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June 12, 2016

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MLP Week Thoughts: Pumping the Brakes

MLPs continued last week’s rally early on this week, adding an additional 2.9% over Monday and Tuesday, helped by strength in commodity prices.  The rally faded late in the week, picking up downside momentum Friday when oil prices dropped back below $50/bbl in a broad market sell-off. MLPs closed the week down 0.2% overall, with large cap strength helping to mask broader MLP weakness (Equal Weight MLP index was down 1.1%).  MLPs remain solidly in the green for the year, and comfortably above key technical levels.
Positive sentiment gave way to concerns over valuation, which makes sense after the sharp move off the bottom.  Concerns crept in regarding the level of future activity and commodity prices reflected in today’s MLP stocks prices.  Research analysts voiced skepticism with downgrades that factored into some of the weakness.
It is encouraging to see the market beginning to question a few things.  Not all MLPs will thrive just because oil has crossed $50/bbl.  The competition for customers and capital is far from over.  Re-rating MLPs to reflect their ability to stay in business is one thing, but to price in certain prosperity across the sector is quite another.
But overall, the mood remains constructive for the MLP sector.  Friday’s 2.3% MLP Index decline was the worst single day decline in more than 2 months.  A few months before that it was unusual if MLPs didn’t fall 2%+ at least once a week.  So…progress!
Read My Lips: Higher Coverage
One theme from the MLPA conference I forgot to mention last week is the future of the MLP model.  On this site, we’ve posited the concept of MLP version 2.0: a more resilient MLP financial model that relies less on capital markets and more on self-funding.  This is accomplished with lower leverage, higher distribution coverage, and ideally some permanent reduction or elimination in IDRs.  MMP is the most extreme example of this model, a growth MLP with no IDRs that hasn’t issued equity in more than 5 years.
At the MLP conference, MLP management teams were often asked if they would consider operating with higher coverage as a general rule in the future and adopt a more resilient financial model.  Management teams are happy to say they will carry higher coverage and lower leverage in the next boom cycle, but what they say today and what they end up doing may be different (especially those with publicly-traded general partners).
Read my lips
We take politicians’ campaign trail promises with a grain of salt. We should do the same with promises of MLP management teams.  If commodity prices end up bailing out some poorly managed MLPs, we can expect some MLPs to continue to be poorly managed.  Its up to the investment community to demand more “prudent” behavior.
Poll Question: Lip Service
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Winners & Losers
News that Shell reached final investment decision (FID) on its planned ethane cracker in Pennsylvania helped boost Marcellus players early this week.  CNNX held those gains better than others and led all MLPs higher.  The Alerian rebalancing announcement that added NGL and TEP to the AMZI Index provided those two stocks with a boost Friday, landing them in the top 5 as the rest of the sector faded.  PAA continues to have a bid, despite lack of clarity on its volumes, leverage and restructuring.
On the downside, FGP’s step out acquisition into a midstream-ish business last year is proving challenging, and questions about contracts plus weak earnings sent FGP down this week.  SUN was downgraded and questions were raised regarding distribution sustainability.
Big weeks from CNNX and NGL sent those two to the top of the sector from outside the top 5 last week.  CPPL climbed out of the bottom 5, replaced by SUN.
General Partner Holding Companies
GPs as a group performed in line with the MLP Index, and the dispersion of returns within the GP group was less than the MLP sector, which is pretty rare.  Several of last week’s big winners sold off this week, including ETE, WMB and SEMG.  ENLC and OKE both were downgraded by analysts, and have rallied on similar themes, but OKE kept on rallying while ENLC sold off hard.
News of the (MLP) World
Meaningful equity capital markets activity this week.  We had the first primary offering by a gathering & processing MLP so far this year, and it traded up!  Also, we had an offering from TLLP that priced at the tightest discount we’ve seen in several months, and it traded up!  On the M&A front, ETE and WMB continue to go through the motions of their merger, even though closing the deal may not even be possible at this point.

  • Tesoro Logistics (TLLP) priced public offering of 5.5mm common units at $47.13/unit, raising $259.2mm in gross proceeds (press release)
    • Bought deal, priced at 4.5% discount to prior closing price
    • Upsized from original offer size of 4.25mm units
    • Traded very well, closed at $50.68, up 7.5% from pricing
  • Rice Midstream (RMP) priced public offering of 8.0mm common units at $18.50/unit, raising $148mm in gross proceeds (press release)
    • Marketed overnight offering, priced at 8.4% discount to prior closing price
    • Traded up from pricing 1.3% the next session
  • Phillips 66 Partners (PSXP) filed equity distribution agreement to sell up to $250mm in common units at-the-market (filing)

M&A / Growth

  • Holly Energy (HEP) announced the acquisition of 50% interest in Cheyenne Pipeline for $42.5mm in cash (press release)
    • PAA continues to own the remaining 50% of the pipeline
    • HEP’s sponsor, HollyFrontier, also executed a long-term extension and increase of its minimum volume commitment to the pipeline
  • EnLink Midstream (ENLK) announced plans to construct new crude oil gathering system in Permian Basin (press release)
    • ENLK plans to spend $70-80mm on the buildout, the first phase of which will be in-service by the end of this year
    • Project is supported by long-term, fee-based agreements with “top Permian Basin producers”
  • The Federal Trade Commission approves the merger of ETE and WMB, but Gulfstream stake will need to be sold (press release)
    • FTC stated the combined entity will need to sell WPZ’s 50% interest in the Gulfstream Pipeline in Florida within 180 days of the merger closing
    • ETE controls 50% of the other major natural gas pipeline serving Florida (Florida Gas Transmission)
    • The sale of the Gulfstream interest has been speculated for several months now, but isn’t mandated unless there is an actual merger between ETE and WMB
    • The tax basis is likely very low on this asset, which may force some creativity on the disposal (either an asset swap or equity deal)


  • Alerian announces changes to its MLP Index series, to be implemented on 6/17 (press release). Changes include:
    • Archrock Partners (APLP), Enable Midstream (ENBL) and Terra Nitrogen (TNH) will be added to Alerian MLP and Alerian MLP Equal Weight Indexes, Capital Products (CPLP) and Calumet Specialty Products (CLMT) will be removed
      • Brings the total number of MLPs in the index up to 44
    • NGL Energy (NGL) and Tallgrass Energy (TEP) will be added to the Alerian MLP Infrastructure Index
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