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March 1, 2013

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MLP Week Thoughts: Drop Down Bonanza Closes Huge M&A Month

MLPs edged up again this week, and so did the broader stock market.  The MLP Index finished February up 0.87% including distributions, which was the weakest February performance since 2009 (-5.4%).  March has been a weaker than average month for MLPs, and was  down in 2012 and 2011.  I would not be surprised to see MLPs drop slightly as a sector in March, and like most of the investing community, I’ve been surprised a correction, even a mild one, hasn’t happened yet. Proceed with caution and make sure you pick the right MLPs if you’re bringing new money to the sector right now.  If you don’t know how to pick the right ones, hire someone like me, or buy a pooled investment vehicle of some kind.

Weekly Review_3-1-13

Oil futures have been up and down for the year, but was down all week, making YTD lows on 3 of the 5 trading days, including Friday’s close below $91 per barrel.  Natural gas futures were up for the second straight week, and natural gas storage chart is starting to look a little better, with storage levels 12% below a year ago (but still 16% higher then the 5 year average).  There have been plenty of false start with natural gas prices recently, and I’m certainly no expert on the dynamics of the natural gas storage market, but natural gas at $3.42/mmbtu is much better than spot prices a year ago of less than $2.50/mmbtu.
Working Gas in Underground Storage Compared with 5-Year Range
For the year so far, all things MLP have returned on average roughly the same amount, with variable distribution MLPs, GP holding companies and the MLP Index all producing a little better than 13% total return.  And that 13%+ total return has been much better than the broader stock markets so far this year, in a reversal of 2012 results.


Big Deal February
This week saw another $3.0bn in announced M&A transactions, bringing total announced M&A value for February to $7.8bn, after a very big January M&A amount of $6.8bn.  MLP M&A is on pace for more than $87bn in M&A this year, which would be a record by nearly $40bn over last year’s $52.5bn record MLP M&A.  This week there were 3 sizable drop down acquisitions this week (into RGP, DPM and WES), and Evercore partners was the big winner on the advisory side, advising on 2 of the 3 transactions.  That means there were some unhappy, possibly chewed-out investment bankers that didn’t advise on the deals.
The good news for unhappy bankers is there is probably plenty more M&A up for grabs in the deal pipeline.  And all that M&A will need to get financed, somehow, which will generate plenty of fees to share.  I’m expecting a big month for equity issuance in March, so position your portfolios accordingly, especially if you own an MLP that recently announced an acquisition, hasn’t issued equity in a more than a year, or has high leverage.
Because MLPs Got High
Regular readers are used to seeing the same charts here every week, especially since my posting has slowed to once a week.  But below is a fun chart that I posted about a year ago regarding the MLP Index and all-time highs.  The point of the chart is that MLPs have seemed expensive compared with their recent trading history for going on 17 years now, with the exception of 2003 and 2008.  So far this year, the Alerian MLP Total Retun Index has already made 16 new all time highs in 2013, well ahead of the pace of the last few years, and on pace for 96 new all time highs.  We will not get to 96, but we’ll probably see a few more all time highs this year.

MLP Index All Time Highs

Winners & Losers
OKS beat consensus expectations for 4Q 2012, but lowered 2013 guidance, and its units were off 6.4% for the week.  DPM announced a large drop down acquisition, but also executed a $446.9mm follow on equity offering, which led to weakness.  EVEP earnings provided no real update on the Utica sale process, leading to what appeared to be frustration selling on Friday.  On the plus side, TLP and CLMT were up big on no news.  CQP was up big after another round of equity was announced as completed via a registered direct offering.


CLMT’s big week catapulted it to the top spot in the sector, alongside GLP.  STON dropped out of the top five after a 2.4% drop for the week.  There are only 5 MLPs that have negative total returns YTD, with EEQ as the only newcomer to the list this week.


News of the (MLP) World


A very active M&A week, fairly active equity week with some unusual equity deals getting done, but no debt deals.  Also, I issued a report on EROC’s earnings beat, reiterating my price target and adjusting my estimates.  Email me if you weren’t on the distribution and would like the report.  Other covered MLPs (QRE, MEMP and VNR) report earnings next week, so stay tuned for more reports next week.

