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January 7, 2014

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2013 Year in Review

MLPs had another very strong year in 2013.  The Alerian MLP Index produced total return of 27.6% in a year that saw the interest rate on the 10yr treasury rise by 127 basis points.  M&A buzz, strength in commodity prices, solid distribution growth, and tailwinds from the broader stock market helped MLPs overcome the mountain of MLP paper issued in 2013 (record IPO issuance and total equity issuance).  Below is a summary of the changes from the end of 2012 to the end of 2013. 
2013 Review
MLPs have underperformed the S&P 500 for two straight years now, which has never happened before.  It therefore stands to reason that MLPs have never underperformed for three straight years, but (in the immortal words of Kevin Garnett) anything is possible!
2013 By the Numbers:

  • MLP IPOs: 18, plus 1 GP IPO makes 19
  • Equity Issuance In Marketed Equity Offerings (including IPOs): $26.5bn (not counting PAGP IPO or ATMs)
  • Debt Issuance: $15.0bn high yield, $15.7bn investment grade
  • Total Announced M&A Value: around $62bn

Below is a recap of where the Alerian MLP Index returns stand relative to recent time periods:

  • December: +1.6%
    • November: +0.9%
    • October: +2.7%
    • September: +2.3%
    • August: -2.5%
  • 4Q 2013: +5.3%
    • 3Q 2013: -0.7%
    • 2Q 2013: +1.9%
    • 1Q 2013: +19.7%
    • 4Q 2013: -3.4%
  • 2013: +27.6%
    • 2012: +4.8%
    • 2011: +13.9%
    • 2010: +35.9%
    • 2009: 76.4%

Review of Lines for 2013
At the beginning of last year, I published the second annual post where I set pretend gambling lines for certain MLP events and made my guess as to whether the actual event would be above or below that line.  Below is my review of those guesses compared with the actual results of these MLP “prop bets” (proposition bets, like you see for major championship sporting events).
MLP Returns vs. S&P 500

  • Line: pick ‘em
  • My Pick: Over
  • Actual Result: Under by around 430 basis points (Alerian MLP Index: +27.6%, S&P 500: +31.9%)

2013 marked an unprecedented two years in a row of MLPs losing to the S&P 500.  This recent lackluster performance is likely the result of increased visibility of the sector and generally rising pressure due to rising interest rates.  I expect headwinds to persist, but if the stock market slows down in any meaningful way, I could see a rotation into MLPs as a safe haven of sorts.

  • Line: 12.5
  • My pick: under
  • Actual 2013 Results: 18

This was by far the biggest miss of my 2013 predictions.  The market’s capacity to absorb MLP IPOs well-exceeded my expectations in 2013, as proven by a record 18 MLP IPOs compared to my best guess of around 12 at this time last year.  The filed IPO pipeline has been whittled down to just 2 names at this point, but there is a long list of companies that have discussed forming an MLP and there are always private equity exits, so we may see another 10+ MLP IPO year, but I do not expect another year like 2013 for the IPO market in 2014.

MLP IPOs by Year_2013

Variable Distribution MLP IPOs

  • Line: 3.5
  • My pick: under
  • Actual 2013 Result: 3

This one was close, but I predicted correctly that while there was plenty of talk of variable distribution MLPs in 2012, there was not quite as much action in 2013.  Variable distribution MLPs will carve out a niche in the MLP space, but I think the initial rush to get your variable distribution MLP to market is over.  CVRR, EMES and OCIP were the variable distribution MLPs to go public in 2013. 
GP Holding Company IPOs

  • Line: 1.0
  • My pick: over
  • Actual 2013 Result: 1.0

PAGP (owner of an interest in the GP of PAA) was the only pure-play GP holding company IPO this year.  By pure-play, I mean their primary assets are GP / LP interests in an MLP, and not significant other operating assets.  There were some other MLP transactions that added to the universe of almost pure GP holding companies, so while my bet is a push, the activity around GP monetization was higher than just the one GP IPO.  First Reserve realized a liquid currency for its GP stake in Crestwood Midstream with the GP merger with NRGY this year.   Also, with OKE’s announcement that it would be spinning off the gas utility into a separate public company, it inched closer to a pure GP.
MLP Consolidations / GP Sales

