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March 30, 2014

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MLP Week Thoughts: Baby Steps

MLPs had a very good week, significantly outperforming the broader U.S. stock market, with a substantial portion of the weekly returns coming from Friday’s rally.  The market cap weighted MLP Index and the equal-weight MLP Index were in-line with each other, implying that this week’s positive trading had broad participation.
This week’s rally may have been helped by rising commodity prices across the board, or it may have been helped by ~$700mm of closed-end funds pricing this week.  Whatever the reason, it will be interesting to see if MLPs can sustain their strength as a group for a few weeks, or if the index will go back to trading flat with the “haves” continuing to outpace the index.

Weekly MLP Review_3-28-14

Heading into the last trading day of the month, the Alerian MLP Total Return Index is up 0.9% so far in March.  If that return stands through Monday, March will have been the best month of the year so far, after +0.6% in January and -0.2% in February. Like Dr. Leo Marvin told Bob in the 1991 movie “What About Bob”: it’s all about baby steps. Looking back in a few months, we might be tied to the mast of a boat screaming with delight, “I’m sailing!”…or the sector might be remanded to the straight jacket of continued range bound trading.

Baby Steps

There was plenty of news directly related to MLPs this week, but also some indirectly relevant news. Two MLP closed-end funds priced this week, each with divergent strategies (and divergent aftermarket trading performance).  They combined to raise around $700mm.  Last year, on the exact same date (3/26), two other closed-end MLP funds priced and raised a combined $1.5bn, weird.  The MLP closed-end fund market seems to have evergreen demand from investors that hate K-1s, so I’d expect to see at least a few other funds come to market later this year (assuming discounts tighten up a bit).
It became public this week that John Tysseland, a prominent, long-time senior MLP equity research analyst at a large firm (Citi) had defected to the buyside.  Another senior analyst at a smaller firm also joined the buyside earlier this week.  Prominent MLP research analysts have gone to the buyside before, but it seems to be happening with increasing regularity these days. With the ongoing institutionalization of the sector, I expect to see continued upheaval on the sell side as the big firms replace fleeing talent, smaller firms lure talent away from the big firms, and the buyside continues to poach from big and small shops.
The dwindling supply of MLP-experienced research analysts combined with the growing list of firms offering MLP equity research may lead to some market inefficiencies, which in turn may provide opportunities for dedicated MLP managers…at least that’s what we like to think…

I like to talk about movies and try to make connections between the MLP world and the movies of my youth.  This sell-side to buy-side migration, if taken to the extreme, would be like if Hollywood movie studios began to hire prominent movie critics to produce movies.  A few things might happen in that scenario: (1) there would be fewer authoritative critics out there to tell us what movies to see, and (2) some bad movies would probably get made.

Winners & Losers

SXL led all MLPs with 8.0% return this week on no news.  FGP bounced back from last week’s drop to make the top 5 this week.  None of the MLPs with acquisitions or capital markets transactions cracked the bottom or top five and the mix of MLPs in both buckets was pretty varied.  It does seem like the smaller cap, more thinly-traded names dominate the bottom 5 this week (average market cap of the bottom five less than $900mm).



Year to date, RNO replaced WNRL in the top five, and the a few other names changed places within the top five, but TEP remains comfortably ahead of the pack.  In the bottom five, EPB showed some signs of life late in the week and moved up a spot to third worst, APL ascended out of the bottom 5, replaced by EROC.



Trading among general partner holding companies was mixed, but the outliers were KMI (+4.1%) and PAGP (-3.3%), which may be indicative of some rotation into large cap value GPs (NSH was also up) from large cap growth GPs, or it may not mean anything at all.  At this point, however, any time KMI is up when the rest of its peers are mixed, it is worth noting.  Even if you don’t own any of the Kinder complex or you think they’re maintenance capex is suspect, the sector is better off with a healthy and upwardly mobile KMI/KMP/EPB. 
News of the (MLP) World
This week, we had another Thursday afternoon equity deal, an upsized fixed income offering, and $1.5bn of M&A and growth projects announced.  Also, the Dominion MLP IPO filed, which brings the utility spin-off MLP filed backlog to two (Enable is the other).  While the refinery corporations were in a great rush to get their MLP IPO spin-off done (with great success almost universally), the utility sector’s midstream value-unlocking via an MLP situations have progressed at a much more methodical pace.  Maybe the momentum builds from here.



