, but nowhere close to all time low (which is 26 basis points almost 6 years ago exactly – 7/13/07). Regardless of the history, the trend below isn’t great to see.
Winners & Losers
Now we’ll get into what everyone was watching this week… LINE was the biggest loser this short week, down an incredible 29.3% since last Friday, reaching prices LINE hadn’t seen in more than 3 years. LINE is now down more than 40% from its late January high of $39.33, just before Bronte Capital started writing negative articles on LINE. The big drop happened early in May when Hedgeye got involved, and it drifted lower before seeming to reach a bottom on June 17th at $30.52. LINE rallied to as high as $34.50 in late June.
Then on Monday afternoon, LINE’s press release regarding the SEC informal inquiry hit the wires. LINE was down 18.7% Tuesday and 15.7% on a short Wednesday. On Friday, LINE was down another 10.7% in early trading that saw LINE’s price reach as low as $20.35, before bouncing 15.2% from there to close +2.9% for the day. All eyes will be on LINE next week as well to see if Friday’s low was the capitulation and things will calm down, if LINE will sink lower still, or if we see more short squeezes sending LINE higher.
Plenty of opinions have already been given about LINE on the Internet. I don’t cover it as a research analyst, and I don’t own it for clients or in our fund. Besides showing what happened, I don’t have much else to say. So, don’t ask me if you should sell it (unless we have a relationship that goes beyond you reading my blog), don’t ask me how long the SEC inquiry will take, or if the BRY merger with LNCO will go through, or if I think LINE will cut its distribution if it doesn’t go through. Don’t ask me to respond to some random contributor at Seeking Alpha saying that LINE is a case-in-point for why some MLPs are ponzi schemes…
Ok, maybe I can respond to that one: I do not think MLPs are like ponzi schemes, but there are certain MLPs that have riskier assets than others. I believe there are many MLPs that would be sustainable businesses without acquiring further assets. I can see how the idea might pop into someone’s head that upstream MLPs have characteristics of ponzi schemes, because upstream MLPs pay out all their cash and they own declining assets. But any MLP that raises money in the equity market to pay distribution would have a very hard time raising equity, and a very hard time getting a credit facility from a bank. For upstream MLPs, the sustainability of current cash flow depends on whether or not maintenance capex of 25%-%30% of EBITDA can indefinitely maintain cash flow, and that depends on the production profile of the properties of the individual MLP (and their balance sheets to some extent). Another wild card is commodity price, which can mask or expose other issues, depending on whether the trend is up or down.
More broadly, it is a challenge to grow a company that is paying out all (or most) of its available cash flow, but many midstream MLPs have proven over more than a decade that it can be done (EPD, KMP, PAA being the most prominent I can think of). What I worry about with some MLPs is the weight that investors are putting on distribution growth in valuation. If an MLP has its valuation based on certain (high) growth assumptions, then not being able to acquire more assets would cause a major drop in that MLP’s valuation. Take a standard drop-down MLP for example. It goes public with a high valuation on the expectation that it will acquire assets from its parent. If the drop downs don’t happen, its valuation will get adjusted much lower, and that scares me more than the MLP being able to maintain distributions (for most MLPs I buy, I have a high degree of certainty about their ability to maintain at least current distributions).
My concern with the LINE action was that panic selling spread to other upstream MLPs, causing serious carnage for BBEP, QRE and ARP (in the chart below). VNR, EVEP, and LRE were also down more than 5%. On average, upstream MLPs were down 7.4% this week, on a week that saw oil prices rise sharply. LINE sold off and others followed, like so many daisy chains of firecrackers that were sold this week across the country. Unlike firecrackers, however, I don’t think upstream MLPs are doomed to blow up. The reality of the MLP sector is that some MLPs do blow up from time to time (see the 3 distribution cuts last year), but we’ve seen no distribution cuts among upstream MLPs since early 2009, and that was under much different macro conditions (and certainly none of those were the result of SEC inquiries).
The selling abated for a bit on Friday, but it was still a very ugly week. The disturbing price action has raised questions about the upstream MLP space, which is understandable when the largest upstream MLP by far is down 29% in a week, but is not justified for MLPs like VNR, MEMP, and ARP. The upstream MLP business model can work, and there are still plenty of mature assets for the group to buy at prices higher than corporate E&P or private equity buyers can pay.
On the winning side of the ledger this week, there wasn’t as clear a trend with the top 5 consisting of a compression MLP, a shipping MLP, an upstream MLP, and two more traditional midstream MLPs. There was a trend in the variable distribution MLPs, with each of the refinery MLPs down sharply (NTI -7.3%, CVRR -11.8%, ALDW -17.4%). CLMT was down 6.5%. The refinery action seems was probably impacted by a reduced spread between Brent crude and WTI, down to less than $5 this week.
As bad as its been for LINE, EVEP has still had a worse year, by a fairly wide margin. Changes this week: BBEP replaced EROC in the bottom 5, PSE and BPL replaced EQM and AMID in the top five.
News of the (MLP) World
Very light week for press releases, but likely a very busy one for most investor relations departments. I’d like to give a shout out to all of the wonderful, hard working investor relations professionals in the MLP space. Its a tough job dealing with both retail and institutional investors, and I’m sure the wide range of questions you receive means there is rarely a dull day.
Equity / Debt
- No deals
M&A / Growth Projects
- QR Energy, LP (QRE) announces acquisition of oil properties in the Ark-La-Tex area from a private seller for $110mm
- 6.0 MMBoe of proved reserves (70% PDP, 92% oil)
- 900 Boe/d, 99% operated
- R/P of 18.3 years with 7-8% decline rate per year
- NGL Energy Partners (NGL) announces acquisition of assets of Crescent Terminals, LLC and partnership interests in Cierra Marine
- Cierra Marine: adds 4 additional tow boats and 7 crude oil barges
- Crescent: adds 130,000 bbls storage capacity in South Texas, and ability to throughput up to 20,000 bbls/d to markets along Gulf Coast
- Linn Energy (LINE) voluntarily discloses informal SEC inquiry into Berry Petroleum acquisition, LINE’s use of non-GAAP financial measures and its hedging strategy
- Linn Energy (LINE) announces monthly distribution of $0.2416/unit, $2.90/unit annualized