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June 14, 2015

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MLP Week Thoughts: Are We There Yet?

Oil, natural gas and NGL prices were up, the S&P 500 and interest rates were stable this week, and yet MLPs were down for a 4th straight week. The selloff was broad-based across sub-sectors, with pockets of small-cap strength. Even a large private equity M&A transaction for midstream assets couldn’t garner enthusiasm for the sector overall. It makes it hard to visualize where the MLP sector catalyst is going to come from.
Weekly Review_6-12
When oil prices collapsed more than 6 months ago and rig counts starting falling, it was supposed to be a matter of time before oil production peaked. In the meantime, demand would react and eventually catch up with supply, tightening the market into the back half of the year.
Here we are months later, and U.S. production growth is still cresting. Demand is doing its part, and inventory draws have been happening here and there, but growth continues, with production running at around 9.6mmbbls/d in May. We started this journey towards slowing U.S. production months ago, and it has been a painful journey for MLPs. We should soon see production rollover, and in a few weeks we will be in the second half of the year. Maybe the calendar is the catalyst…
Are-We-There-Yet
Poll Question
Recap: Last week’s poll question was about oil exports, and the consensus of those that voted was that oil producers (37%) would be the biggest beneficiary of the oil export ban being lifted, followed by pipeline and storage MLPs (35%). In last place were the gathering & processing MLPs (4%), behind the U.S. consumers (6%) and shipping MLPs (18%).
This week, the Hess transaction was intriguing because of its high multiple, and I wanted to get your take, readers, on what the valuation implications of the high multiple might be for MLPs.

Sorry, there are no polls available at the moment.

Winners & Losers
The winners had a small cap bias this week. DKL bounced back from last place last week to first place. SMLP reversed poor recent trading with a 7.4% bounce on Friday, which I can only assume is a positive read through from the Hess Bakken Midstream transaction announced Thursday morning, because Hess is a customer of SMLP’s in the Bakken. HEP will be added to the Alerian MLP Index and traded well in light of that.
Top5Bottom5_6-12-15
On the downside, GLP’s equity offering sent its stock sharply lower, while DPM cracked the bottom 5 this week with no news (and for DPM, no news is bad news, as the market awaits a sponsor solution).
Top5Bottom5_6-12-15_chart
Year to date
Year to date, no change among the bottom 5, still dominated by upstream MLPs. On the upside, its small cap MLPs with limited commodity price exposure leading the way, with DKL replacing GLP in the 5 spot.
Top5Bottom5_6-12-15_YTD
Top5Bottom5_6-12-15_YTD_chart
GP Holding Companies
GPs had another rough week, but overall outperformed the AMZ. No meaningful announcements among the GPs this week, but PAGP did disclose the PAA pipeline oil spill cleanup expenses so far, which didn’t help. OKE continued its relentless decline, down another 2.7% this week and is now down 45% since peaking in September 2014. When growth rates get reduced at the MLP level, the pain gets amplified at the GP level.
Top5Bottom5GPs_6-12-15
 
SE made it a second straight week down more than 3%, likely on DPM’s weakness.
Top5Bottom5GPs_6-12-15_chart
News of the (MLP) World
Light week of MLP transactions, but news flow around the MLP space was pretty extensive. Alerian announced big turnover in this quarter’s index rebalancings. Hess Midstream found a big private equity partner for its eventual MLP, Cheniere announced another 19 mtpa of LNG export projects, and a yieldco IPO launched. In the MLP space, there was a small follow-on offering that traded down in the after-market, suggesting pricing on follow-on offerings still hasn’t quite been calibrated for the new normal MLP fund flow situation.
News-of-the-World
Equity

  • Global Partners (GLP) priced offering of 3.0mm units at $38.12/unit, raising $114.4mm in gross proceeds (press release)
    • Overnight offering, priced at 4.2% discount to prior closing price
    • GLP declined an additional 2.2% from pricing in the next trading session
  • 8point3 Energy Partners (Nasdaq: CAFD) launched IPO of 20.0mm shares with a midpoint price of $20.00 (4.2% implied yield) (filing)
    • CAFD is a partnership in structure and a corporation for tax purposes, and I would classify it as a yieldco, so will not include in ongoing MLP-related statistics
    • Expected to price 6/18/15
  • Shell Midstream (SHLX) filed S-1 to register the 7.7mm units it sold in a private placement last month for the firms that purchased the units (filing)
  • Summit Midstream (SMLP) entered into equity distribution agreement to sell up to $150mm of equity at-the-market (filing)
  • Royal Resources Partners files for MLP IPO to raise up to $100mm (filing)
  • Cypress Energy (CELP) filed S-3 to register up to $1.0bn of debt and equity securities (filing)
    • CELP is also registering 7.5mm for secondary sale