  • DCP Midstream (DPM) prices upsized public offering of 11mm common units at $40.63/unit, raising $446.9mm in gross proceeds (press release)
    • One day book build, with file to price decline of 3.9%
  • Enbridge Energy Management (EEQ) prices sale of 9.0mm shares to underwriters at $26.44/unit, raising net proceeds of $238.0mm (press release)
  • Cheniere Energy (CQP) announces private placement of 17.6mm common units, raising $372.2mm in net proceeds (press release)
    • Reduced equity overhang with no market disruption, market liked that


  • Vanguard Natural Resources (VNR) announces acquisition of natural gas, NGL and oil properties in the Permian Basin for $275mm from Range Resources (press release)
    • VNR to acquire natural gas, NGL and oil properties in southeast New Mexico and West Texas area of Permian Basin
    • Asset details:
      • 137 Bcfe of proved resrves (78% PDP) on 7,000 net acres
      • Current production: 17 mmcfe/d (41% natural gas and 59% oil and NGLs) with 20 year reserves/production ratio
    • Acquisition to be financed with borrowings on VNR’s credit facility
  • Martin Midstream (MMLP) announces acquisition of six liquefied petroleum gas pressure barges and two commercial push boats for $50.8mm (press release)
  • Regency Energy (RGP) announces acquisition of Southern Union Gathering Company, LLC for $1.5bn from Southern Union Company (jointly owned by Energy Transfer and Energy Transfer Equity) (press release)
    • Purchased from Southern Union Company (jointly owned by Energy Transfer (ETP) and Energy Transfer Equity (ETE))
    • Acquired assets include 5,600-mile gathering system and ~500 mmcf/d of processing and treating facilities in west Texas and New Mexico for natural gas and natural gas liquids
    • Transaction to be partially funded with $900mm of new RGP units issued to Southern Union Company, including $150mm of new Class F common units that will not receive distributions for the next 8 quarters
    • Remaining $600mm will be paid in cash funded from long-term borrowings
    • ETE has agreed to forego incentive distribution rights payments associated with the newly issued units for 8 quarters and to eliminate $10mm annual management fee due from RGP for two years post-closing
    • Expected to close in 2Q 2012 and expected to be “slightly accretive” in 2013
  • DCP Midstream (DPM) announces $626mm Eagle Ford drop down acquisition from DCP Midstream, LLC (press release)
    • DPM to acquire additional 47% interest in its existing Eagle Ford joint venture with DCP Midstream, LLC, bringing total total JV stake for DPM to 80%
    • Eagle Ford JV owns five cryogenic processing plants with 760 mmcf/d processing capacity and ~6,000 miles of gathering systems, three fractionators with 36,000 bbls/d capacity, the newly constructed Eagle Plant (200 mmcf/d processing capacity), and the Goliad Plant currently under construction (will have 200 mmcf/d processing capacity)
  • Western Gas (WES) announces acquisition of 33.75% interest in Marcellus Shale gas gathering systems from Anadarko and Chesapeake for $623.5mm (press release)
    • WES to acquire a 33.75% interest in both the Liberty and Rome gas gathering systems from Anadarko Petroleum Corp (APC) for $490mm
    • WES will separately acquire a 33.75% interest in the Larry’s Creek, Seely and Warrensville gas gathering systems from an affiliate of Chesapeake Energy Corp for $133.5mm
    • Assets acquired serve producers in north-central Pennsylvania and have total combined throughput of 1.2+ bcf/d
    • APC acquisition to be financed with $220mm cash on hand, $246 in borrowings and $25mm worth of WES units
    • APC acquisition represents a 7.6x EBITDA multiple, is expected to be immediately accretive and close by 3/1/13
    • Chesapeake acquisition will be financed with borrowings on WES’s credit facility, and is expected to close by 3/15/13
    • Chesapeake acquisition represents a 9.7x 2013 EBITDA multiple
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