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July 24, 2016

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MLP Week Thoughts: Powering Through to Earnings

MLPs beat oil again this week (+0.8% vs. -3.7%), but oil’s slow motion slide towards $40 is becoming a nuisance.  MLP continue to get a boost from the market’s thirst for yield, as long as oil prices don’t fall to far.  MLP trading has been stagnant, but positive leaning lately, helped by positive fund flows and ATM blackout periods.
It feels like institutional investors are shifting portfolios around to position for earnings season rather than wholesale buying we’ve seen since February.  Perhaps earnings season will inspire another leg in the rally, or it might lead to a selloff.  Either way, the calm waters we’ve had the last few weeks is unlikely to continue.
KMI earnings this week were solid and largely as expected, yet KMI sold off after earnings.  We may have reached a point where just surviving or meeting the market’s expectations isn’t enough to drive higher valuation.  Its hard to draw conclusion from KMI’s special situation, given that it doesn’t benefit from the yield trade.  An MLP meeting expectations while yielding closer to 10%, however, may see a more positive market reaction.
This week I did a little kayaking on a lake in Hunt, Texas.  I mention the location just to add to my bonafides as an MLP Guy, because we all know you sound smarter when discussing MLPs with a Texas twang.  Anyway, MLP action in the brief time since oil stopped rising and rates started falling is a bit like kayaking against the current.  Right now the headwinds are creating a current that’s more than manageable with a bit of paddling, but progress across the lake is slower than it might be otherwise.
Winners & Losers
Surprise non distribution cuts drove outperformance for the top few MLPs this week (e.g. CCLP, CPLP), while hope of strategic support helped ETP and EEP make the top 5 this week.  GEL’s equity offering helped land it at the bottom of the sector in another week with a pretty tight return range across the sector.  Expect more individual company volatility next week as earnings start to roll in.
Massive gains the last few weeks for CPLP as it made it two in a row at the top.
Year-to-date, CPLP’s gains the last few weeks have finally helped it climb from the bottom spot among MLPs YTD.  Only 2 relevant MLPs have produced greater than 20% declines this year, in stark contrast to the carnage last year.
Every one of last week’s top 5 declined this week, allowing JPEP to joined the top 5.
General Partner Holding Companies
General partners overall under-performed MLPs this week, with median declines of more than 2%.  GP’s generally have lower yields than their MLPs, making the yield trade less relevant for them.  Also, given many are structured as corporations, they tend to have more correlation to oil prices, which was a negative this week.  WMB and ETE carry high yields (based on last quarter’s distribution), but rallied this week on optimism for pending strategic and distribution announcements.
WMB and ETE made it two straight weeks in the top 5, which is an achievement in the choppy recent trading we’ve seen since oil started its decline.
News of the (MLP) World
It was a lighter week of transactions for MLPs this week, but there were two equity offerings, well more like one and a half offerings).  GEL’s tighter discount and deal size was a positive data point for MLP equity markets.   Distribution announcements also seemed to be pretty healthy, with much fewer cuts this quarter than last.

  • Genesis Energy (GEL) priced public offering of 8.0mm units at $37.90/unit, raising $303mm in gross proceeds (press release)
    • Overnight offering, priced at 5.0% discount to prior closing price
  • Blueknight Energy (BKEP) priced public offering of 3.3mm units at $5.90/unit, raising $19.5mm in gross proceeds (press release)
    • Overnight offering, priced at 8.1% discount to prior closing price
    • Offering was upsized 10% from 3.0mm units originally offered

M&A / Growth

  • Blueknight Energy (BKEP) announced sale of G.P. and IDRs, and $108.8mm drop down from new sponsor (press release)
    • Private company Ergon Inc. to acquire BKEP’s general partner and incentive distribution rights (IDRs) for an undisclosed sum
    • In separate, but related transaction, BKEP announced drop down of nine asphalt terminals from Ergon for $108.8mm at 8.5x EBITDA multiple
    • The acquisition will be financed with a combination of common equity ($20mm issued to public, $5mm issued to Ergon), preferred equity issued to Ergon and the remainder with debt
    • Ergon has identified two additional drop down assets that BKEP will likely acquire over time
  • Tallgrass Energy (TEP) announced open season for shipper commitments for light crude oil transportation service from Weld County, CO to delivery points at Ponca City and Cushing, OK on the Northeast Colorado Later of Pony Express (press release)
    • Open season expected to end at the end of August


  • Distribution announcements:
    • VLP: $0.365, +7.4% quarter over quarter, +24.8% year over year
    • SHLX: $0.25, +6.4% qoq, +31.6% yoy
    • RMP: $0.2235, +6.4% qoq, +17.0% yoy
    • TCP: $0.94, +5.6% qoq, +5.6% yoy
    • PSXP: $0.505, +5.0% qoq. +25.0% yoy
    • DM: $0.2355, +5.0% qoq, +25.3% yoy
    • TLLP: $0.842, +4.0% qoq, +16.5% yoy
    • CNNX: $0.254, +3.7% qoq, +15.5% yoy
    • PTXP: $0.2846, +3.5% qoq, +3.5% yoy
    • WGP: $0.43375, +2.4% qoq, +19.2% yoy
    • MMP: $0.82, +2.2% qoq, +10.8% yoy
    • WES: $0.83, +1.8% qoq, +10.7% yoy
    • HEP $0.585 +1.7% qoq, +7.3% yoy
    • TLP: $0.69, +1.5% qoq, +3.8% yoy
    • GPP: $0.41, +1.2% qoq, +2.5% from MQD
    • MPLX: $0.51, +1.0% qoq, +16% yoy


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