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Jan 4th, 2013
MLP Market Post
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MLPs disappointed in 2012, but its a testament to just how great MLPs have been over the years when a positive 4.8% total return for the sector, with solid distribution growth, is a disappointment. MLPs didn’t finish well either, with total returns in the fourth quarter of -3.4% for the MLP Index and back to back negative months to finish the year. MLPs and the rest of the market have been shot out of a cannon so far this year, see today’s other post for more on that awesome analogy. So maybe after a year of consolidation, MLPs are ready to breakout again in 2013, we’ll see.
The big positive trends in 2012 were the performance of variable distribution MLPs, this year’s MLP IPO class, and MLP GP Holding companies. On the M&A front, the upstream sector was very active in 2012, and I expect that to continue through 2013. The variable distribution model in 2012 proved itself to work exceptionally well in an upcycle for the assets owned by those variable MLPs. I expect the downside volatility will be high in the opposite scenario, but we’ll have to wait and see whenever fertilizer and refining margins revert. The GP holding company trend is many years in teh making and seems sustainable given the scarcity value and the persistent undervaluing of IDR math, as discussed earlier this year here.
The big negative stories were coal MLPs, propane MLPs, dry gas focused gathering & processing MLPs, and NGL prices. Two coal MLPs cut their distributions in 2012, and all 4 had total returns worse than -15% for the year (PVR, which is no longer majority coal operations, produced total return of 10.1%). All 4 propane MLPs had negative 2012′s due to the warm winter and cheap heating alternatives that lowered retail propane volumes across the board. Low natural gas prices hurt some gathering & processing MLPs that have operations focused in areas where E&P companies were laying down rigs. The breakdown of the 10 biggest winners and losers for the fourth quarter and for the year are listed below. These two lists exclude variable MLPs and GPs, which I break out further below.
Variable Distribution MLPs
MLP GP Holding Companies
Fewer One Night Stands
Equity capital markets digested a record amount of equity, but suffered a bit of indigestion late in the year. MLP equity deals were increasingly difficult to get done as the year went on. The solution for many MLPs was to extend the marketing period for their offerings from overnight deals to a one day marketing period. The result was a total of 14 marketed follow on offerings in 2012, including 11 after August 1st. The 14 total was the most we’ve seen in at least 5 years, but it wasn’t the largest percentage of deals. Back in 2008, when markets were essentially closed the second half of the year, 55% of the MLP equity deals were marketed deals. The trend in the structure is important, because if there is an overwhelming appetite for MLP paper, MLPs will do more overnight deals, because that type of deal is quicker, cleaner and can be done at less than 4% discount.
MLPs took off like they were shot out of a cannon this week. We’ll see how long it takes for gravity to take effect. Perhaps gravity will take the form of a fresh slew of equity offerings in the coming weeks, or the next DC crisis which we forestalled for at least a month or two this week. But for now, its all good.
MLPs were up each of the 4 trading days, and week over week the MLP Index was up a staggering 7.0%, the best week over week change since March 2009 when the index was up 10.3%. There was clearly some money on the sidelines waiting for the fiscal cliff deadline to pass, or just waiting for the first of the year to allocate capital to the MLP space. The pop has pushed MLPs out to an early lead on the S&P 500.
This week was so epic, I came up with two analogies for this week’s action (the first being the cannon thingy above). I mentioned this on Twitter, but this week reminded me of the 90s movie PCU. The premise of that movie was that in order to save their on-campus housing, a group of campus outcasts had to bring together all the random politically correct groups (hippies, african americans, feminists, etc.) for an all campus party. Its a fun movie if you’ve never seen it. But this week’s market action was akin to an all campus party after the fiscal cliff. Stocks of all types, all the MLPs, everything was up. The last few years of roller coaster price action has trained us to prepare for a hangover after such parties, but MLPs are well positioned after their “down” year to sustain some out-performance this year.
Winners & Winners
Not one single MLP had a negative week this week. I can’t remember the last time that happened. Very rare. The high beta, low liquidity names led the pack, with AMID popping 18.5% to lead everyone.
I Realize You Have a Choice When it Comes to MLP Content…
Because the content on this site is free, I have no real obligation to continue to produce content here, but the rewards for doing so continue to be incredible. I’ve met (or virtually met) many new and interesting people, gained some new clients, gained plenty of publicity/credibility, and attracted speaking engagements all from this blog. I even got my job from a reader. Since I launched the site in 2009, there has been an explosion of MLP articles in mainstream publications, on Seeking Alpha, Motley Fool and other random blogs like mine. Through all that noise, you all have continued to read this site and tell friends about it,which is much appreciated. Having said all that, my posts these next few months will likely be fewer and with less words than usual. At my day job (at Guzman & Company), we’ve got some very exciting plans for MLP equity research that I will share in more detail here by the end of the month. But for the next 30 days or so, I will be exhausting most of my content producing efforts in the execution of those plans. I hope you understand.
