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May 11, 2014

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MLP Week Thoughts: Data Dump, IPOs Jump

MLPs were up early in the week, with the MLP total return index reaching an all-time high Wednesday, before the sector sold off Thursday and Friday to finish flat.   The S&P 500, US 10 year treasuries, oil and ethane were likewise flat.  The Alerian MLP Index has produced 7.4% total return year to date, well ahead of the S&P 500 (at around 2% including dividends).  Utilities are still leading the way, but they’ve lost a bit of their momentum of late.
On our weekly dashboard, natural gas and propane (each down 3.0%) and utilities (down 0.8%) were the only meaningful movers.  Despite the lack of macro or sector price movement, it was a busy week for the MLP space, with 2 IPOs, several M&A announcements, and a tidal wave of earnings releases.
Weekly MLP Review_5-9-14
At least 50 MLPs released quarterly results this week.  I won’t recap individual MLPs, but winter was the biggest driver of results across the space.  Colder weather caused NGL prices to spike, helping most gathering and processing and pipeline MLPs that deal in NGLs (with the exception of Bakken, where winter hit operations harder).  Natural gas demand was very strong, there were even some positive natural gas storage results for some MLPs.  Refined products MLPs that engage in blending found success with high butane blending margins this quarter.
It wasn’t all positive, upstream MLPs saw production weakness generally on bad weather.  Crude oil marketing margins were down for MLPs engaged in those activities.  Also, distributable cash flow was artificially high in some cases because the harsh winter caused maintenance capital projects to be delayed, which means more maintenance capex for the balance of the year for most MLPs, which will pressure 2Q distribution coverage ratios.
Yes, earnings came at a furious pace and were largely positive this week, but the bigger story was the stellar pricing and aftermarket performance of the two MLP IPOs: GasLog Partners (GLOP) and PBF Logistics (PBFX). These two very different drop-down stories each popped more than 20% on its first trading day, after pricing higher than the midpoint filing range, which was news in and of itself (see this WSJ article, featuring a quote from me).
Below is the updated chart of top IPO pops, with the shaded boxes representing MLP IPOs from the last 12 months.  As a shipping MLP, GLOP is an outlier among the recent MLP IPO pops that have made the top ten list (4 refinery spinoffs including MPLX from late 2012).
IPO Pops_5-9
Scarcity of IPOs so far this year is proving beneficial to those that are going public.  The chart below is a sort of histogram of MLP IPO aftermarket performance.  In 2013, 13 of the 19 MLP IPOs closed below their IPO price within the first 30 trading days, and 15 of 19 traded below IPO price intra-day during the first 30 days.  Only 4 MLP IPOs, all drop-down MLPs, were up and stayed up from the start.  There are certainly some MLP IPOs in the red column that have gone on to perform amazingly well despite early weakness (EMES, TEP, SXCP, USAC), but didn’t get the immediate follow through on the IPO.
MLP IPO Trading
In 2014 (granted a much smaller sample size), 3 out of 4 MLPs have performed well immediately following pricing.  Also of note, none of the last 6 MLP IPOs have printed a closing price below IPO price.  Why the change?  One answer is there have been fewer IPOs, and so the few IPOs that we do see have get more individual attention from the investment community.
Another answer may be related to the growth in capital controlled by individual MLP managers.  The amount each manager needs to buy in an IPO to build a meaningful position must also grow.  Therefore, if they like an IPO and get an allocation in the IPO, they need to buy in the aftermarket to build that allocation into a legitimate position.  There are many more multi-billion dollar MLP managers in the market today than there were a few years ago, and that is impacting the IPO market.  The logical next step would be for some company with substantial asset scale (like ENBL had earlier this year) to try for a much larger MLP IPO than we have typically seen, maybe pushing towards $1bn.  That’s not exactly Alibaba big, but it would be gigantic for our little world.
Winners & Losers
As mentioned above, the newest MLPs did the best this week.  Other winners this week were those that announced strong 1Q results or future prospects during conference calls (SGU, QEPM, and WNRL fall in those categories).  WPT was down on no company-specific news.  GSJK, QRE and NKA released weak results, leading to their selloffs this week.  ARP had weak results as well, and announced an equity deal that added pressure to its units.
After two straight weeks in the bottom five in weekly performance, GSJK has fallen out of the top five year to date, replaced by WNRL.  With its rally this week, SGU replaced TLLP in the top 5.  APL joined the bottom 5, displacing LGCY.
I hope everyone has a wonderful Mother’s Day, the day America puts away its “yo momma” jokes, and husbands try to make up for watching consecutive nights of the NFL Draft in prime time this week just to see where Johnny Football is headed.  Unlike NFL draftees, I’m excited to be headed to Jacksonville for this year’s NAPTP next week.  I’m sure I’ll see some of you there.
News of the (MLP) World
It was a very active week for equity, growth projects, M&A, executive appointments and the foisting of IDRs onto unsuspecting unitholders.  See below for details on everything.  There was definitely a trend of weak upstream MLP earnings on harsh winter weather, and a trend of those MLPs announcing large accretive acquisitions to make up for poor results this quarter.

