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June 9, 2012

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MLP Week Thoughts: Overhang Building

Alerian MLP Index was up 1.9% this week, good to see, but MLPs underperformed the S&P 500, which was up 3.8%.  Still struggling oil and gas prices may have weighed on MLPs.  Crude oil didn’t bounce too much, only up 1.4% this week and still under $85 per barrel, and natural gas was slightly lower on the week, and still well below $2.50 per mcf.   NGLs bounced back and so did 10-year Treasury yields (which I think had almost nothing to do with MLP performance this week).  The big loser, as happens in big up weeks for the market, was gold (down 1.7%).

Damned if you Do, Damned if you Don’t
I don’t have much to say in the way of general comments, except to discuss a sort of weird damned if you do, damned if you don’t phenomena which may be at play currently in the MLP space.  There are 10 MLP IPOs in registration, and probably 3-5 others in stealth registration (file confidentially until 21 days prior to IPO), as is now allowed under the Jobs Act for certain qualifying issuers.  There is also a massive amount of equity that needs to get issued if MLPs are going to live up to their capital budgets, and this second quarter has fallen off the annual pace of issuance.  Investors may start to sell or at least not buy because of equity issuance expectations.  That’s the “damned if you don’t” part of the equation.
The “damned if you do” part comes from the short term underperformance of any MLP that is issuing primary units.  The delicate balance of just the right amount of equity is what the sector always strives to achieve, but I think it may be swinging towards equity overhang territory currently.  Not sure what can be done to bring it back into balance, aside from a new crop of MLP investors popping up somewhere. I am reading more articles these days about pension funds allocating to MLPs, so we’ll see.
Sidenote: There are very few phrases for which I can recall the first time I ever heard them.  However, I remember the first time I came across the phrase “Damned if You Do, Damned if you Don’t”.  It was in the song “Deep Deep Trouble” on the 1990 album called Simpson’s Sing the Blues (which believe it or not peaked at #3 on the Billboard chart, according to Wikipedia).  I had the album and had it on a loop in the summer of ’91 at Camp Stewart.  In the chorus to “Deep Deep Trouble” about halfway through the song, Bart Simpson starts saying it in the refrain.  You can watch the whole video below and wax nostalgic with me about what is was like to purchase music in a store, while wearing your striped Girbaud jean shorts.

Winners & Losers – This Week and YTD
E&P MLPs were up sharply this week, even with relatively weak commodity price changes, mostly because they were down so much last week, and the sky didn’t fall on Europe this week.  All of the top 5 are E&P MLPs, with the exception of CHKM, whose parent’s got divorced and GIP got full custody of the midstream assets, sending CHKM up.  Very eclectic bottom 5 this week, with CQP down double the next biggest losing MLP.  NGLS continues to struggle in the face of weaker NGL prices.

As shown below, OXF and NKA have pulled away year to date in their respective categories.  OXF is down almost 45%, and NKA is up 41%.  RNO replaced LRE, and was back in its usual spot in the bottom five for the year this week.  Top five saw RRMS drop out of the top 5 for the week.

News of the (MLP) World
CHKM GP changes hands, GIP now 100% owner of GP (press release)

  • Starts the clock on GIP launching GP IPO
  • See here for more of my thoughts on price paid, not that it matters to CHKM
  • Good for CHKM unitholders generally to have clarity around the GP (for now), but questions remain around its biggest customer: CHK
  • CHKM will retain drop down benefit for years to come according to management, CMD purchased as well
    • CMD will have acreage dedications in Eagle Ford, Utica, Haynesville, other areas
  • What will they change the name to?
    • CHKM will want to get away from the association with CHK going forward, and Global Partners is already taken, so wonder what they’ll call it going forward?
    • Suggestions welcome

CVR Energy, Inc. continues to battle Carl Icahn:

  • CVI rejects short-form merger request (press release)
  • 2 pension funds sue Carl Icahn over his attempted short-form merger (FuelFix)

FGP announces solid earnings (press release)

  • FGP was up 3.0% on the week, including 6.9% jump on Friday after the earnings release before the market opened on Friday.
  • Propane volumes were only down 11%, compared with 23% warmer temperatures, hooray!
  • FGP explained that conditions were improving, citing cheaper propane (down 53% since last year) and on-track internal cost cutting initiatives as reasons for optimism.

VNR announces Arkoma acquisition for $445 million from Antero Resources (press release)

  • Vanguard CEO Scott Smith again stated that he believes “it’s a great time to purchase natural gas assets and we believe this transaction will prove to be an excellent addition to our portfolio.”
    • If you have access to capital like the E&P MLPs do, it is a great time to buy natural gas assets on the cheap, as the E&P players have been doing at a rapid rate this year.
  • VNR’s reserve-based credit facility will be the source of funds for the acquisition, and VNR has requested that its bank group perform an interim borrowing base redetermination to include the acquired properties.  VNR expects a $300 million increase in the borrowing base.
    • VNR expects to have $200mm in liquidity after the redetermination, but an equity offering is not out of the question.
  • VNR was up 8.5% on the week
  • 420 bcfe of proved reserves (58% developed and 82% natural gas)
  • Reserve life of 15 years
  • Hedge book valued at $100mm

CLMT buys Royal Purple, Inc. for $335mm (press release)

  • $28.5 million in EBITDA in 2011 (11.7x), according to conference call, but CLMT will make further announcements in the coming weeks as to expected 2012 results and accretion.
  • Announced acquisition Wednesday pre-market, CLMT was up 3.5% on day of announcement and 3.7% for the week
  • Less than $1.0mm in maintenance capex, between $5.0-$10.0mm in synergies with CLMT, non-seasonal stable cash flows
  • Around $0.20 accretive to distributions was said on the call
  • Financing: cash, including proceeds from the recent equity offering, but potentially more equity to come, management is reviewing all alternatives
  • Competitive bidding process that CLMT won
  • This acquisition makes it almost $800mm in acquisitions in last 12 months for CLMT

KMI Secondary (press release)

  • An even bigger pile of equity than the CHKM equity changed hands this week when KMI priced spot secondary of $2.0 billion of shares held by the PE syndicate that took KMI private back in 2006/2007.
  • Alleviates some serious equity overhang in KMI, with no change to the unit count.

Disclosure: Long KMI and VNR.  The information in this article is not meant to be financial advice, I am not your financial advisor and I am posting my comments for informational purposes only.

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