  • Line: 2.0
  • My pick: over
  • Actual 2013 Result: 9

This was far and away the biggest MLP consolidation year ever, with 5 MLPs being bought out or merged into other MLPs, and 4 other transactions that involved the sale of all or a portion of the GP interest of an existing MLP.  Also, there was the transformative assets sale of EROC’s midstream business to RGP that was announced last week.  I don’t expect this unprecedented MLP on MLP consolidation within the sector to continue as strong in 2014, but I do expect to see a similar level of activity at the GP level of MLPs, as mature MLPs look for new growth avenues and companies with MLP-capable assets search for MLP partners as an alternative to an MLP IPO.
2013 Mergers or buyouts:

  • RGP buys PVR
  • KMP buys CPNO
  • CMLP merges with NRGM / NRGY
  • PXD buys PSE
  • PAA buys PNG

2013 GP Transactions:

  • DVN buys XTEX / XTXI
  • Alinda Capital buys MMLP GP
  • Arclight buys AMID GP
  • ETE buys 50% of SXL GP interest from ETP

Regular MLPs Changing to Variable MLPs

  • Line: 0.5
  • My pick: under
  • Actual 2013 Result: 0

This will happen some year, I still believe, but did not happen in 2013.
Distribution Cuts

  • Line: 1.5
  • My pick: under
  • Actual 2013 result: 1.0

EROC sharply reduced its distribution for the second time in 5 years, but that was the only cut of 2013.  CLMT (a potential future candidate for switching to variable distribution MLP given its volatile fuels refining business) didn’t reduce its distribution even with two straight quarters of negative distributable cash flow (in 2Q and 3Q).
MLP Tax Law Changes

  • Line: 0.5, with 1 being MLPs taxed as corporations, 0 slightly better than now, and 0.5 nothing meaningful.
  • My pick: push (0.5)
  • Actual 2013 result: 0.5

Nothing meaningful on the tax front got passed this year.  MLP parity act is still a possibility, which would add to the MLP sector’s already growing attention and interest, but no negative tax changes on the horizon, for now.
Equity Issuance in Marketed Offerings

  • Line: $22bn
  • My pick: under
  • Actual 2013 result: $26.5bn

Along with my call on a less robust 2013 IPO market, the pile of MLP equity paper issued this year far exceeded my expectations.   On average, IPOs and follow on offerings traded weaker in the aftermarket than they did in 2012, likely the result of so much equity in the market in 2013.
Upstream MLP M&A

  • Line: $6.5bn
  • My pick: over
  • Actual 2013 result: $10.0bn ($4.5bn was the LINE / BRY deal alone)

Upstream MLP M&A exceeded 2012’s total in 2013, but it didn’t feel like it, because several upstream MLPs didn’t reach their acquisition totals from 2012, and the total M&A value was concentrated among a few larger deals.
MLPs launching at-the-market (ATMs) equity distribution programs

  • Line: 10
  • My pick: Over
  • Actual 2013 Result: 17 (does not include ATM renewals, truly new ATM programs only)

ATM’s have has become the preferred mechanism for MLPs to use to fund ongoing growth capital needs.  MWE used its ATM the most, raising more than $1bn in primary equity via its ATM program in 2013, including $691mm in 3Q alone.  Expect all MLPs to eventually put ATM programs in place, but I would expect the number of new ATM programs to be down in 2014 from 17 last year.
MLP private letter rulings

  • Line: 8
  • My pick: under
  • 2013 result: 25

2012 was a record year for PLRs at 18, more than double that of any previous year.  That was followed up with another year of record PLR issuance in 2013 at 25, which was surprising to me, because I thought 2012 might have been an anomaly.  But the PLR activity seems to somewhat track IPO activity, hence record IPOs and record PLRs.
Top 5 Winners & Losers of 2013
Frac sand MLPs like HCLP (and not pictured here variable distribution frac sand MLP EMES was a top performer as well) and those involved in M&A at the MLP or GP level (PSE, XTEX, AMID) dominated the winners.

2013 Winners & Losers

Happy New Year, good luck in 2014.

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