M&A / Growth Projects

  • Hess Corporation (HES) announced sale of 50% interest in its Bakken Midstream assets for $2.675bn and formation of joint venture with Global Infrastructure Partners (press release)
    • Assets expected to produce $295mm EBITDA the next 12 months, implying an 18x multiple for GIP’s 50% stake
    • The JV will spend $325mm to $350mm in capex over next 12 months
    • Hess Midstream plans to move forward with its MLP IPO (already on file) following the close of the acquisition and formation of the JV (expected in 3Q 2015)
    • GIP is a private equity investor that recently raised a $10bn infrastructure fund
      • In the past, GIP purchased a 50% G.P. interest plus L.P. interests in Access Midstream Partners from Chesapeake, eventually selling its stake to Williams
    • Energy Transfer (ETP) provided additional details of its $1.5bn Project Revolution in the Marcellus (press release)
      • ETP has entered into long-term gas gathering, processing & fractionation agreements with EdgeMarc Energy
      • ETP has purchased 20 miles of gathering pipeline from EdgeMarc and plans to build a 200 mmcf/d processing plant, a new fractionator and additional gathering pipelines to support the midstream agreements
      • The new plant is expected to be in-service by 2Q 2017, with residue gas from the plant flowing into ETP’s Rover pipeline and NGLs flowing into the Mariner East pipeline
    • Cheniere Energy (LNG) announced two new LNG projects (press release)
      • LNG plans to develop approximately 9 mtpa of incremental LNG production capacity at Corpus Christi (2 additional trains) after receiving regulatory approvals in 2017
      • In addition, LNG plans to partner with Parallax Enterprises to develop up to 10 mtpa through two mid-scale LNG projects in Louisiana
      • Both projects could begin production by 2021 and be fully ramped up to capacity by 2025

Other

  • Alerian announced changes to its MLP Index and MLP Equal Weight Index (press release)
    • Added: AM, DM, SHLX, GLP, HEP
      • 3 of the 5 went public in 4Q last year
    • Removed: NRP, LGCY, BBEP, BWP, NMM
      • Only 1 coal and 2 E&P MLPs left in the index, with combined weights of less than 2% (those combined sectors peaked at around 10.6% in 2011)
    • Weights of these new additions should be higher than the sub-2% combined weight of the removals, which means the creep higher of EPD, ETP, MMP weights will take a break (at least until WPZ gets removed from the index)
  • Alerian announced SHLX to be added to the Alerian MLP Infrastructure (AMZI) Index (press release)
    • No removals
    • This is the index tracked by the biggest MLP ETF in the market
  • Other index changes:
    • Alerian Energy Infrastructure Index added in 7 general partner holding companies, 4 MLPs and 1 energy infrastructure stock (MIC), removing 7 companies (including 3 MLPs that were subsidiaries of some of the GPs added)
    • Alerian Natural Gas MLP Index removed 2 compression MLPs and replaced them with AM and DM
  • In an 8-K, Plains All American (PAA) provided an update on the California pipeline spill that occurred on May 19th (filing)
    • PAA has incurred $65mm in costs to date, about $3mm per day, not counting potential insurance recoveries
    • Approximately 75% to 80% of the affected shoreline has achieved end-point cleanup goals
    • PAA ramped up personnel working on the cleanup from 250 to 1,400 over the first 21 days of the spill, and at one point had 25 vessels working, all under the direction of the Unified Command (a combination of 5 Federal agencies, 3 state agencies and PAA working on the cleanup)
  • Management changes:
    • Southcross Energy (SXE) announced new CFO (press release)
    • Exterran (EXH/EXLP) announced management teams for post-separation SpinCo and RemainCo (press release)
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