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September 20, 2015

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MLP Week Thoughts: Certain Uncertainty

Conditions were not met for the Fed to increase rates this week, and conditions for an MLP liftoff didn’t quite fall into place either. The Fed’s rate liftoff is delayed at least until the end of 2016. MLP liftoff timing is even more uncertain, as are the conditions. But rising rates are no longer standing in the way, and the removal of that headwind was a meaningful driver of MLP outperformance…for 2 hours on Thursday. While interest rates have taken a back seat lately to commodity prices and fund flows, the rally late Thursday implies that at least some of the recent MLP weakness was due to rising rate fears.
Weekly Review_9-18-15
MLPs declined 0.4% this week, way underperforming utilities and tracking closer to the S&P 500. Oil prices rallied hard Wednesday on the bullish inventory report, but fell back Thursday and Friday. The Fed’s statements like “recent global economic and financial developments may restrain economic activity somewhat” contributed to the rally being faded. The schizophrenia this week in the energy sector was matched only by Donald Trump’s face at this week’s debate.

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MLPs appear oversold at this point, after 3 weeks of negative price performance and -33.4% year-over-year total returns. 2008’s total return was -36.9%. The Alerian MLP Index finished that year with a yield of 12.1%, the highest month-end yield before or since that point. Given how much turnover the index has seen and how many young, high-growth, low-yielding MLPs there are in the index now, cross era comparisons are tough.
The index today yields 7.6%, the highest yield in more than 5 years. 19 out of 50 MLPs in the index currently yield more than 10%, and around half of all MLPs yield more than 10%. Yields of 10%+ for so many midstream MLPs has never been sustained for more than a few months in the history of the MLP index.   Equity financing competitive midstream capex or acquisitions with 10%+ yielding equity is not going to work for long. At some point the “ask” side of the apparently still wide “bid-ask” M&A spreads will need to adjust lower or to hold on long enough for that elusive MLP liftoff.
CBRE Clarion Webcast Series
As a follow-up to the whitepaper we published on oil exports and the impact on midstream MLPs, we produced a webcast that went live on the website this week that runs through the main takeaways of the paper. You can click through and see the video here.
Oil Exports Video
We expect to continue to produce whitepapers and webcasts on timely MLP topics. Send me an email if you have suggestions for a topic that deserves some detailed attention.
Winners & Losers
Three of the top five performers this week were E&P MLPs. VNR was the top performer after news last week it was being added to the Alerian MLP index while MCEP was the latest beneficiary of insider buying. NGL had strong performance as the positive vibes continued from last week’s unit repurchase program announcement.   There were no clear trends among the bottom five although three of the five (PSXP, VLP, and CPPL) are dropdown growth stories, which are clearly no longer en vogue.
DKL fell out of the top five this week, replaced by CCLP while the bottom five names remain the same.
General Partner Holding Companies
WMB was the top performing GP after news the acquisition by ETE could be announced in the next 10 days. CPGX followed CPPL down this week. Other recently public, natural gas-focused, high valuation GPs TEGP and EQGP did not bounce back from their downdrafts last week.
News of the (MLP) World
Shaken by the action in small cap MLPs that issued equity last week, MLPs are likely pursuing alternative financing options rather than marketed follow-on offerings. PIPE chatter has picked up, and then a large PIPE was announced Friday, which was well received. This follows the OKS PIPE that seems to have helped OKS performance the last month, and the SHLX PIPE earlier this year. The PIPE market hopefully doesn’t get back to excessive levels we saw in 2006 and 2007, but in moderation PIPEs can help reduce the capital markets friction (to put it mildly) we have seen of late. Also expect some convertible and PIK units to be issued in the next few year to sponsors and dedicated MLP investors.
Capital Markets

  • Antero Midstream (AM) announced private placement (PIPE) of 12.9mm units to institutional investors for gross proceeds of $243mm (see acquisition press release below)
    • This offering was in addition to 11.0mm units issued to sponsor Antero Resources to help fund the drop down acquisition of the water business, described below
    • The $243mm in gross proceeds equates to roughly $18.84/unit issue price (7% discount to prior closing price)
    • AM traded positively following the PIPE, up 3.7% in the next session

M&A / Growth Projects

  • Antero Midstream (AM) announced $1.05bn drop down acquisition of sponsor Antero Resources Corp’s integrated water business (press release)
    • The acquisition will be financed with a combination of cash, assumed debt, equity to Antero Resources Corp and the above-described PIPE transaction
    • The purchase price represents a 8.5x to 9.0x 2016E EBITDA multiple, implying around $115-125mm in EBITDA for 2016
    • AM will acquire 100% of Antero’s fresh water delivery business, consisting of 2 separate systems that deliver water to well completion operations in the Marcellus and Utica Shales
    • AM will enter into a 20-year, fixed fee water services agreement with minimum volume commitments through 2019
  • EnLink Midstream (ENLK) announced the acquisition of gathering & processing assets in the Delaware Basin from Matador Resource Company (MTDR) for $143mm (press release)
    • Assets located in Loving County, TX and include a gas processing plant with 35 mmcf/d of capacity and 6 miles of high-pressure gathering pipeline
    • MTDR will dedicate 11,000 acres to a 15-year, fixed-fee gathering & processing agreement
    • ENLK expects to spend an additional $250-350mm to expand its position in the Delaware Basin over the next 18 months
    • According to management, the acquisition will represent a 7-8x EBITDA multiple in 3-4 years, including the additional capital deployed to develop the system
    • Funded with borrowings and $58mm from ENLC balance sheet, with the additional capex funded by ATM issuance and borrowings over the next year
  • Energy Transfer (ETE) close to acquiring Williams Companies (WMB) (per Bloomberg)
    • Nothing has been finalized, and like we’ve seen with other reports from unnamed sources in the past, news breaking out can derail a deal (like ETE’s Targa acquisition)
  • SemGroup (SEMG) announced that its Canadian subsidiary SemCAMS will construct condensate gathering and processing facilities in the Duvernay region (press release)
    • Project is expected to cost $62mm (Canadian)
  • Kinder Morgan (KMI) announced extension for binding open season for its $4bn Utica Marcellus Texas Pipeline project (press release)
    • Extension is through 12/15, an additional 3 months
    • KMI highlighted that it continues to see high interest levels from producers in the region


  • The energy panel of the U.S. House of Representatives passed legislation to repeal the 40-year-old ban on U.S. oil exports (Reuters)
    • The bill is expected to be passed by the full House in a few weeks
    • President Obama and the White House have come out against the bill and there are questions about whether a similar bill will pass in the Senate
    • Opponents of the bill appear to be focused on environmental impact of more drilling activity, possible loss of jobs at refineries, and potential negative impact on the Jones Act
    • Odds vary wildly across industry experts and management teams of producers and refineries, but the progress of the bill in the House is generally viewed as increasing the odds of relief from the oil export ban prior to the 2016 election from almost no chance to at least some chance
  • Mexico released rules for its listed energy infrastructure vehicle, called Fibra E
    • I was only able to find article in Spanish on the rules (see Forbes Mexico article)
    • The structure has been described as something like an MLP, but expect more details to emerge over the next few weeks
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