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December 8, 2013

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MLP Week Thoughts: Lowered Expectations

MLPs had a rough week.  The Alerian MLP Index was down 2.7%, and the midstream-focused Cushing 30 and Alerian MLP Infrastructure indices were down more than 3.0% each.  It was the worst week since the last week of May when the Alerian MLP Index was down 4.3%.
The macro drivers were mostly neutral to positive this week.  The S&P 500 was flat, commodity prices were up (both oil and natural gas), and November employment data came in better than expected.  The 11 basis points spike in the 10 yr interest rate and the flood of MLP paper hitting the market this week in the form of IPOs and follow-on offerings provided some headwinds for MLPs.  But this week’s MLP price action was mostly related to the MLPs themselves, and two MLP families in particular that announced their 2014 expectations: Kinder Morgan and Crestwood. More on that below.
Weekly MLP Review_12-6-13
Oil rebounded 5.4% and natural gas broke through the good side of $4.00, both bullish for MLPs broadly.  But the cold weather that’s driving up natural gas prices could also impact the 4Q operating results of upstream and gathering & processing MLPs.  Also since our last post a few weeks ago, crude oil spreads have widened, both the WTI-Brent (shown below) and the WTI-LLS.  If this persists, expect crude focused midstream players to show the benefits in 4Q earnings releases.


Also, since I last posted, we passed through the end of another month.  For November, the Alerian MLP Total Return Index was up 0.9% compared, and is up 25.6% year to date through 11/30.  Below is a recap of the Alerian MLP Index returns across various time periods through 11/30.  Looking forward, on average, December has been a positive month, with average returns since 1996 of 1.4%.  Last December was the second worst month of 2012 with a -3.7% return, but the Fiscal Cliff was the overriding cause.

  • November: +0.9%
    • October: +2.7%
    • September: +2.3%
    • August: -2.5%
    • July: -0.5%
  • 4Q so far: +0.9%
    • 3Q 2013: -0.7%
    • 2Q 2013: +1.9%
    • 1Q 2013: +19.7%
    • 4Q 2012: -3.4%
  • 2013 YTD: +25.5%
    • 2012: +4.8%
    • 2011: +13.9%
    • 2010: +35.9%
    • 2009: +76.4%

Winners & Losers
Delek was the big winner this week on no company specific news, but there was a positive initiation report from Howard Weil that came out Monday.  While other refined products MLP subsidiaries were universally down this week (MPLX, PSXP, HEP, WNRL), DKL may have entered investor radars as a smaller and lower growth comp to the Valero MLP IPO that launched this week.
QEPM (+4.8%) also had a notable positive move this week after its parent company (QEP Resources) announced the spinoff of its midstream business, including its G.P. and L.P. interests in QEPM.  It is unclear how much value this transaction in itself will “unlock”, but the market appears to like the idea of having a management team focused on building the midstream business.
On the downside this week, EPB (-15.5%) had the biggest fall, which was the market’s reaction to Kinder Morgan’s 2014 guidance released Tuesday that calls for EPB to maintain its current quarterly distribution rate for the next 12 months, implying 2% year over year growth (press release). By comparison, EPB’s last twelve months distribution growth was 12.1% and its 3 year distribution CAGR was 16.6%.   The road to this week for EPB started more than 2 years ago when KMI announced the acquisition of EP.  Right here at this blog and echoed by research analysts at the time, it was noted that EPB got the short end of that transaction.  The broader question of KMP’s slowing growth trend was actually the topic of my second post ever 4 years ago, appears to be playing out.
There was also a trend this week of smaller midstream MLPs that have under-performed YTD trading down sharply, including SXE, EROC and FISH (pictured above and below).  The whole sector traded off on average around 2.7%, and when that happens, investors tend to reduce exposure to smaller, high beta MLPs.  This gets exacerbated for geographically concentrated assets in advance of a cold fourth quarter that could lead to weaker results.  Scale and geographic diversification are important.
No material changes in the top 5 and bottom 5 year to date this week.  SMLP popped up into the top five, replacing EQM.  It looks like it may be a tight race to the bottom for 2013 overall, with EROC edging closer to the bottom spot currently held by EVEP.
Not pictured are the MLPs and C-corps that own G.P. interests in MLPs, but CEQP was down 15.7% on distribution guidance that was basically the same as its underlying MLP (press release).  That is unusual for a G.P., but CEQP has operating assets besides its financial assets in CMLP.  CEQP joins a host of other MLPs that are pointing towards 2015 for brighter days.
Our team will be attending the Wells Fargo MLP conference next week, and we expect to hear plenty of chatter regarding recently lowered expectations for some MLPs and what this means for the health of the entire sector.  My general view is that these are isolated cases and it argues for active management within the MLP sector by people that are closely tracking individual MLPs.
News of the (MLP) World
There were 4 equity offerings that priced this week, as well as two IPOs (VLP and CQH) and a follow-on offering still on the road and expected to price next week.  There is a big holiday push to get these deals done before the market closes for good.  It is unlikely that there will be another MLP-related IPO for the rest of the year after CQH prices next week.  There have been 19 MLP IPOs, 1 GP IPO and 1 corporate L.P. interest holding company (CQH).



