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May 22, 2016

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MLP Week Thoughts: Off the Sidelines

MLPs rallied for the 12th week in 15 off the bottom, finishing up 4.4% overall since last Friday.  Total return for the MLP Index is 10% year to date.  MLPs are outperforming the S&P 500 over the last 1-month, 3-months and 6-months.
Weekly Review_5-20-16
Oil prices continued higher this week, helped by continued global supply outages and a solid refined products inventory draw.  Propane prices hit a 52-week high Tuesday, but remain roughly 50% lower than September 2014 highs.
Rate In-Sensitivity: Fed minutes trumped hopeful markets Wednesday, causing a selloff in risk assets and in particular yield-based equities like utilities and MLPs.  Thursday and Friday saw MLPs snap back.  The upside of investors not as focused on yield as a valuation metric these days is that MLPs don’t have as much sensitivity to rising rates, maybe.
Technical Progress: MLPs started the year down 28% in 5 weeks, but have produced an astonishing 53% total return since then.  On 2/11, MLP index yielded 12%, and today it yields less than 7.5%.  The MLP price index closed above 300 for the first time since November on Thursday, and while it hasn’t seen 400 since July 2015, MLP charts continue to get healthier.
Buying Dips Where Available: Because the rally has been so furious, it’s been hard to find entry points for anyone that’s been watching MLPs shoot higher from the sidelines.  It seems like investors took the brief dip Wednesday as an opportunity to buy MLPs.  Large, liquid MLPs outperformed Thursday and G&P MLPs outperformed Friday.  Equity risk premiums are dropping for the more commodity sensitive midstream players. People are buying what is perceived as cheap and what will likely continue to work in a rising commodity price and drilling activity environment.
Off Sidelines
Poll Question Review – Plaintive Expectations
Last week’s question focused on GP/LP consolidations, specifically the two most presumptive ones (RRMS/SEMG and PAA/PAGP), at least based on what I hear and read.  Oil prices continue to improve, improving the outlook for both PAA and RRMS, and it appears to be making the GP/LP consolidations less attractive and no longer the slam dunk they might have been absent the rally.
The poll question results were mixed, but seemed to indicate a high probability (67% of respondents) that at least 1 of RRMS or PAA will consolidate with their respective GP in some way.  33% of respondents expecting neither RRMS or PAA to consolidate with its respective GP.  Speculation is rampant that PAA may announce some type of restructuring involving the IDRs at the analyst day this week, which would probably be premature at this point.
Winners & Losers
The announcement that Range Resources was acquiring Memorial Resource Development caused PTXP to rip higher this week on improved counterparty profile and potential additional development opportunities.  RRMS rallied double digits again.  TEP’s final announcement regarding the REX acquisition proved to be the most impactful, as the market responded very positively to the update and contract extension, plus additional year of top-tier distribution growth guidance.
Equity issuance is proving challenging to digest.  Recent issuers PSXP, SHLX and WNRL struggled this week.  Very thinly-traded DKL traded poorly as well on follow-through from weaker 1Q results and possibly some overhang at this point.
RRMS is now the best performing MLP in the entire sector for the year, following its stunning reversal and non-stop rally.  ENBL joined the top 5 this week as well.  On the downside, some of the biggest winners from last year, SHLX and DKL, dropped into the bottom 5 for the year this week.
General Partner Holdings Companies
TEGP stole the show this week with updated guidance, contract extension and vision for Rockies Express, not to mention best-in-class distribution growth guidance for the next few years.  WMB diverged from ETE pretty dramatically, which I don’t believe means the market thinks the merger is any more likely than last week.  SEMG again was in the top 5, but lagged its subsidiary MLP.
News of the (MLP) World
MLP equity offerings continued this week.  No change to key traits of these deals and other recent deals: high re-offer discounts, bought deals with substantial amount of units pre-sold before launch, and issuers with refinery logistics and liquids assets.  The equity capital market remain challenged, but MLPs that are trading ok and are willing to sell equity at an 8% discount are able to get deals done.  Smaller MLPs with limited float like WNRL are going to continue to come to market because the small trading volume limits ATM ability and sponsors have already taken back units throughout 2015 and may have reached their limit.

  • Shell Midstream (SHLX) priced public offering of 10.5mm units at $33.25/unit, raising $349.1mm in gross proceeds (press release)
    • Offering upsized from 9.5mm units originally offered
    • Bought deal, priced at 8.6% discount to prior closing price, closed flat in a -2.2% MLP tape, well-outperforming other MLPs at least from offering price
  • Western Refining Logistics (WNRL) priced public offering of 3.75mm units at $21.73/unit, raising $81.5mm in gross proceeds (press release)
    • Bought deal, priced at 8.0% discount to prior closing price
    • Underperformed other MLPs on the next trading session, but held up better as the week progressed and other MLPs sold off
    • Offering proceeds not ear-marked for any specific deal, but WNRL has plans to execute a drop down acquisition in 2Q or 3Q
  • Canadian midstream company Keyera (KEY-CN) priced offering of 8.25mm shares at CAD$36.35/share, raising CAD$300mm in gross proceeds (press release)
    • Bought deal, priced at 4.1% discount to prior closing price
    • As is common in Canada, Keyera traded up from offering price and finished more than 5% up from offer price the next day, erasing the discount
    • KEY also announced a $600mm natural gas processing complex project with the acquisition

M&A / Growth

  • Shell Midstream (SHLX) announced acquisition of drop-down acquisition of additional equity interests in onshore liquids pipeline assets for $700mm (press release)
    • Assets acquired at attractive 8.8x EBITDA multiple
    • SHLX has been clear that it expects to executed a similar headline amount of drop-down value this year as last year’s $1.2bn, so this is likely the first of at least one more acquisition in 2016
    • Funded with cash on hand, borrowings, and proceeds from the equity offering discussed above
  • Williams Partners (WPZ) announced open season for Northeast Supply Enhancement project, an expansion of the Transco pipeline (press release)
    • Project is being designed to provie 400,000 dekatherms per day of firm natural gas transportation capacity from Compression Station 195 in York County, PA to existing interconnection Rockaway Transfer Point
    • Expected to be in-service for the 2019/2020 winter heating season
  • Kinder Morgan (KMI) announced that Canada’s National Energy Board recommends approval of the Trans Mountain Expansion Project
    • This project at $5.4bn estimated cost represents roughly 38% of KMI’s announced project backlog
    • This announcement is in-line with expectations, timing-wise and KMI will still need to satisfy the conditions of the recommendation and secure agreements from First Nations
    • December 20th deadline for final approval is the next date to keep an eye on for this long-dated development project with a target in-service of 2019


  • Breitburn Energy (BBEP) files for Chapter 11 bankruptcy (press release)
    • BBEP expects to continue its operations without interruption, funded with cash on hand, cash from operations and $75mm debtor-in-possession financing facility
  • Constitution Pipeline Company (Owned by Williams, Cabot Oil & Gas, Piedmont Natural Gas and WGL Holdings) announced the appeal of New York State Department of Environmental Conservation’s refusal to grant the company’s request for a Section 401 Water Quality Certification under the Clean Water Act (press release)
    • The appeal contends the refusal is arbitrary and capricious and constitutes an impermissible challenge to the FERC’s Certificate of Public Convenience and Necessity which was issued to the company in 2014
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