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December 2, 2011

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MLP Week Thoughts: I'm Infallible Young Fella!

Everything bounced back strong this week, on better news out of Europe (although that could change next week), and further promising datapoints on the U.S. economy, including a good jobs report today.  MLPs weren’t up as much as stocks, but they also weren’t down as much last week, either, and have well outperformed year over year and year to date.

It feels like MLPs have been tempting fate for quite a while and that at some point there will be a pullback.  If you’ll allow me another 80s comedy reference (hopefully my last for a while, but never know when inspiration will strike), the sector sort of reminds me of the bishop in Caddyshack who plays the round of his life amidst a driving rain storm, before getting struck down on the 18th green after missing his final putt.

Tough to say which hole we’re on right now, but the MLP index is at a level it tested in July and October and failed to break through both times.

MLPs have marched higher despite constant equity offerings that continue to rain down on them.  At some point something could potentially strike down the sector.  Maybe that something is another stock market drop like we saw in September or November driven by some crisis unrelated to MLPs, or maybe it’s a news items that scares people away from the sector specifically, maybe anti-fracking or tax legislation.  Whatever it is, anyone who has watched the MLP index oscillate between 330 and 390 this year has to be a little nervous as we edge higher on a daily basis.
On the other hand, while the index has not broken through on a price basis, the MLP Index has seen more than 3% distribution growth since its April peak, which is just a reminder that the value of the index does not factor in distributions.  If the MLP Index were to trade at the same yield as it did at its peak in April of 5.8%, that would translate to an index value of more than 400.   So, while chartist may focus on how the index is approaching its range boundary on a price basis, it has a ways to go to match the peak yield from April, if that gives anyone comfort.
The chart below is a two factor way to look at what the sector could do in the next 12 months.  If yields remain flat in the next 12 months and if MLP grow distributions by 5%, the total return of the Index would be around 12%.  If distribution growth is there, the sector’s yield would need to back up to more than 7% in order for MLPs to lose money for investors in the next year.

So, is the distribution growth, the flurry of positive 2012 management guidance announcements, and a hot M&A market enough to counter-balance the relentless equity deluge, and send MLPs back above their April highs?  Maybe so, but many MLPs are already at or near all-time highs, including EPD,  KMP and NGLS.  What’s holding back the MLP Index are names like NRGY, BWP, NKA and lately EPB that have lagged.  The wide range of returns is a welcome change from the correlated swings that dominated in the second and third quarters of this year.  Well, it’s a welcome change if you own the ones going up…

Winners and Losers

STON was the big loser this week, after S&P put them on negative credit watch on Tuesday afternoon and it traded off 12.4% on Wednesday.  The negative watch was on the unsecured debt of STON, and the explanation focused on leverage and the fact that STON was an MLP that would periodically issue equity.  I’m not sure how that was a surprise to the ratings agency, but oh well.
On the positive side, NMM went from worst last week (-10%) to first this week at 14.2%.  LGCY was also in the bottom 5 last week, and is up more than 9.2% this week.  GP holding companies had a great week, particularly TRGP (up 14.0%) and XTXI (13.8%).

News and Notes from a Busy Week
There are two IPOs expected to price in the next week, Rose Rock Midstream and Memorial Production Partners, for a combined $340 million.  Also, E&P MLP Mid-Con Energy Partners will launch at some point in the next 30 days after they filed a third amendment with pricing data which indicates a 9.5% midpoint yield.
Kinder Morgan announces 2012 guidance (press release)

  • Expects 13.4% growth in KMI dividend year over year
  • Expects $4.98 per unit distributions for KMP in 2012 (7.4% higher than current annualized rate of $4.64)
  • Budget assumes $93.75 per barrel WTI oil prices, so there is significant upside built in to the budget should the actual oil price average closer to $100 per barrel or higher.
Alerian adds BBEP to MLP Index, KWK uses opportunity to sell out of its units (equity press release

  • BBEP replaces ENP in the index
  • KWK sells its BBEP units at 4.2% discount, units traded up more than 11% from pricing the next day (see my post from earlier this week on that situation)

HEP prices $78.9 million equity offering at $53.50 per unit, 3.98% discount to last close (press release)

  • Did not trade well in the aftermarket, under-performing the MLP index by 1.4% Thursday, and was flat on Friday

Plains All American buys Canadian assets, among other things:

  • PAA buys Canadian natural gas liquids (NGL) and liquified petroleum gas (LPG) business for $1.67 billion (press release)
    • To be funded with combination of debt, retained cash flow and equity issued in November (for now)
    • Distribution guidance for 2012 at 8% to 9%
    • To make the deal work, PAA’s general partner agrees to reduce cash from IDRs by $15 million each of the next 2 years, and by $10 million thereafter.
    • Permanent IDR reduction by a dollar amount makes much less of a dent than a percentage basis, especially when PAA distributes almost $250 million a year to its GP and that will grow to almost $300 a year with the distribution growth guidance.
  • PAA announces 4 unrelated acquistions for $620 million, expects 4Q results to exceed guidance by 10-15% (press release)
    • Assets include:
      • Canadian trucking business
      • South Texas crude oil and condensate gathering system
      • Multi-product storage facility in Virginia
      • Pipeline in the Permian Basin
    • PAA expects to spend an additional $100-$150mm on these assets in next 24 months

EEP prices $262.2 million equity offering at $30.85 per unit, 3.6% discount to previous close (press release)

  • Tight discount, did not trade well in the aftermarket, under-performing the MLP index by close to 1% Friday

APL signs long term deal with XTO Energy (press release)

  • Agreement to provide gathering and processing services for an incremental 60 mmcf/d from Woodford shale region in Oklahoma to its Velma processing facility in Velma, OK.
  • Supports previously announced 60 mmcf/d expansion of Velma processing facility, which will have total nameplate capacity of 160 mmcf/d once the expansion is completed.

NGLS / TRGP announce management changes, update of distribution outlook (press release

  • Joe Bob Perkins promoted to CEO and member of the board, Rene Joyce will assume role of Chairman
  • $1.2 billion of growth projects are starting to come online and make an impact on cash flow.
  • Management expects 10% to 15% distribution growth for NGLS in 2012, compared to the last 4 quarters growth rate (8.0%) and the average annual growth rate for NGLS for the last 3 years (4.0%), that’s a large jump.
  • Management expects TRGP to raise its dividend between 30% to 40% in 2012, compared with 19.4% dividend growth since IPO (26.7% annualized).

Mike Linn out at Linn Energy (press release)

  • Retiring as executive Chairman of the board
  • Linn had been replaced as CEO by Mark Ellis in January 2010, Ellis now replaces Linn as Chairman
  • No word on whether the name of the company will be changed to Ellis Energy, LLC

WPZ in exclusive negotiations with Delphi Midstream (press release)

KMP to add 2.4 million barrels of storage capacity at Edmonton terminal for $210 million (press release)
VNR completes ENP acquisition (press release)

APU / ETP – re-file HSR notification, second request (press release)

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.

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