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June 1, 2014

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MLP Week Thoughts: Liquefaction Action

MLPs traded sideways for most of the week, before buyers showed up Friday to push the MLP Index to a brand new all-time high to close out the week.  The MLP Index finished the short week up 0.7%, but trailed the S&P 500 (+1.2%) and utilities (UTY +2.3%).  The 10 year treasury yield is now closer to 2.0% than it is to 3.0%, and is now down 56 basis points since the beginning of the year.
Weekly MLP Review_5-30-14
Oil futures were back down, but remain well above $100/bbl.  Natural gas and ethane were both up more than 2.5%, and propane was down 1.1%.  Year over year, energy commodities are up across the board, and are at values that generally result in attractive economics for producers (bottlenecks notwithstanding), continued drilling, and growth in supply.  Domestic demand growth isn’t keeping pace, and even with midstream development that gets that supply to the Gulf Coast, the industry is looking ahead to a glut of hydrocarbons on the coast.  Crude remains backwardated as a result, even as the crude oil exports discussion grows louder by the week.
On the natural gas side, LNG exports appear to be the solution, and they grabbed all the headlines this week.   The U.S. Department of Energy announced a proposal to change the process of reviewing LNG export applications such that the DOE will review an application only after a project has received final environmental approval from FERC (read more details in this Reuters article).
The FERC review process is much costlier (reportedly up to $100mm) than the DOE’s review.  This change shakes up the approval order, because it will favor those projects that are well-capitalized and commercially viable over those that got in line first.  Some have linked the timing of this pro-natural gas announcement to the Obama administration’s efforts to reduce carbon emissions from coal-fired power plants via the Environmental Protection Agency (Forbes).  Politics are always a factor when Washington is involved.
Take a Number
There are still questions as to how many of the 25 projects currently in various stages of development would be built even if they were all approved today, so line jumping can make a huge difference.  LNG export development is a rich company’s game, akin to reaching the front of the line to buy an expansion sports franchise (as opposed to grabbing an existing franchise for 4x the previous record price, like Steve Ballmer did this week).  If you get to the front of the line and get approved, you earn the right to spend a bunch of money, and hopefully earn a return.
I got a taste of what can feel like an endless queue this weekend.  On Friday night, I attended an elementary school talent show.  It was 2 hours of loosely choreographed dance routines, interspersed with the occasional gymnastics or musical instrument display.  The most depressing part, after learning that there were 30 acts, was learning that my daughter’s act (a costumed group dance to the Frozen song “Let it Go”) was listed in the program as the 25th act.  And there was nothing I could do to move her up in line.  I may not have been willing to pay $100mm, but by the 3rd different dance routine set to Pharrell’s “Happy”, I would have emptied my wallet to jump the line.  I will spare you my hard-fought home video of the performance…
Cheniere Energy, Inc. seemed to be the biggest immediate beneficiary of the proposed change.  Cheniere’s stock price was up 17% this week on the news of the DOE proposal, but also on the announcement of another commercial agreement, this time to provide LNG to Spanish utility Iberdrola from train 1 and train 2 of Cheniere’s planned Corpus Christi facility (press release).
Monthly Update
Back in MLP land, the month of May is in the books, and for the first time in 5 years, May was positive for the Alerian MLP Index.  As shown in the chart below, it was the third straight positive month for the index.  Looking ahead, June has been positive in each of the last 4 years, and 12 of the last 18 years.  In each of the last 4 years, June offered the chance for the index to bounce back from weakness in May.  The last 3 times that we had a positive May, it was followed by a negative June.  In other words, it’s been 9 years since both May and June were positive.  With 1Q earnings and the NAPTP conference behind us and digested this week, catalysts for the sector will likely be M&A announcements and macro factors.
Monthly Review_5-30
Winners & Losers
There were no traditional midstream MLPs among the top 5 this week, with EROC leading the way. On the downside, sector darling OILT led the sector lower with a 5.6% decline week over week, with volatile trading throughout the week that seemed to be sparked by some analyst indications that valuation was stretched.  OILT is not alone with its high-multiple valuation, but the sell-off didn’t extend to those names, for now.  DPM drifted lower all week, before turning positive Friday.  The two most prominent compression MLPs, USAC and EXLP, were both down as well.
WPT bounced back from leading the sector on the negative side last week. OCIR made it two straight weeks in the top 5, while EXLP made it two straight weeks in the bottom 5.
On the year to date winners and losers, OILT dropped one spot while EXLP joined the bottom 5.  PSXP is still the leader among MLPs that have a minimum quarterly distribution.  Variable distribution MLP EMES was up 8.2% this week and has produced a total return of 122.6% year to date.  EMES has a change to be at the top of the MLP sector performance table for two straight years, unheard of in recent years.  Frack sand is an important component of drilling and completion, and EMES is the purest way to play that booming market.
News of the (MLP) World
Very quiet week for MLP news, which is probably due to the short week and the NAPTP conference having just happened.  In recent years, however, there is usually at least one MLP that is mum on equity issuance at the conference and then launches an equity offering immediately after the conference. Not so this year.  We did get some M&A news, however, as Petrologistics agreed to be acquired for a cash price less than its IPO price of 2 years ago.  Also, the rumor mill for potential TLP acquirers received a little press.  The TLP sale process hasn’t garnered much enthusiasm within the MLP community, but seems to be progressing a bit.

  • EnLink Midstream Partners (ENLK) files equity distribution market to sell up to $75mm worth of common units at-the-market (filing)
  • Oiltanking (OILT) announces 2:1 unit split to go into effect on July 14 (press release)
    • For those keeping score at home, remember to update the IDR tiers in your OILT waterfall and change the historical distribution payouts, because if you accidentally double OILT’s yield in your model from 2.25% to 4.50%, it’s not going to stand out like it used to when a 7% yielding MLP split its units (all part of the brave new lower-yield world)

M&A / Growth Projects

  • Petrologistics (PDH) announces sale to Flint Hills Resources (subsidiary of Koch Industries) for $14.00/unit in cash, or approximately $2.1bn (press release)
    • Flint to pay $14.00/unit to unitholders, but will pay only $12.00/unit for common units held by financial sponsors (Lindsay Goldberg and York Capital) and certain executives
    • Purchase price represents a 5.2% premium to the prior day’s closing price before the announcement
    • Transaction is expected to close by year-end
    • PDH went public on 5/3/12 at an IPO price of $17.00/unit, but never closed above that price
    • PDH has produced a total return of +1.6% from IPO to today’s closing price, if you include distributions
    • Shrinks the variable distribution MLP pool from 9 down to 8
  • TransMontaigne Partners (TLP) has reportedly narrowed list of bidders for its sale (Reuters)
    • List includes NGL Energy (NGL) and Buckeye Partners (BPL)


  • Crude-by-rail volumes to the West Coast not under the radar anymore, sparking concerns from locals (Fuel Fix)
  • Discussion of LNG market dynamics after China-Russia gas accord (Fuel Fix)
    • Reduces China’s need for LNG import, increasing China’s negotiating power on the LNG it does need
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