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April 19, 2015

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MLP Week Thoughts: Production Cuts, Both Ways

MLPs traded positively for the 5th straight week, with the Alerian MLP Index (AMZ) increasing 1.1%.  The AMZ is now 6.6% higher than its most recent low on March 16th, and has produced total returns of 7.5% since its 52-week low reached on January 13th.  But the index remains 15% lower than its peak in August.  MLPs were helped by higher commodity prices and limited equity issuance again this week. MLPs outperformed the S&P 500 (-1.0%) and utilities (-1.2%) by a wide margin this week.  Year to date, the AMZ is still in the red, but is moving up the leaderboard, distancing itself from utilities and edging closer to the S&P 500.
Weekly Review_4-17-15
Oil futures finished 8.6% higher than last week, making it 5 straight positive weeks.  Oil price in the spot market is now 28.3% higher than its 52-week low reached on March 17th, and reached its highest point so far this year on Thursday.  Oil prices rallied sharply after the latest oil inventory report was released by the EIA that showed a smaller than expected inventory build.
Reduced drilling activity is beginning to impact U.S. oil production, which was certainly expected to happen after all the capex cuts we heard about since November.  Good for prices, but bad for gathering, processing and pipeline volumes in the short term.
KMI Stressed over Lack of Distress
The biggest news in MLP land was non-MLP KMI released 1Q results this week that met the market’s expectations.  KMI highlighted the strength of its development backlog, particularly related to demand-pull natural gas pipeline projects.  CEO Rich Kinder also expressed frustration on the conference call with the lack of distress amongst producers.  Producers have been able to issue equity and attract private equity to support them, and that has kept more distressed asset sales from materializing.
We’ve seen that play out with MLP acquisitions from producers this year, which are getting done at non-distressed multiples.  There is a lot of cheap capital chasing returns all along the energy value chain, and that tends to mask what otherwise would be distress, and reduces the acquisition opportunity set for well-capitalized buyers. MLPs have shown that capital is available to them as well, which may limit consolidation activity in the MLP sector this year.
Such is the paradox of oil prices and M&A for the MLP investor.  In the short term, we are rooting for less production to get prices up to stimulate more production in the long term.  And we are caught between rooting for distress among producers to shake loose assets, so long as those distressed producers aren’t major customers of MLPs we may own.  We will see the beginnings of the impact of these paradoxes as MLP 1Q results start streaming in.
CBRE Clarion Web Series
My firm has recently launched a series of videos produced in association with papers we publish on various infrastructure and MLP-related topics.  My colleague Marc DeCroisset was featured in one, and I was featured in another, each of us alongside the head of our infrastructure investment team, Jeremy Anagnos.
Marc discussed the emergence of renewable energy as an invest-able category within the universe of publicly-traded infrastructure stocks. You can watch the video by clicking on the picture below, and you can read the related whitepaper here.
In the other video, I discuss with Jeremy the technological improvements and cost reductions that are driving production efficiency gains and may lead to a lower breakeven oil price over the next few years, and also how that should allow MLPs to realize volume growth and growth in opportunity set even in a lower price environment. You can watch the video by clicking on the picture below, and you can read the related whitepaper here.
Winners & Losers
Oil prices up, upstream and services MLPs up, which explains the top 5.  Marine transport MLPs dominated the bottom 5 (4 out of 5).  Besides CPLP (equity offering), none of them had any news, but there must be some reason they all fell in unison.
GLOP moved from the top 5 to the bottom week over week, but no other repeats week over week.
As you would expect when looking at the year to date chart of winners and losers, there are plenty of commodity sensitive names among the bottom 5, names you would expect to be down when oil and natural gas prices drop, with one significant outlier at the bottom: CNNX (note that the list does not include NKA, which is down 30.4% year to date).  Expectations for CNNX were very high at IPO, but lately CNNX seems to have slipped into obscurity.
LINE crept back into the top 5 this week, while FISH dropped out. SDLP displaced EVEP in the bottom 5. Top5Bottom5_4-17-15_YTD_chart
News of the (MLP) World
Another quiet week all around for MLPs. A few pending MLP IPOs filed amended S-1s this week (PennTex filed first amendment since December this week, among others), implying the IPO market may re-start soon. See below for an updated backlog of energy MLP IPOs, which totals 17.
IPO Backlog_4-17-15

  • Capital Products Partners (CPLP) priced public offering of 12.8mm units at $9.53/unit, raising $122.0mm in gross proceeds (press release)
    • Overnight offering, priced at 4.0% discount to prior closing price, and traded up 1.1% from pricing in the next trading session
  • Marlin Midstream (FISH) filed $1bn mixed shelf, registered 10.7mm units owned by NuDevco Midstream (filing)
  • Targa Resources (NGLS) filed S-3 to register up to $1bn of equity and debt securities (filing)

M&A / Growth Projects

  • JP Energy Partners (JPEP) announced acquisition of Southern Propane for $14.9mm (press release)
    • Southern Propane is an industrial and commercial propane distributor and logistics provider serving the Houston market
    • JPEP will fund the acquisition with cash and 267,000 units issued to seller
  • Magellan Midstream (MMP) announced joint development agreement with TransCanada Corp (TRP) to pursue a Houston pipeline connection project (press release)
    • Project would include construction of a 9-mile, 24-inch diameter pipeline, in which each party would own 50%
    • The joint project is expected to cost $50mm and be completed in 2015
  • Global Partners (GLP) announced acquisition of retail portfolio from Capital Petroleum Group for $156mm (press release)
    • GLP will acquire 97 Mobil and Exxon branded retail gas stations and 7 dealer supply contracts in New York City and Prince George’s County, Maryland
    • GLP expects to close the acquisition in 2Q15 and to pay with borrowings on its revolve
  • Delek US Holdings (DK), sponsor of Delek Logistics (DKL) announced that it has acquired 48% stake in fellow refiner Alon USA Energy (ALJ), sponsor of variable distribution MLP ALDW (press release)
    • ALJ has discussed potentially launching an MLP for its midstream assets that produce around $50-$60mm in EBITDA annually
    • A full tie up between ALJ and DK may lead to those midstream assets being earmarked for drop down into DKL over the next few years


  • Distribution Announcements:
    • OKS/OKE – flat distributions/dividends
    • KNOP +4.1%
    • OCIP +1.2%
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