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February 22, 2015

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MLP Week Thoughts: Refreshing Expectations

MLPs rebounded this week, with most of the gain came on Friday when MLPs rallied despite lower oil prices.  The Alerian MLP Index (AMZ) traded up 0.7% for the week, and is now 3.0% higher than the February low from last Wednesday.  Performance was better among midstream MLPs than upstream MLPs, and better among larger MLPs, with significant differentiation among winners and losers within subsectors.
Weekly MLP Review_2-20-15
The S&P 500 posted a third consecutive positive week up 0.6% to new highs, while utilities posted 1.0% gains for the week. Oil prices finished 4.6% lower this week on continued U.S. inventory builds, and the latest rig count reports that apparently weren’t draconian enough to sustain a fourth consecutive positive week for oil prices.  Continued cold weather helped natural gas prices spike, up 9.6% this week and 17.1% since hitting a 52-week low two weeks ago.  Cold weather has also helped propane price change this year outpace all other energy commodities.
Top Tier Over the Years
Last week, I ranked MLPs that have paid a distribution for at least a year (so not including recent IPOs) based on their historical annual distribution growth rates.  Top Tier MLPs are growing quite rapidly, with each of the top 20 MLPs growing distributions at an annual rate of more than 15%.
I was curious about how that top tier looked 5, 10, and 15 years ago.  I have run the numbers and below I share the summary results.  The number of fast growing MLPs has expanded along with the universe of MLPs, but the percentage of MLPs growing more than 15% annually has been higher than it is today before (in 2005).
Top Tier Summary
Other takeaways:

  • MLP distribution growth rates were quite low exiting 2009 after the financial crisis sent commodity prices tumbling. MLPs appear better positioned this time around based on 2015 guidance so far.
  • In 2000, there were still many MLPs content not to grow distributions at all, about half of the universe of 19 MLPs had not grown distributions at all in the 3 years prior to 2000. This was the very early stages of the growth MLP model.  (KMP led the way with 32.0% 3 year CAGR, followed by BPL at 17% and Teppco Partners at 15%).
  • 2005 was close to the apex of the first round of growth MLPs that were able to grow consistently by acquiring assets from third parties. Once more MLPs came to market, competition for acquisitions heated up, and the sector started shifting towards “organic” growth and drop-down acquisitions.
  • 2015 growth MLPs rely on sponsor-driven growth (i.e. drop downs). 17 of the top 20 fastest growing MLPs today achieved their growth with the assistance of drop downs. In 2010, just 7 out of 20 relied on drop downs.  In 2005 and 2000, drop-down MLPs were even scarcer.

Another Obtuse Index Change
Alerian announced BWP to be added to the 50-member Alerian MLP Index and Alerian MLP Equal Weight Index, replacing APL (press release).  BWP was removed from the index last year after cutting its distribution drastically. Prior to its removal, BWP had been in the index since December 2005 (just a month after its IPO in November 2005, before there were 50 MLPs trading).  BWP does not currently pay its minimum quarterly distribution, which is a criteria for inclusion in the index.  I guess there were no MLPs that met all the qualifications for inclusion, so BWP may have been added because it checked the most boxes of Alerian’s criteria (found here).
Expect more turnover with the index going forward, assuming that distribution cuts beyond the MQD disqualify VNR, EVEP, LINE and BBEP from inclusion in the next rebalancing, and assuming the ETP/RGP deal closes.  Below is a chart that highlights the changes to the index since the beginning of 2014, which highlights the massive turnover and the weight redistribution towards large caps, but also some names getting shuffled in and out of the index (yellow shaded names).
AMZ Turnover
Winners & Losers
TEP announced solid results and surprised the market by giving 3 year guidance for 20%+ distribution growth annually.  RMP caught a bid this week, presumably on stronger gas prices and a possible read through to higher volumes.  PBFX continues to climb higher after its big distribution announcement last week.  Better results out of MEP caught the market by surprise, sending its units higher.
On the downside, upstream MLPs VNR and NSLP were dragged down by lower oil prices, but we aren’t seeing the wide daily swings in upstream MLPs that we saw a few weeks ago.  CMLP was down on news that a customer that represents 10% of EBITDA may finally throw in the towel and go CH 11.   EQM seems to be suffering from some GP overhang, down 6.7% this week.  PSXP’s offering contributed to its weakness.
NSLP went from top performer to near the bottom on weaker oil prices this week.  MEP made it two weeks in a row in the top 5.
Year to date, small cap, high beta MLPs dominate the top and bottom 5.  Of note, I have not included NKA and RNO in these charts and will not going forward.  Generally stocks that trade below $5.00 and pay little or no distribution show up on these charts because of volatility, but are mostly meaningless to MLP investors, so it makes sense to exclude them to get a better picture of what’s moving among significant MLPs.
DPM and WLKP escaped the bottom 5 this week, while CELP and NMM made the cut for the top 5, displacing NSLP and LRE.
News of the (MLP) World
Reports of 4Q2014 results were again the focus this week. Results and stock price reactions were mixed, but the market generally reacted positively to receiving clarity on 2015 capital expenditure and distribution growth plans.   While trading volumes in MLPs have trended down over the last few months, the capital markets remain open to MLPs, confirmed by a $396mm equity offering from PSXP.

