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November 15, 2015

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MLP Week Thoughts: Cyclical Style Drift

2015 continues to be a painful transition year for MLP investors that has seen the focus shift from growth to value, then to deep value.  MLPs finished the week down 5.7%, dragged down by broad market weakness (S&P 500 -3.6%) and dropping oil prices (-7.9% this week).  For the second time this quarter, MLPs had 7 straight negative trading days.  But halfway through the 8th day (Friday), large cap MLPs had a big intra-day reversal to finish positive even with oil prices down more than 3%.  The sector’s focus now shifts to the Energy Transfer analyst day and to a suddenly wide open equity capital market.
Weekly Review_11-13-15
Déjà vu
This week felt familiar, and not just because of the horrific terror attacks in France.  It also felt familiar because it was the 9th week the MLP Index declined 5%+ since last August.  That’s 9 out of 63 weeks total, or 14% of the weeks since MLPs peaked on 8/29/14.  By comparison, there have been only 24 such 5% decline weeks out of 1,036 weeks of index data we have since 1996, or just 2% of the time.
Overall volatility has clearly been elevated recently and it may continue to be higher than historically going forward, given that there are more open ended MLP products allowing for fast entry and exit, and given that the U.S. is effectively the world’s swing producer.  5% weekly MLP Index moves in either direction have happened 19% of the time since the 8/29/14 peak, compared with 4% overall since 1996.
Volatility won’t be this extreme forever.  As gray haired management teams and energy investors have pointed out this week, the oil business is cyclical.  The cycles can be dramatic, but it’s important to remember that they are cycles that eventually self-correct through supply and demand adjustments.
While the energy market seems dire now at the bottom of the cycle, experienced market participants know that this is just another cycle (many have experienced more than 5 cycles over the last few decades).  Eventually supply and demand will be in balance, leading to drilling expansion and infrastructure opportunities.  Of course, MLPs will emerge from the wreckage wounded, but when the cycle tilts back upward, some MLPs will have set themselves up for even greater success in the next cycle.
It feels like the worst of the current cycle is over.  The 2 month public MLP equity offering blackout has now ended, and the offerings this week traded much better than those in early September.  Also, while the timing seems questionable, there is an IPO on the road.  Finally, M&A activity is picking up in the upstream sector, where well-capitalized companies are seeing greater value in buying production than creating it through drilling.  Expect to see MLP M&A to continue to backfill growth in 2016, which promises to be a transition year for growth capital projects.
Winners & Losers
It was another one of those weeks we’ve seen too many of in 2015.  Cataloging the carnage, it was a very mixed bag at the top of the sector, including a few MLPs that tend to be down when oil prices drop (CELP, SDLP, MEMP).  No traditional midstream MLPs made the top 5.  MLPs that get whipped around more than SXE and AZUR do week to week, and this week they both dropped 20%+.
AZUR has had back to back 15%+ decline weeks, SXE was in the top 5 last week before taking two steps back this week.  No other repeats week over week.
No real changes to the ugly picture below.  SXCP dropped into the bottom 5 after a 27% decline this week.
General Partner Holding Companies
All GPs were down this week and the median of GPs underperformed the MLP Index dramatically.  Pretty much the same as last week, only more than twice as bad.  TRGP and SEMG have had it worst of all, both down double digit percentages each of the last two weeks.  Natural gas pipeline corporations SE and CPGX were each in the top 5 both weeks, a reflection of the lack of commodity price exposure in their businesses (outside of SE’s stake in DCP Midstream).
News of the (MLP) World
EQM ended a nearly 2 month drought for MLP public equity offerings, the longest drought since late 2008 through early 2009.  SHLX settled all quarterly business this week.  And amidst a clear glut of MLPs in the market, an IPO for a brand new MLP launched.
Capital Markets

