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February 24, 2013

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MLP Week Thoughts: Linn-Berry Swirl Wins Week

MLPs followed the broader market slightly lower this week, with some fireworks on the edges around earnings and deals (PVR and LINE, for example).  Natural gas and propane were both up big, but gold futures closed at their lowest point since late June, and are down 7.2% from the high for the year of 1695.4 reached on January 22.  Oil hit its lowest point this year on Thursday, and closed down 3.4% for the week.
Weekly Review_2-22-13
I look forward to some fresh drama in the markets under the header of sequestration, and I expect to see at least 2 follow on offerings after the capital markets calm of the last few weeks of earnings releases.  Its just math that if MLPs need $20bn+ in annual equity capital, that’s at least $400mm per week (based on a very optimistic 50 weeks with the capital markets open).  We’ve had a quiet few weeks, and the sector needs to play capital raising catch up, which I expect to weigh on MLPs this week.
Variable distribution MLPs were the big losers for the week (down 4% on average), led by RNF (-11.3%) and PDH (-8.3%).  GPs had a mixed week, ranging from ATLS up 4.5% to NSH down 4.0%, but are keeping pace with the Alerian MLP Index for the year so far. ATLS was helped by strong ARP earnings release on Thursday, on which I will be publishing a report on Monday.


MLPs got press in Barron’s for the second straight week.  Last week, Barron’s highlighted the “controversy” around LINE’s practice of capitalizing put premiums and its distributable cash flow calculation.  More on LINE’s much better week below.  This week’s Barron’s cover story hit on the major trends in the sector and tapped real pros in the space, Kyri Loups and Chris Eades, for the discussion.  This is when Barron’s MLP coverage is at its best, highlighting the sector as a whole.  Barron’s coverage can get into trouble when trying to keep up with individual names, which is understandable, given the multitude of new MLPs and MLP products in recent years.
JCT Update
A few weeks ago, the Joint Committee on Taxation released its latest estimate of what all of the current tax breaks in the tax code cost the government in lost revenue (click here to download the report).  The Committee estimates that MLP line items will total $7.0bn for the next 5 years (2012-2016), up from the five year estimate of $1.5bn in 2012’s report, or 4.7x more. Click here to read a good summary of the situation from Bloomberg.  The annual number of $1.6bn for 2016 in 2013’s report also quadrupled from $0.4bn estimated for the final year (2015) in 2012’s report.
I’ll be out with more thoughts on this and taxes in a report at some point in the next few weeks, but the short answer is I am not worried about MLPs losing their tax advantage in 2013.  Last year, I went through and totaled all the line items up (14 pages worth) and it ended up being $6.1 trillion total.  I haven’t done that work yet this year, but if the number is similar in this year’s 5 year estimate, MLPs would still represent around 1/10th of 1% of the overall tax “expenditures”.

Tax Exp_2013

Winners and Losers
LINE was the big winner this week, unleashing the power of a fully armed and operational LNCO on the market with its $4.3bn acquisition of Berry Petroleum. LINE’s likes to highlight how its market cap is bigger than the rest of the upstream sector combined, but if they stay busy, LINE may be able to say it acquired more assets in 2013 than all other upstream MLPs combined (certainly the case thus far). I still contend that the acquisition opportunity set is big enough to satiate upstream MLPs large and small.  But LINE is operating on a whole other level, and if it had a tougher sounding name it might be considered the evil empire of the upstream MLP space (Linn + Berry sounds like a frozen yogurt flavor).
The flurry of good news on LINE couldn’t have been choreographed better or come at a better time. After playing defense against shorts last week, LINE was on offense this week. The big acquisition lowered leverage (all stock for stock), it was announced as very accretive, and LINE management confirmed intent to change to a monthly distribution. None of this is good news for shorts, which had all the momentum heading into the week.


