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December 28, 2012

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MLP Prop Bets: 2013 Lines are In

For the second straight year, I am going to play bookie and set some lines for prop bets on what will happen in the MLP capital markets next year.  The lines are below, along with my opinion on each topic.  Please share with me in the comments section below your suggestions of potential prop bets, what you think of my lines, and what side of each bet you’d take.  Or you can just passively read it and hopefully enjoy.
1. Returns vs. S&P 500

  • Line: pick ’em
  • My pick: over
  • 2012 result: -1050 basis points

Continued low interest rates, MLP distribution growth, secular growth in drilling activity and reasonable starting valuations should produce solid total returns for MLPs on the whole  in 2013.  Does the S&P 500 have enough gas for another year of 13%+ returns?  I am a huge MLP homer anyway, but after such drastic under-performance, I am even more bullish on this relative trade than usual.

  • Line: 12.5
  • My pick: under
  • 2012 result: 12

After such a successful year for the MLP IPO market, it would be logical to assume that even more MLPs will come to market in 2013.  But I think 2013 will be a year when the market digests the 25 MLP IPOs issued in the last 2 years, and while there may be 10 MLP IPOs, I doubt we will see a new record set.


3. Variable Distribution MLP IPOs

  • Line: 3.5
  • My pick: under
  • 2012 result: 3

There were 2 variable MLP IPOs in 2011, 3 in 2012, will we see 4 in 2013?  I don’t think so.  One is on file (CVR Refining), but even with that headstart, I’ll take the under.
4. GP IPOs

  • Line: 1.0
  • My pick: over
  • 2012 Result: 1

There has been 1 GP IPO in each of the last 3 years.  Its a fair bet that there would have been 1 in 2013 no matter what happened with WGP.  But the success of that deal will spawn at least one more GP IPO than usual.  There aren’t too many candidates, however, given that the MLP needs to be in the 50% IDR tier usually before the GP will take itself public.
5. MLP Consolidations / GP Sales

  • Line: 2.0
  • My pick: over
  • 2012 result: 2

There will be more consolidation in the MLP space going forward.  The pace of that consolidation is the question.  I believe we will see that pace step up next year with a few GPs potentially changing hands or being bought by bigger MLP or even some full consolidations of L.P. interests by one MLP of another (e.g. ETP buying RGP, KMP buying EPB, etc.).
6. Regular MLPs Changing to Variable MLPs

  • Line: 0.5
  • My pick: under
  • 2012 result: 0

I put this out there because I do think it will happen someday that some MLP that started its life as a traditional MLP with minimum quarterly distribtuion, IDRs, subordinated units, etc, will change itself into a variable distribution MLP.  This could be a pure marketing change or a change to the partnership agreement to get rid of the IDRs and the MQD.  There is a precedent for a change to variable MLP:  Terra Nitrogen (TNH).  TNH still has IDRs, leftover from its original conception as a regular MLP.  I don’t think this happens this year.  There also might be the next logical step of a variable distribution MLP going public with IDRs, just to see if that would fly.
7. Distribution Cuts

  • Line: 1.5
  • My pick: under
  • 2012 result: 3

It seems to have become more commonplace to see an MLP cut its distribution, especially after 3 cuts in 2012.  Also, MLPs have gotten into weirder assets of late and have historically pushed the limits of distribution coverage to maximize distributions (and unit prices).  That would seem to indicate that the risk of distribution cuts is higher.  That may be true, but despite last 2012’s spike in distribution cuts, in 2011 and 2010 there were no MLP distribution cuts at all.  Also, the new MLPs are not at much risk of cutting distributions to common unitholders in their first 2 years as a public MLP given the levers they can pull to maintain common unit distributions, like cutting distributions to sub units.
8. 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)
  • 2012 result: 0.0 with all the private letter rulings, it was an expansive year for MLPs

My bet here is that nothing will target MLPs specifically, and that MLPs will continue to exist in their current form at this point next year.  Much of my personal net worth and professional aspirations rest on this bet.
9. Equity Issuance in Marketed Offerings

  • Line: $22bn
  • My pick: under
  • 2012 result: $21.5bn

I’m trying hard to avoid the recency bias here, but its difficult given how hard it has been for MLPs to issue equity since the end of October.  In 2013, I believe MLPs will tap alternative equity sources more readily than they have in the last few years.  PIPEs, ATM deals, equity issued directly to sellers in M&A transactions will all play their role in reducing the capital markets needs of the MLP sector.
10. Upstream MLP M&A

  • Line: $6.5bn
  • My pick: over
  • 2012 result: $5.8bn

Upstream M&A was $5.8bn in 2012, which is huge for a group of MLPs that have a combined enterprise value of around $31bn.   E&P companies all over are going to continue to struggle with cash flow in 2013 in the current commodity price environment.  They will continue to seek exits for their mature properties to fund ongoing development.
11. MLP PIPE Deals

  • Line: 7.5
  • My Pick: Over
  • 2012 result: not that many

MLP PIPEs, or private investments in public equities, were extremely popular for the 3 years prior to 2008, and then that market pretty much dried up.  I haven’t tracked MLP PIPE like I have IPOs and marketed deals in the last few years.  There were a few deals this year that come to mind, but less than 10 for sure.  They are usually issued in conjunction with an acquisition to a group of institutional investors.  I expect more in 2012 as MLP management teams look for more creative ways to get their capital needs met outside of the public equity capital markets.
12. MLPs Launching At-The-Market Equity Distribution Programs

  • Line: 10
  • My Pick: Over
  • 2012 result: 8

There are 15 MLPs with ATM equity distribution agreements in place.  I expect many more in 2013.  This funding mechanism makes sense for most MLPs.  It doesn’t cost anything to set up, can be used to issue equity at management’s discretion, and reduces overall equity needs, reducing the size of marketed equity offerings the MLP needs to execute.
13. MLP Private Letter Rulings 

  • Line: 8
  • My Pick: Under
  • 2012 result: 16

In 2012, there more private letter rulings made by the IRS than in any other year, double that of any other year in fact.  I think this 2012 was an anomaly and there just isn’t that much stuff to ask about.  I could be wrong if the MLP Parity act were to be passed and all of a sudden alternative energy MLP hopefuls flooded the IRS with requests.


I’ll stop there with 13 prop bet lines for 2013…what do you think?

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