  • Valero Energy Partners (VLP) launches MLP IPO of 15.0mm units at $20.00 midpoint price (press release, roadshow presentation)
    • Pricing 12/10, chatter is that the deal was well oversubscribed
    • Midpoint IPO yield: 4.25%
    • Stable crude and refined products midstream assets contributed initially with minimum volume commitments covering 85% of the revenue
    • Large drop down story is driving the lower IPO yield, which is actually a bit higher than PSXP’s IPO yield was
  • Access Midstream (ACMP) prices secondary offering by GIP of 6.0mm units at $51.45/unit, raising $308.7mm in gross proceeds (press release)
    • Overnight offering priced at 4.7% discount to prior close
    • Traded up 0.7% from pricing in the next trading session
  • Cheniere Energy Partners LP Holdings, LLC (CQH) launches MLP IPO of 30.0mm common shares with a midpoint price of $20.00 (press release)
    • Pricing 12/12/13
    • Initial holdings of CQH will include 11.9mm common units in CQP, 45.3mm Class B units in CQP, and 135.4mm subordinated units
    • Only the common units are paying a distribution, while the Class B units are PIK-ing, and the sub units are still a few years away from converting
  • Seadrill Partners (SDLP) prices public offering of 11.2mm common units (downsized from 12.9mm) at $29.50/unit, raising $330.4mm in gross proceeds (press release)
    • One day marketed offering that saw a 5.0% file-to-price decline
    • Seadrill Limited (Sponsor) initially announced it would invest $50mm at the public offering price in addition to the proceeds from the deal, but increased its equity contribution from $50mm to $100mm to make up the difference of the downsized public offering
  • Lehigh Gas (LGP) prices public offering of 3.1mm common units at $26.90/unit, raising $83.4mm in gross proceeds (press release)
    • Overnight offering priced at 4.8% discount to prior close
    • Units closed up 0.4% from pricing in the next trading session
  • Western Gas (WES) prices public offering of 4.5mm common units at $61.51/unit, raising $276.8mm in gross proceeds (press release)
    • Overnight offering priced at 3.0% discount to prior closing price
    • Traded down 1.6% from pricing in the next trading session
  • Enable Midstream (ENBL) files initial registration statement for MLP IPO of up to $500mm (SEC filing)
    • ENBL was formed by OGE Energy, CenterPoint Energy, and ArcLight
  • Vanguard Natural Resources (VNR) enters into equity distribution agreement to sell up to $500mm of common units and $250mm of Series A Preferred units at the market (SEC filing)
  • Golar Midstream (GMLP) launches marketed public follow-on offering of 8.5mm units (press release)
    • Proceeds to be used to partially fund the Igloo acquisition discussed below

M&A / Growth

  • QEP Resources to pursue separation of midstream business, which includes its interests in QEP Midstream Partners (QEPM) (press release)
    • QEP Field Services will become a separate entity from QEP, with its own midstream-specific management team (to be determined who that team includes)
    • QEP management cited the following strategic reasons for the spin off:
      • Allowing for separate valuation of QEP’s midstream business
      • Allowing each business to independently deploy resources and allocate capital
      • Permitting each business to compete more effectively in their respective markets
    • Perhaps this will be clearer when details emerge, but if the intent of this transaction is to unlock value of the midstream business, selling assets down to the existing MLP could be a simpler alternative to a full separation.
      • That alternative might also be more lucrative over time if QEP were to retain the G.P. and incentive distribution rights
  • SDLP to acquire two semi-submersible rigs for a combined purchase price attributable to the MLP of approximately $527.8mm (press release)
    • SDLP and Seadrill Limited will acquire the West Sirius rig (currently operating in the US Gulf Coast) for an implied purchase price of $1.0bn, of which $298.4mm will be funded by SDLP
    • SDLP and Seadrill Limited will acquire the West Leo rig (currently operating in West Africa) for an implied purchase price of $1.25bn, of which SDLP will be responsible for $229.4mm
  • Golar LNG (GMLP) announces acquisition of the Golar Igloo from Golar LNG Limited for $310mm (press release)
    • The Igloo is a floating storage and regasification unit that is under construction, but will be completed and delivered this month
    • Acquisition will close in March 2014, at which point the Golar Igloo will commence service under a 5 year time charter agreement with Kuwait National Petroleum Company, which is expected to generate $32-$34mm


  • Holly Energy (HEP) announces retirement of CEO Matt Clifton effective 12/31/13 (press release)
    • Clifton to be appointed executive chairman of HEP
    • Board appointed current HollyFrontier Corp (HFC) CEO Michael Jennings to CEO position at HEP
  • NuStar Energy (NS) announces retirement of Curt Anastasio effective 12/31/13 (press release)
  • QRE switches to monthly distributions (from quarterly), joining VNR, LINE and BBEP among MLPs that pay monthly (press release)
    • New policy will begin in January 2014
    • The press release cited investor preference and the ability to provide steadier stream of distributions
    • There is the belief that monthly distributions provide marginal deterrent to short selling due to frequency that short sellers would have to pay distributions
    • It makes sense that upstream MLPs would start the monthly distribution trend given that they are similar in some ways to royalty trusts and private drilling programs that tend to pay monthly
    • I don’t believe we’ll see midstream MLPs employing monthly distributions en masse any time soon
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