OXF, which was on the bottom last week, was there again this week, after another double digit percent loss this week.  Not sure if it will recover at this point.  PVR lowered guidance and reported weak earnings, leading to a double digit drop this week as well.
PVR’s bad week dropped it close to the bottom of the sector for the year.  OXF’s free fall continues, and its anti-lead widened vs. all other MLPs.  GLP lost the top spot after flying a little too close to the sun YTD, and falling back a bit this week on what appears to be profit taking.  STON took over the top spot, but its neck and neck for the top three, which is a fairly motley crew of small cap, special situation MLPs.
News of the (MLP) World



  • Kinder Morgan Energy (KMP) prices spot offering of 4.0mm common units at $86.35/unit, raising $345.4mm in gross proceeds
    • Gross proceeds of $345.4mm
    • Offering part of KMP’s routine capital raising program (this is KMP’s 3rd similar sized spot offering since June 2012)
    • Spot offering, priced at 2.1% discount to prior close
  • Boardwalk Pipeline (BWP) files S-3 registering up to $500mm of equity and debt securities

M&A / Growth Projects

  • Magellan Midstream (MMP) announces acquisition of 800 miles of refined products pipeline from Plains All American Pipeline (PAA) for $190mm
    • MMP to acquire 800 miles of refined petroleum products pipeline, including:
      • Rocky Mountain pipeline system, consisting of 550 miles of common carrier pipeline that also includes 4 terminals with nearly 1.7mm barrels of storage capacity
      • New Mexico pipeline system, consisting of 250miles of common carrier pipeline that transports refined products from El Paso to Albuquerque, NM, and transports products south to the Texas-Mexico border
    • Acquisition is immediately accretive to MMP’s distributable cash flow per unit
    • Assets are not considered core to PAA’s ongoing operations
  • Linn Energy (LINE) and LinnCo (LNCO) announce acquisition of Berry Petroleum Company (BRY) for $4.3bn in total consideration
    • LINE to acquire all of BRY’s outstanding shares and will assume BRY’s outstanding debt
    • First ever acquisition of a public corporation by an upstream MLP
    • Expected to close by June 30, 2013
    • Structured as a tax free exchange that will use LinnCo LLC (LNCO) shares at a 1.25 LNCO:BRY ratio
    • Approximately 19.8% premium to prior close for BRY shares
    • After the exchange, the BRY assets will be moved to LINE in exchange for LINE units issued to LNCO
    • Announced distributable cash flow per unit accretion in 2013 of $0.40 per unit
    • LINE and LNCO to increase quarterly distributions 6.2% and 8.5%, respectively, in the quarter following transaction close
    • BRY’s proved reserves are 1.65 Tcfe (75% oil ), will increase LINE’s liquids reserves to 54% from 46% pro forma
    • BRY’s current production is approximately 240 MMcfe/d
  • Kinder Morgan Energy (KMP) announces KW Express (partnership between KMP and Watco Companies) will construct 210 Mbbl/d crude by rail project on the Houston Ship Channel
    • KMP announces that KW Express (a partnership between KMP and Watco Companies) entered long-term agreement with Mercuria Energy Trading Company to construct a 210,000 bbl/d crude by rail project
    • Project will be located at the Greens Port Industrial Park on the Houston Ship Channel
    • Facility will allow Mercuria to source crude from various origination locations including Cushing, West Texas, the Bakken Shale and western Canada for delivery by rail into the Houston Ship Channel
    • KW Express will own 85% of the project and will construct and operate the project, Mercuria will retain 15% interest


  • Linn Energy (LINE) management confirms that LINE will move to a monthly distribution payment from a quarterly payment
    • Enterprise Products (EPD) announces election of Randa Duncan Williams to Chairman of the Board of its GP, and announces creation of Office of the Chairman, which will include Randa Duncan Williams, Michael Creel (CEO), and Jim Teague (COO)
  • Vanguard Natural Resources (VNR) announces monthly distribution of $0.2025 per unit, no change from prior month
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