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August 2, 2015

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MLP Week Thoughts: Picking Up the Pieces

MLPs bounced back this week, with the Alerian MLP Index gaining 3.3% including distributions.  From last Thursday’s close to Wednesday, the index was up 6.7% over 4 straight positive days, before settling down with two 1%+ decline days to close the week.  Stabilizing oil prices helped MLPs continue the rally from last Friday, but then faded as ex-dates for MLP distributions and earnings releases began to hit later in the week.  Interest rates helped out this week, as the Fed inaction seemed to spark hope for further inaction in the coming months, sending U.S. treasury rates lower and utilities higher. Also, oil prices took a tumble to fresh multi-month lows on Friday, which didn’t help.  MLPs outperformed the S&P 500 (+1.2% this week) and underperformed utilities (4.1%).
Weekly Review_7-31
This week’s MLP price action seemed to be more discerning than last week’s broad selling.  Investors were willing to step back into smaller, oversold MLPs, and into small/mid-sized MLPs reporting positive 2Q results.  But larger MLPs struggled in the back half of the week, which seemed to be a function of ex-dates and broad market sentiment against energy and oil prices rather than an indication of their business prospects.
The MLP sector has been imbalanced to the downside for nearly a year now, and brief rallies have been breakable by any number of negative factors.  The MLP Index moved 1%+ each of the 5 trading days this week.  A sustained recovery in the face of so much negative sentiment will be fragile and subject to volatility, so was the strength early in the week the beginning of a fragile recovery, or just a pause in the ongoing MLP decline that resumed later in the week?
Status Update
MLPs finished July with a negative 3.2% total return.  It was the third straight negative month for the MLP Index, 5th negative month so far in 2015 and the 9th in the last 11 months.
Status Update_7-31
Looking ahead, August has been a mixed month over the years, with 12 positive and 7 negative months and average returns of 0.7%.  Last year’s KMP merger-fueled 8.2% return for the MLP index was the best ever August.
Since the end of last August, the index has produced total returns of negative 25.6%.  At the end of next month, we will have gone a full year since reaching the last MLP Index all-time high (barring a 34.5% gain in for the index this August).
Winners & Losers
After leaving MEP to fend for itself over the last few years and delaying drop downs, MEP’s sponsor EEP this week announced steps to fix its natural gas gathering & processing MLP.  Read about those below in the news section, but the market reacted very positively.
On the downside, it was all about upstream MLP distribution suspensions.  NSLP (immediately) and LINE (by 3Q) both eliminated their distributions, which did not please the market.  LINE trades below $5/unit now, and has lost more than 90% of its value since early 2013, when it traded above $40/unit.
ENBL made it 2 straight weeks in the top 5 with a 13% gain.  DKL bounced back from a spot in the bottom 5 last week to join the winners this week.  WPT had some very volatile days when rumors of forced-selling were swirling around and it recovered this week as well.
Year to date, upstream MLPs comprise the bottom 5, while the top 5 consists of a refinery MLP at the top and a mashup of smaller MLPs.
DKL rejoined the top 5 this week, after a one week hiatus.  LINE dropped into the -50% total return club at the bottom of the sector performance chart.
General Partner Holding Companies
Last week, each and every GPs was down.  This week all but WMB were positive.  The median GP return underperformed the MLP Index, however.  PAGP led the way on the upside on no discernable news items.  AHGP, TEGP and EQGP all saw their MLP subsidiaries report good 2Q results.
News of the (MLP) World
Earnings releases dominated news this week, with limited transactional news and no equity deals to report.  More of the same next week, although some brave MLP may try to test the capital markets.

  • The yieldco IPO that launched last week (Terraform Global) ran into some challenges in its efforts to price this week, and has re-filed its prospectus to reduce the size of the deal and drop the price to $15 from $19-21/share (prospectus)
    • There is some investor overlap between MLPs and yieldcos, and it is clear capital markets remain challenged in the current environment, especially for externally funded growth stories

M&A / Growth Projects

  • Sunoco Logistics (SXL), Energy Transfer (ETP) and Phillips 66 (PSX) announced JV to construct oil pipeline from Nederland, TX to Louisiana refinery (press release)
    • Pipeline will be called the Bayou Bridge Pipeline, and will deliver crude oil from terminals in Nederland, TX to Lake Charles, Louisiana
    • The JV will launch an expansion open season for service to the market hub at St. James, Louisiana
    • JV ownership breakdown: PSX at 40%, ETP and SXL with 30% each
    • The Lake Charles portion of the pipeline is under construction and will be in service by 2016, with the St. James expansion expected to be in-service by 2H 2017
    • No financial details were released, but on PSX’s call management put an estimate of $700-900mm for the committed pipeline to Lake Charles
  • ONEOK Partners (OKS) announced plans to invest between $70mm and $100mm to expand its ONEOK WesTex Transmission intrastate natural gas pipeline system to serve markets in Mexico (press release)
    • 260 mmcf/d of additional capacity by 1Q 2017
    • Anchor shipper is Comision Federal de Electricidad, Mexico’s national electric utility, which has signed a 25-year take or pay contract
    • Project is expected to have an EBITDA multiple of 5-7x


  • Cheniere Energy, Inc. (LNG) announced 20-year LNG offtake agreement with Chile’s Central El Campesino for 0.6 million tons per annum beginning in 2019 (press release)
  • Enbridge Energy (EEP) announced actions to support subsidiary MLP Midcoast Energy (MEP) and ensure 1.0x distribution coverage each quarter and 5% distribution CAGR through the end of 2017 (press release)
  • Distribution increases:
    • PBFX +5.7%
    • WNRL +5.0%
    • DKL +3.8%
    • ARCX +3.7%
    • VTTI +3.5%
    • SRLP +3.2%
    • AHGP +2.4%
    • EEP +2.3%
    • ARLP +1.9%
    • BPL +1.1%
    • EXLP +0.9%
    • USDP +0.9%
  • Cut: NSLP suspended distributions, LINE announced intent to suspend distributions
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