  • Noble Midstream (NBLX) launched public offering of 12.5mm common units in MLP IPO with a $20.00/unit midpoint price (6.25% implied yield), seeking to raise $250.0mm (filing)
    • Noble Energy (NBL) is the sole sponsor and owner of the GP/IDRs
    • NBL is co-sponsor of an MLP that went public just over a year ago, CONE Midstream (CNNX), which was very successful initially, before falling more than 50% in the last year
    • Expected to price 11/19 after the market closes
    • The initial assets consist of DJ Basin oil and gas gathering assets underpinned by 15 year fixed-fee contracts with cost-of-service redetermination and annual rate escalators
    • The structure is similar to CNNX, with multiple integrated development companies that will eventually be dropped down
    • NBLX has a ROFO on all North American midstream assets of NBL outside of the Marcellus joint venture with CONSOL
  • EQT Midstream (EQM) priced a 5.65mm common unit offering at $71.80/unit, raising $405.7mm in gross proceeds (press release)
    • Bought deal, priced at 5.76% discount to prior closing price
    • EQM traded down from pricing by 0.4% in the next trading session, roughly in line with the MLP Index that day
    • Proceeds to be used to finance ongoing growth capital expenditures
    • This was the first public equity offering by an MLP since early September, the longest public offering drought since late 2008 through early 2009
  • Shell Midstream (SHLX) priced 8.0mm common unit offering at $32.54/unit, raising $260.3mm in gross proceeds (press release)
    • Overnight bought deal, priced at 3.0% discount to prior closing price
    • SHLX traded very well in the next trading session, closing +2.3% from pricing on a day when the MLP Index declined 3.0%
    • Proceeds to be used to partially finance the drop down announced this week
  • SXL priced $1bn worth of senior notes (press release), including:
    • $600mm of 4.40% senior notes due 2021 at 99.905% of par
    • $400mm of 5.95% senior notes due 2025 at 99.735% of par
    • Proceeds to be used to reduce credit facility borrowings

M&A / Growth Projects

  • Tesoro Logistics (TLLP) announced acquisition of the Los Angeles Storage and Pipeline Assets from Tesoro Corporation for $500mm (press release)
    • The assets include 97 liquids storage tanks with a combined capacity of 6.6mm barrels and a 50% interest in Line 88, a 16-mile pipeline that transports jet fueld from Tesoro’s LA refinery to the LA International Airport
    • Assets are expected to generate $60mm in annual EBITDA (8.3x multiple)
    • The assets are underpinned by a 10-year contract with Tesoro
    • Funded with borrowings and $250mm worth of equity issued to Tesoro Corp
  • Shell Midstream (SHLX) announced acquisition of Auger Pipeline System and Lockport Crude Terminal from Shell Pipeline Company for $390mm (press release)
    • Purchase price represents 8.6x multiple of 2016 expected EBITDA
  • MPLX announced revised terms for its merger with MWE, including a higher cash component of $5.21 per MWE unit (press release)
    • The implied spread on the merger remains very wide, helped by repeated announcements by former CEO John Fox affirming and re-affirming his stance against the merger
    • John Fox will host a conference call on 11/17 to discuss his views (press release)
  • Summit Midstream (SMLP) confirmed earlier report that its sponsor, private equity firm Energy Capital Partners, is evaluating strategic alternatives for its general partner (press release)
    • The alternatives under consideration include: (1) a sale of Summit Investments, (2) a GP IPO, (3) accelerating drop-down sales to SMLP, and (4) a unit repurchase program
    • A sale seems to be the preferred alternative, but at this point ECP is committed to ensuring that SMLP does not become an orphan MLP
    • At the same time, ECP has not contractually protected SMLP from becoming an orphan MLP with a ROFO on the Utica assets
  • Kinder Morgan (KMI) announced plans to form Mexican gas marketing company in a joint venture with TrailStone (press release)
  • TransCanada (TRP) announced that it was awarded a project to develop the Tuxpan-Tula Pipeline in Mexico (press release)
    • Pipeline is supported by a 25-year natural gas transportation contract with the Comision Federal de Electricidad (CFE)
    • TRP expects to spend $500mm to develop the pipeline, with an in-service date of late 2017


  • Azure Midstream (AZUR) announced resignation of CFO, effective immediately (press release)
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