  • Phillips 66 Partners (PSXP) priced public offering of 5.25mm units at $75.50/unit, raising $396.4mm in gross proceeds (press release)
    • One day marketed offering, with a file-to-price decline of 4.2%, and PSXP traded down 0.7% the following day
    • Proceeds to be used to partially fund the drop down acquisition announced this week


  • Phillips 66 Partners (PSXP) priced $1.1bn of senior notes, including (press release):
    • $300mm 2.646% senior notes due 2020 at par
    • $500mm 3.605% senior notes due 2025 at 99.967% of par
    • $300mm 4.680% senior notes due 2045 at 99.953% of par

M&A / Growth Projects

  • EnLink Midstream (ENLK) announced drop down of additional 25% interest in EnLink Midstream Holdings for $925mm (press release)
    • ENLK has been very active lately, this transaction represents the 3rd acquisition of 2015 for ENLK and the 5th acquisition in the last 6 months
    • 100% equity financed with the issuance of 31.9mm units to sponsor EnLink Midstream LLC (ENLC)
    • ENLK now owns 75% of EMH, with ENLC holding the remaining 25%
    • Acquisition price represents a 9x multiple of expected 2015 EBITDA
  • Phillips 66 Partners (PSXP) announced acquisition of interests in 3 pipeline systems from sponsor for $1.01bn (press release)
    • PSXP will acquire 1/3rd interest in Sand Hills and Southern Hills NGL pipeline companies and a 19.5% interest in the Explorer pipeline
    • Financed with $880mm of cash (funded with debt and equity issuances above) and 1.7mm units issued to PSX
    • Acquisition price represents 9.5x multiple of expected 2015 EBITDA
  • Sunoco Logistics (SXL) announced the acquisition of 40% of the West Texas Gulf oil pipeline system for $456mm (press release)
    • SXL owned 60% of the pipeline already, and now owns 100%
    • Acquisition closed in two separate transactions in December and January
    • The pipeline system connects Permian Basin produced oil to multiple markets across Texas
  • NGL Energy (NGL) announced plans to increase the size of Grand Mesa oil pipeline to a higher capacity 20-inch diameter design (press release)
    • Increase in size of the pipeline will increase the capacity from 130,000 bbls/day to 200,000 bbls/d
    • Grand Mesa is currently under construction and expected to be completed by 4Q 2016
  • ARC Logistics (ARCX) announced acquisition of an oil terminal in Joliet, Illinois in a JV with GE Energy Financial Services (press release)
    • Financed in part with a PIPE of $75mm with “institutional investors” at $17.00/unit
    • ARCX closed at $19.82 Friday, up 7.7% on the day, but representing unrealized gains for the PIPE investors of 16.6%
    • Acquisition represents 9.0x EBITDA for its portion of the acquisition ($130mm)
    • Assets supported by 3-year contracts with a major oil company and with minimum volume commitments


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