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February 1, 2013

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MLP Week Thoughts: KMP Polygamy Continues

MLPs were up for the 5th straight week (+2.4% this week including distributions that have started flowing in).  MLPs were up 4 out of 5 days this week, and the 4 up days represented fresh all time highs for the MLP Index.  Strength probably attributable to buying in advance of distributions and strength in oil prices.  Stocks were up this week as well, but the S&P 500 trailed MLPs.  Interest rates crept up and the 10-year closed just over 2%.  Natural gas was down sharply this week as it is becoming clear the winter is not going to be cold enough to overcome still growing natural gas production.  Ethane and propane had good weeks, probably attributable to oil price strength.
MLP Index finished January up 11.9%, the second best January on record, January 2009 was the best ever at 14.0%.  February has traditionally been weaker, but the last 3 years MLPs were up in February.
Weekly Review_2-1-13
There have been 22 previous streaks when the MLP Index increased week over week for at least 5 straight weeks.  The longest streak was 11 weeks in a row, from May to July 2005.  The most recent 5+ week streak came in July of last year.  During this most recent 5 week streak, the MLP Index is up 14.7%.  MLPs will be tested next week, with distribution ex-dates and the laws of gravity working against them.  I would be surprised to see MLPs up again next week, as I think some of the earnings releases won’t be great given the NGL price environment in 4Q 2012 and weak natural gas price outlook.
The rest of the weekend, I will be working on research models and reports for our MLP initiation coming next Thursday.  I’ll post a link next week for people to sign up to get the reports.  Enjoy the Super Bowl…
Copano Says Yes
Biggest news this week (and of the year so far) was the announcement that KMP will buy CPNO for $5.0bn (including assumed debt) in an equity for equity deal.  After casually dating CPNO with its Eagle Ford JV for a few years, KMP decided to make it official.  It will be a late summer wedding, with the deal expected to close in the third quarter of 2013, following a unitholder vote.  My general thoughts follow, but do not confuse them for a recommendation of any kind.  I sent these thoughts to Loren Steffy, who turned them into a / Fuelfix post here.
It’s a good deal for CPNO, at a price CPNO investors haven’t approached since mid-2008.  CPNO has struggled to produce any distribution growth recently, with 16 straight quarters with no distribution growth from late 2008 until now.  In its early days, CPNO was one of the fastest growing MLPs in the sector, growing its quarterly per unit distribution at an annual rate of approximately 30% for the 4 years prior to late 2008.
CPNO was often suggested by MLP prognosticators (including me here) as being on the short list of potential candidates to be bought by another MLP.  CPNO doesn’t have a general partner, which makes it marginally easier to buy than a traditionally structure MLP.  Also, a few years ago, CPNO’s founder and CEO John Eckel passed away, which on the margin made CPNO a better target, especially to an IDR holding MLP, given Eckel’s disdain for the IDR structure.  EPD and KMP were mentioned as the logical buyers.  Then, a few years ago KMP and CPNO entered a joint venture to develop midstream assets in the Eagle Ford shale, making KMP the frontrunner to eventually buy CPNO outright.
CPNO true believers will say this is the worst time to sell as CPNO’s Eagle Ford assets are poised to see volumes ramp up, but KMP has a track record of buying things at the right time.  KMP gets another avenue for growth, although not much initial accretion.  KMI will be a big beneficiary, through its ownership of the incentive distribution rights (IDRs) of KMP.  Those IDRs pay out more cash if there are more units outstanding at KMP, which there certainly will be after this deal.  KMI agreed to annual IDR givebacks to help make the deal work for KMP, but will still make out with immediate accretion. (I own KMI in client accounts, no positions in either CPNO or KMP, but note this discussion is not a recommendation and I make no comment as to valuations of any of the stocks mentioned).
This deal also highlights the divergent paths of the two largest MLPs.  KMP has been on a buying spree lately, whereas EPD, which for years grew through large acquisitions (including buying MLPs Gulfterra and TEPPCO) is now growing through building assets (and building distribution coverage) rather than buying (and maintaining slim coverage like KMP).  Both plans are working, just a variance of philosophy.
Finally, after 25+ MLP IPOs in the last 24 months, its good to see that I’ll have one less ticker symbol to track when this deal eventually closes.  Lost in the flurry of IPOs has been the growing consolidation in the sector, with KMP and ETP leading the charge.  KMI bought the GP of EPB, ETP bought the GP of SXL and RGP before that.  WPZ bought into ACMP’s GP.  NRGY and ETP sold their propane businesses, reducing the number of MLPs with propane exposure to 4 primary MLPs.  This recent consolidation is a trend that will continue as smaller MLPs find it tougher to compete and larger MLPs find it tougher to grow.
Winners & Losers
CPNO was the big winner on the week, trading up 15.8%.  OXF, the most volatile MLP the last few years, was down 36.7% this week after the announcement that distributions would be suspended entirely after a 54% distribution cut last quarter.  One year ago OXF was trading at more than $17 per unit, and closed this week at $3.69 per unit, a decline of 78% during just a brutal 12 months for them.  RNO was down 10.1% this week on what must have been sympathy selling as investors don’t want to be invested in any coal MLP that has cut its distribution recently.  GMLP was down 7.3% on its equity offering announcement, which hasn’t priced yet, as far as I can tell.  HCLP reported EBITDA for the fourth quarter that was 30% below Wall Street expectations, which contributed to its slide week over week.
For the year, there are only 3 MLPs that have produced negative total returns: USAC, SXE and OXF.  Last Friday, OXF held the second highest spot on the chart below, up 31.3%, but what a difference a week makes.  GLP took over the top spot from AMID.  The top 3 are all small cap MLPs, other than that, not much in the way of trends so far.
News of the (MLP) World