  • Dominion Midstream Partners (DM) files initial registration statement for MLP IPO of up to $400mm of common units (S-1 filing)
    • The only asset included initially is a preferred equity interest in the Cove Point LNG facility that entitles the MLP to the first $50mm of cash distributions made by Cove Point
    • Expected to remain flat until Cove Point liquefaction facility is completed and liquefaction revenues kick in
    • Growth for DM will be driven by the pace and size of drop down acquisitions from D to DM
    • $47mm of distributable cash flow attributable to DM included in the S-1 forecast
  • Exterran Partners (EXLP) prices public offering of 5.4mm common units at $28.36/unit, raising $153.1mm in gross proceeds (press release)
    • Overnight offering, priced at 3.9% discount to prior close
    • In the session following pricing, EXLP traded poorly from the open and went as low as 2.0% below the offer prices, but closed at the offer price of $28.36/unit


  • Calumet Specialty Products (CLMT) prices private placement offering of $900mm of 6.5% senior notes due 2021 at par (press release)
    • Upsized from $850mm initially offered
    • Proceeds will be used to fund the $235mm acquisition announced this week, the retirement of $500mm of 9.375% senior unsecured notes at a premium, and for general purposes

M&A / Growth Projects

  • Kinder Morgan Energy (KMP) announces $1bn worth of investment projects related to its CO2 business (press release)
    • KMP to construct new $300mm, 213-mile pipeline to transport CO2 from its source field in Apache County, AZ to the KMP-operated Cortez Pipeline in NM
    • KMP to invest an additional $700mm to drill wells and build field gathering, treatment and compression facilities at the St. John field
    • Project expected to be in service by 3Q 2016
  • Legacy Reserves (LGCY) announces two oil properties acquisitions for a combined $112mm (press release)
    • Properties are located in Chaves County, NM and Sheridan County, Montana
    • Combined current production: 800 Boe/d
    • Proved reserves of 9.0 MMBoe (95% oil, 95% operated)
    • Expected to be funded by borrowings on LGCY’s credit facility
  • Calumet Specialty Products (CLMT) announces acquisition of Anchor Drilling Fluids for $235mm (press release)
    • Anchor is a independent provider of drilling fluid solutions, completion fluids and production chemicals to more than 250 customers in the oil and gas industry
    • 7.4x implied EBITDA multiple based on $31.6mm of 2013 EBITDA
    • Acquisition expands CLMT’s operations to a new customer base that’s closer to the wellhead
  • Memorial Production (MEMP) announces acquisition of oil and gas producing properties in the Eagle Ford Shale for $173mm from Alta Mesa Holdings (press release)
    • Properties with 7.4 MMBoe of proved reserves (63% proved developed) located in Karnes County
    • Current production of 1,650 Boe/d (80% oil, 10% NGLs, 10% natural gas)
    • Transaction structured with an increasing working interest designed to offset declines and create an approximate 9% annual decline rate
    • 12.3 year reserves to production ratio
    • Acquired interests are 100% non-operated and are primarily operated by Murphy Oil
  • Ferrellgas (FGP) announces acquisition of Country Boys Gas, an independent propane company based in Commerce, GA (press release)
    • Transaction terms not disclosed (translation: very small transaction)
  • ETE files LNG application with FERC for Lake Charles facility (press release)


  • Canadian public company Veresen receives approval to export LNG to non-FTA countries from its to be built Jordan Cove LNG facility (press release)
    • Veresen expects commercial LNG production to start in early 2019
    • The approval allows for 6 million tons per annum (mtpa) to non-FTA, Veresen expects the Jordan Cove facility to have ultimate capacity of 9 mtpa
    • Veresen received DOE approval to import up to 1.55 bcf/d of natural gas from Canada for the purpose of exporting from the Jordan Cove LNG facility
  • Canadian government approves 4 long-term licenses to export LNG from proposed projects on Canada’s west coast (Wall Street Journal)
    • Facilities receiving approval: Pacific NorthWest LNG, Prince Rupert LNG, WCC LNG and Woodfibre LNG
    • Combined capacity of up to 73.4 mtpa
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