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September 12, 2015

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MLP Week Thoughts: Back...To the Woodshed

There may have been more people in the office this week, but they weren’t buying MLPs, which declined 4.3%, a multiple of the decline in oil prices this week. MLPs continue to capture a disproportionate share of the oil-related downside and limited upside. On August 24th, oil hit its most recent bottom just above $38/bbl. Oil has rebounded more than 17% since. As of Friday, the Alerian MLP Index has rallied just 1.7% since oil bottomed on August 24. MLPs have produced -23.4% total return YTD, compared with a 16% oil price decline. Oil price volatility means uncertainty, and uncertainty makes it hard for investors to buy in to the oil price rally.
Weekly MLP Review_9-11-15
On the bright side, natural gas prices are firming ahead of winter, as are lighter NGLs (granted, all off of very low bases). Also, the broader stock market stabilized, up 2.1% this week. Improvement in those areas could at some point draw attention away from oil price uncertainty, but it’s doubtful in the near-term.
A major energy conference this week did little to disconnect MLPs and the rest of the energy sector in the eyes of the market. Kinder Morgan’s presentation at the conference went to great lengths to explain how its business is about leasing space on its (mostly natural gas) pipelines, and not about oil prices. Higher oil prices are clearly positive for MLPs, but lower oil prices aren’t this negative for MLPs, especially when you hear about efficiency gains and continuously declining breakeven prices for new drilling.
Perhaps in an effort to take some of the spotlight from that conference, another broker published a lower for even longer oil price call, while simultaneously downgrading the MLP sector, which reinforces the perception that oil price and MLP price should have a linear relationship.
Winners & Losers
Very few MLPs were positive this week. DPM traded very well following the sponsor support transactions announced on Wednesday. Beyond that, news flow wasn’t a factor among the top 5. Equity issuance drove the downside for USAC and AMID. MEMP was the big loser, down sharply Friday which may have been a reaction to the news it would be removed from the Alerian MLP Index.
No follow through on positive price action for last week’s winners.
On the YTD chart, every one of the top 5 was negative this week, probably due to some profit taking among the group. USAC went from best performing MLP to 3rd best after its equity offering related beating this week.
General Partner Holdings Companies
GPs outperformed slightly overall, but they were all negative this week. GPs backed by producer sponsors led the losers. EQGP fell 15.6%, but still carries a very low 1.3% current yield, so not exactly cheap. OKE was the best performer in the group, as the market seems to buy into the volume growth story to some extent now that valuation has come down.
News of the (MLP) World
Two smaller MLPs decided to test the MLP capital markets this week, and were able to get their small deals done, but the aftermath for each was ugly. That should send a message to the rest of the MLP sector that if you absolutely need capital to fund growth, it may be cheaper to find a new sugar daddy to acquire you rather than launch an equity offering.
The major challenge is that large, well-capitalized MLPs trading at premium valuations are hard to find given the large-cap selling that’s happened as fund flows have exited. Even the big MLPs will either have to use their own equity or raise capital to fund the acquisition of another MLP.  Maybe Apple will use some of its cash to start consolidating (nay, revolutionizing) the MLP sector…

  • American Midstream (AMID) priced public offering of 7.5mm common units at $11.31/unit, raising $84.8mm in gross proceeds (press release)
    • Overnight offering, priced at 5.2% discount to prior closing price
    • AMID traded down another 11.5% from pricing, closing down 16.1% overall on the next trading session
    • AMID has gone from $9.60 in early August, up to $15.36 (+60%) following sponsor support, now back down to $10.01 (-35%)
    • Proceeds to be used to fund portion of previously announced Delta House acquisition
  • USA Compression (USAC) priced public offering of 4.0mm common units at $19.33/unit, raising $77.3mm in gross proceeds (press release)
    • Overnight offering, priced at 4.5% discount to prior closing price
    • USAC units traded down another 7.9% from pricing, closing down 12.1% overall on the next trading session
    • Proceeds from the offering to be used to reduce borrowings and for general purposes

M&A / Growth Projects

  • Phillips 66 (PSX) and Spectra Energy (SE) announced cash and asset contribution to privately-held DCP Midstream, LLC to stabilize balance sheet (press release)
    • PSX agreed to contribute $1.5bn in cash
    • SE agreed to contribute certain pipeline assets (ownership interests in Sand Hills and Southern Hills NGL pipelines) owned by Spectra Energy Partners (SEP)
    • While this was viewed as positive for DPM, because it stabilizes the direct parent of DPM, the pipeline assets are not expected to be dropped down to DPM at any point (and in fact may revert back to SEP at some point)
    • Although not in the press release, in exchange for the assets coming out of SEP, SE will retire units of SEP and provide IDR waivers to make the transaction cash flow neutral to SEP
    • DCP Midstream, LLC remains 50% owned by each sponsor (PSX and SE)
  • Williams Partners (WPZ) announced restructured gathering services agreements with Chesapeake Energy (CHK) in Utica and Haynesville dry gas production areas (press release)
    • Utica: WPZ entered into long-term contract that increases the area of dedication by 50,000 acres and extends the term of the dedication to 2035, and importantly the new contract changes cost of service arrangement to a flat fee
    • WPZ expects the new agreement to support $600mm of capex over the next 5 years in the Utica
    • Haynesville: WPZ’s new Haynesville contract includes a fee-based arrangement through 2035 with minimum volume commitments and commitments to bring online 140 new wells before the end of 2017
    • WPZ expects the agreements to be net positive to EBITDA given near-term higher volumes and development commitments


  • In other Williams (WMB) news:
    • Spectra apparently bowed out of the bidding for WMB (according to Rueters), leaving the board with two options: accept bid from ETE or continue with WPZ buy-in on its own
    • WMB announced quarterly dividend of $0.64/share, and noted that the strategic alternatives process remains ongoing (press release)
  • Alerian announced the following changes to its indexes:
    • Alerian MLP Index and Alerian MLP Equal Weight Index (press release)
      • VNR, BWP and CPPL in
      • MEMP, LINE and HCLP out
    • Alerian Natural Gas Index: CPPL added, replacing BWP (press release)
    • Alerian MLP Infrastructure Index: CMLP removed from the index (press release)
  • NGL Energy (NGL) announced $45mm unit repurchase program (press release)
    • NGL traded up 5.5% on the announcement
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