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January 18, 2015

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MLP Week Thoughts: Bottoms...Up

What a week! The Alerian MLP Index dropped like a rock to start the week, closing Tuesday at a fresh 52-week low that was 6.0% lower than last Friday.  On the back of stabilizing oil prices, MLPs traded better the rest of the week, including a 3.3% pop on Friday, to finish the week down just 1.4%.  The Alerian MLP Equal Weight Index (AMZE) declined 3.0%, which highlights how midstream MLPs outperformed, a sign that some risk differentiation might be developing.
Weekly MLP Review_1-16-15
It’s been a risk-off year so far, with the broad market down 2%, interest rate on the 10-year are down to 1.82%, and utilities have picked up where they left off up and are up 3.3%.  Oil was volatile all week, but rallied after hitting a new low Tuesday to finish the week slightly positive (U.S. oil spot price +0.7% week over week), breaking a streak of 6 straight declining weeks.  Oil rallied 6.1% from Tuesday’s close to the end of the week.  Natural gas was volatile as well, but finished up 5.1% for the week.
Winners & Losers
Oil stabilizing didn’t help upstream MLPs much this week.  4 of the bottom 5 were upstream MLPs.  Only one of the top 5 this week was in the Alerian MLP Index (GEL).  FISH popped 14% on the news that its GP was acquired and its growth rate would be accelerated.
Last week, midstream MLPs dominated the bottom five.  Not so this week.
It’s still very early on, but a theme is emerging on the downside so far this year (upstream MLPs still weak). On the upside, the names are spread across subsectors, but they are all smaller, more thinly-traded MLPs.
News of the (MLP) World
There were encouraging signs for MLPs from the capital markets this week, as two non-investment grade MLPs successfully raised debt capital. Also, there were positive signs that strategic transaction opportunities for MLPs are beginning to emerge from the volatility.  The Azure Midstream acquisition of Marlin Midstream’s GP is a sign of things to come.  Azure was going to go public, but saw the opportunity to avoid the capital markets and get public quicker.  There will be more transactions that would have otherwise been IPOs.  Whether that’s producers shedding assets to MLPs when last year they would have gone IPO, or MLPs buying MLPs.

  • Targa Resources (NGLS) priced $1.1bn of 5.0% senior notes due 2018 at par (press release)
    • NGLS will use the proceeds from the offering to fund tender offers for bonds outstanding at Atlas Pipeline Partners (APL – gathering & processing MLP), in connection with and conditioned upon the proposed merger between NGLS and APL
    • Offering was upsized from $800mm initially offered
    • Positive indication of the ability for other MLPs to access the debt capital markets
  • SunCoke Energy Partners (SXCP) priced $200mm of 7.375% senior notes due 2020 at 102% of par (press release)
    • Proceeds from the offering will be used to partially finance the acquisition of a 75% interest in a cokemaking facility in Illinois owned by its sponsor

M&A / Growth Projects

  • Marlin Midstream (FISH) announced the sale of its general partner and 90% of its incentive distribution rights to private company Azure Midstream Energy, LLC (press release)
    • As part of the transaction, FISH will acquire Azure’s Legacy gathering system in East Texas and northern Louisiana for $162.5mm
    • Azure will retain additional assets to sell down to FISH over time
    • Azure (owned by private equity firm Energy Spectrum) had been planning an MLP IPO of these assets, but this is a short cut
    • The Legacy acquisition and the future drop-down acquisitions combine to raise FISH’s distribution growth profile, and FISH’s stock price reflected that re-rating this week
  • Bloomberg reports that three large MLPs were among the bidders for a large pool of midstream assets owned by Pioneer Natural Resources (Bloomberg)
    • The assets are said to be worth as much as $3bn, and include natural gas and condensate infrastructure in the Eagle Ford Shale in South Texas
    • The MLPs were Williams Partners (WPZ), Enterprise Products Partners (EPD) and Energy Transfer Partners (ETP)
  • Enlink Midstream (ENLK) announced acquisition of oil logistics company for $100mm (press release)
    • ENLK continues to execute its plan to use its investment grade balance sheet and debt capacity to make accretive acquisitions
  • SunCoke Energy (SXCP) announced $245mm drop-down acquisition of interest in a cokemaking facility (press release)
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