  • PBF Logistics (PBFX) prices IPO of 13.75mm common units at $23.00/unit (5.22% yield), raising $316.3mm in gross proceeds (press release)
    • GP is PBF Energy (PBF), publicly-traded refinery operator
    • PBFX will have a right of first offer on a suite of logistics assets owned by PBF
    • Opened at $28.00/unit (+21.7%), and closed at $27.68/unit (+20.3%) on its first trading day
    • 4th MLP IPO so far this year, lowest yielding MLP IPO so far (lower than ENBL at 5.75%), and lowest yield since VLP in December (3.70%)
    • 4th straight MLP spun out of a publicly traded refinery to price above the midpoint of the IPO filing range
    • 9th biggest IPO pop ever for an MLP IPO
  • GasLog Partners (GLOP) prices IPO of 8.4mm common units at $21.00/unit (7.14% yield), raising $176.4mm in gross proceeds (press release)
    • Opened at $25.50/unit (+21.4%), closed at $26.11/unit (+24.3%) on its first trading day
    • 6th biggest IPO pop ever for an MLP IPO
    • GLOP will own 3 LNG tankers on long-term contracts, and publicly-traded GP GasLog Limited (GLOG) has another 18 tankers to drop down to GLOP over time
    • Management indicated 10%-15% annual distribution growth the next few years, driven by drop down acquisitions
  • Atlas Resource Partners (ARP) prices offering of 13.5mm common units at $19.90/unit, raising $268.7mm in gross proceeds (press release)
    • One day marketed equity offering, 3.02% file-to-price decline
    • Second offering in 3 months
    • Proceeds will be used to partially fund acquisition announced below

M&A / Growth Projects
Lots of articles and commentary coming out of the Offshore Technology Conference in Houston this week

  • Floating LNG is coming (Fuel Fix)
    • Floating LNG offers the promise of a cheaper price tag and the ability to be located near offshore natural gas wells, cutting down on infrastructure needs.  I guess FERC still has to approve such a facility if it were in the Gulf of Mexico, but there must be someone out there trying to locate one of these in international waters and avoid very expensive and cumbersome approval process.  There is an floating LNG MLP IPO from a company called Hoegh that has already filed confidentially.
  • Total executive downplays LNG buildout (Fuel Fix)
    • Says LNG price differentials will evaporate by 2020, with the result that fewer LNG liquefaction facilities getting built in the U.S.

Other interesting articles

  • Building pipelines across borders continues to spark controversy, this time in Arizona (Fuel Fix)
    • Mexico pipeline detractors in Arizona think pipeline will provide a “superhighway for drug and people smugglers”.
  • Josh Brown on Crude by Rail (the Reformed Broker)
    • Josh makes the connection between lack of Keystone approval and Warren Buffet’s ownership of BNSF railroad.
  • Ohio Fracking Ban effort continues after 3 failed attempts (Forbes)
  • The uneasy balance of geopolitical uncertainty reducing supply and US oil production making up for it (Bloomberg Business Week)
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