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September 11, 2011

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MLP Week Thoughts: Equity Flood Starts with a Single Deal

Lot of action in the short week after labor day.   Two out of the 4 trading days saw the S&P 500 move more than 30 points, first up 33.4 on Wednesday, then down 31.7 on Friday.  The net of the week was down 19 points or 1.7%.   If there were an index for hot air from politicians, it would have been sharply up this week with the republican debate debut of Rick Perry and President Obama’s Job speech, which the markets didn’t seem to like.
MLPs had a solid week relative to everything else (including gold), losing on 0.3% on the week, and really holding up well on Thursday and Friday.  YTD, not including distributions, the S&P 500 has lost twice as much value as the MLP Index has.  We’ll see if that trend continues through the last 4 months of the year.

One of the key deciding factors in how well MLPs will do to year end is how much new equity the MLPs issue.  With a large backlog of IPOs, see MLP IPO update post here, and with the regular equity that is needed to fund growth projects and acquisitions, the often delicate balance of supply and demand of MLP paper could get out of whack.  The first equity deal after the capital markets dead period in August came this week, when Calumet Specialty Products ($CLMT) priced a $198 million equity offering on Thursday.  That single deal didn’t seem to have a large negative impact on the MLP market this week, but that might not be the case if there is a week with an IPO or two on the road, a bought deal and a follow on equity offering.  How well will MLPs hold up relative to the broader equity markets when the equity flood really starts?
Turning now to which MLPs moved the most in either direction this week, the aforementioned CLMT was hit the hardest, while $EVEP continues to soar on Utica shale validation.  The remainder of the positive movers were continued recoveries from large negative price moves over the past several months.  $GLP in particular looks to be breaking out to the upside, up 15.8% the last month and up 10.9% since August 25th.  No one is happier about this than me, having stuck with and added to our position in GLP through the downturn.

MLP News Wrap
On Tuesday, 9/6/11, Encore Energy Partners ($ENP) announced the acquisition of certain non-operated working interests in mature producing oil and gas reserves for $47.6 million.  The properties are 83% oil and NGLs, and 100% proved developed. (Press Release)
On Tuesday, 9/6/11, Enterprise Products Partners ($EPD), Enbridge Energy Partners ($EEP) and Anadarko Petroleum Corporation ($APC) announced a joint venture to construct a new NGL pipeline and two new NGL gathering systems from Carson County, TX to Mont Belvieu, TX.  No details on the expected costs, but the companies announced the assets would be completed and in service in the second quarter of 2013.  (Press Release)

Map of new NGL pipeline

On Tuesday, 9/6/11, Sunoco, Inc. ($SUN) announced that it plans to exit its refining business to focus on more profitable midstream and retail businesses. (Rueters).  $SXL was put on negative credit watch after the announcement by SUN, which owns the general partner of $SXL and around 34% of its L.P. units.
On Wednesday, September 7th, NuStar Energy ($NS) announced new projects in the Eagle Ford, including reversing an eight-inch refined products pipeline from Corpus Christi to Three Rivers, TX, and convert it to crude oil service.  Upon completion the pipeline will transport crude from the Eagle Ford shale to Valero’s Corpus Christi refinery.  The pipeline is expected to be in service at the end of September.  This is NS’s fourth announced project in the Eagle Ford shale.  (Press Release)
On Wednesday, September 7th, EPD and Duncan Energy Partners ($DEP) announced the completion of their merger.  This is a culmination of a process that started with EPD’s initial offer to purchase DEP on February 23, 2011, and since then DEP has traded up more than 27%.  Good deal for DEP unitholders, no question about it, but what is less clear is how this IPO back in February 2007 was worth it for EPD unitholders. I’m not sure if the total amount of proceeds EPD has received since the IPO combined with the increase in the value of the 7.0+ million DEP units owned by EPD was worth all the trouble.  It was an interesting experiment to launch an MLP with a public MLP parent, a structure since copied by $PAA and $NRGY, but at least DEP didn’t have incentive distribution rights.  (Press Release)
On Wednesday, 9/7/11, Markwest Energy Partners ($MWE) announced significant progress with its Marcellus Shale projects.  Mariner West pipeline project with $SXL completed its open season and execution of definitive transportation agreements.  MWE also announced the completion of two other milestones in the development of Markwest’s fractionation and de-ethanizing facilities in the Marcellus Shale.  (Press Release)
On Thursday, 9/8/11, Calumet Specialty Products Partners, L.P. ($CLMT) Priced $200mm of debt at 9.375%, and priced $198mm of equity at $18.00 per unit, which equates to 11.0% yield at CLMT’s current distribution per unit. Use of proceeds will go towards the acquisition of the Superior, Wisconsin refinery for $475mm, announced July 25th.   CLMT traded down 3.33% on Friday to close the week at $17.40 per unit, a 12.8% drop from the previous week.  Equity deal press release here, debt deal press release here.
Disclosure: The information in this article is not meant to be financial advice, we are not your financial advisor and I am posting my comments for informational purposes only.  Long GLP, EPD.

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