  • Navios Maritime (NMM) prices public offering of 4.25mm common units at $14.15/unit, raising $63.7mm in gross proceeds (press release)
    • Overnight offering, priced at 4.7% discount to prior close, traded up 2.2% the next trading session
  • Vanguard Natural Resources (VNR) prices public offering of 8.0mm common units at $27.85/unit, raising $222.8mm in gross proceeds (press release)
    • Overnight deal, priced at 4.4% discount to prior close, traded flat the next trading session
  • New Source Energy Partners L.P. launches IPO to raise $80mm in gross proceeds at a 10.5% midpoint yield, expected to price February 7th (latest S-1)
    • Upstream MLP, would be the first one of those to go public since December 2011 when we saw MCEP and MEMP come out


  • Atlas Pipeline Partners (APL) prices upsized offering of $650mm of 5.875% senior notes due 2023 at par (press release)

M&A / Growth Projects

  • Kinder Morgan Energy (KMP) announces agreement to acquire all of the outstanding units of Copano Energy (CPNO), for approximately $5bn, including the assumption of CPNO debt (press release)
  • Golar LNG (GMLP) announces the acquisition of LNG carrier Golar Maria for $215.0mm and launch of equity offering (press release)
  • El Paso Pipeline (EPB) announces JV with Shell US Gas & Power to develop an LNG export facility at EPB’s existing Elba Island LNG Terminal (press release)
  • Global Partners (GLP) announces the acquisition of a West Coast crude oil and ethanol facility in Oregon for $95.0mm (press release)

Distribution Announcements

  • Increases (quarter over quarter):
    • AHGP: $0.74, +2.8%
    • ARLP: $1.1075, +2.1%
    • PVR: $0.55, +1.9%
    • ETE: $0.635, +1.6%
    • DPM: $0.69, +1.5%
    • SEP: $0.495, +1.0%
    • EXLP: $0.5125, +1.0%
    • EVEP: $0.767, +0.1%
  • Flat: QRE, RGP, ETP, EROC, EEP
  • Distribution Cut: OXF suspends distributions


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