News of the (MLP) World
- New Source Energy (NSLP) files S-1 for initial public offering to raise up to $106.3mm
- R.W. Baird leading the deal, which I believe is their first lead managed MLP IPO, so congrats to them on that, score one for the smaller banks
- Upstream MLP, headquartered in Oklahoma City
- Will own 14.2 MMboe of proved reserves (as of 6/30/12), 6.8 MMboe additional proved reserves held by sponsor
- Use of proceeds from the IPO and credit facility borrowings to go to sponsor as consideration for contributed assets
- 3,316 boe/d projected 2013 production (per S-1),
- 63.8% NGLs, 4.7% oil and 31.5% natural gas
- Has incentive distribution rights up to 25%
- Western Gas (WES) files equity distribution agreement to sell up to $125mm in common units at the market
- Vanguard Natural Resources (VNR) announces increased borrowing base from $960mm to $1.2bn in connection with the closing of its previously announced $328.8mm acquisition from Bill Barrett Corp
- Eagle Rock Energy (EROC) announces increased commitments under its senior secured credit facility from $675mm to $820mm
M&A / Growth Projects
- Enbridge Energy (EEP) announces $0.2bn further expansion of the Lakehead System to add 230,000 bbl/d of capacity (press release)
- EEP quoted the investment in decimal point billions, apparently detail in millions too trivial to disclose, must be nice…
- EEP to expand Lakehead System between Neche, ND and Superior, WI
- Expansion will add additional 230,000 bbl/d capacity at an estimated cost of approximately $0.2bn
- Expansion involves increased pumping horsepower, with no line pipe construction
- Expansion will be included in the Mainline Expansion Joint Funding Arrangement under which 60% of the capital will be funded by Enbridge, Inc and 40% by EEP
- Expected to be in service in 2015
- Martin Midstream (MMLP) announces acquisition of Talen’s Marine & Fuel for net investment of $47.4mm after selling certain working capital-related assets to Martin Energy Services (press release)
- Pretty complex transaction for relatively small dollars, but MMLP likes to offload the marketing pieces of their assets to the parent and keep the MLP assets fee-based
- MMLP acquired all of the outstanding membership interests in Talen’s Maring & Fuel, LLC, effective 12/31/12, from Quintana Energy Partners, L.P.
- Simultaneous with the acquisition, MMLP sold certain working capital-related assets to Martin Energy Services, LLC (MES), a wholly owned subsidiary of the GP of MMLP
- MMLP’s net investment is $47.4mm, funded by MMLP’s credit facility
- Expected 2013 cash flows to be $6 to $7mm
- Assets include additional marine fueling barges and tug boats and delivery rolling stock
- MES amended various service agreements with MMLP pursuant to which MMLP provides certain terminalling and marine services to MES
- MES markets and distributes marine fuel and lubricants along the Gulf Coast utilizing MMLPs shore-based marine terminals
- Talen’s Marine & Fuel business will join MES’s existing portfolio
- QR Energy (QRE) announces $145mm acquisition of oil properties in the Florida Gulf Coast area from Quantum Resources Fund (press release)
- Purchase price of $145mm, funded by cash on hand and credit facility borrowing, paid in cash to seller, Quantum Resources Fund (QRE’s sponsor)
- Properties consist of 11.3mmboe of proved reserves (87% oil and 13% NGLs) in the Jay field in the Florida Gulf Coast
- Expected to produce $35mm in 2013 adjusted EBITDA (4.1x EBITDA multiple) with $11mm maintenance capital expenditures and $3mm in additional G&A expenses
- Very solid accretion, increases liquids exposure, which is generally a good thing
- Approximately 2,500 boed with annual decline rate of approximately 9%
- American Midstream (AMID) announces long-term agreement with Silver Oak Energy to provide midstream services and to construct and operate additional midstream facilities to support Silver Oak’s production in the Woodbine Formation in East TX (press release)
- DCP Midstream Partners (DPM) announces Wouter Van Kempen to replace retiring Mark Borer as CEO (press release)
MLPs were up 2.3% last week, then down 2.3% this week, so we’ve just basically given back the pre-Christmas present we got last week…
Just one more trading day left…it will certainly be good to say goodbye to this year, and hello to a fresh start, even if that start is from the bottom of a cliff. The MLP Index will finish up for the year, but only by including the distributions. Commodity prices were up for the week, with oil up 2.3% and propane up 6.8% for the week. Its been a pretty ugly year for liquids this year, including oil, but at least natural gas has shown a bit of life of late. I’ll be brief with this post after my posting binge yesterday (2012 Prop Bet Review and 2013 Prop Bet Lines). I expect to do a mid-week review of the final numbers for the year, so look for that amidst all the meaningless bowl games on New Years Day…
Winners & Losers
RNO led the winners this week. The other distressed coal MLP (OXF) was down big again. WES made a rare trip to the bottom five. NRGY had a positive week after leading the losers last week. Virtually no news this week and light volume all around, so not sure you can make anything of these moves.
With the big drop this week, CLMT is making the race to be crowned the biggest winner of the year a close one. MPLX popped into the top 5 this week, replacing TLLP. With their big weeks, RNO and NRGY escaped the bottom five, replaced by BPL and EROC.
GPs and variable distribution MLPs, on the right of this chart, have been the big winners of the MLP space this year.