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September 9, 2012

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MLP Week Thoughts: Russian Roulette Continues

MLPs roughly flat for the week, and are now underperforming the S&P 500 year to date, but also year over year, as shown in the chart below.  Interest rates were up a bit this week, but still at historically low levels.  Gold was the big winner last week, while energy commodity prices were mostly down, propane being an exception, up 3.9%.

Below are some year over year charts that give a pretty good indication of where things stand.  The first chart is the Alerian MLP Total Return Index, which shows MLPs are at their highest level since late February.   MLPs have been helped by general stock market strength and extremely low yields, which have allowed MLPs to move higher despite lower NGL and natural gas prices.

The chart below is spot propane prices at Mont Belvieu, which are down 40.7% year over year, but have shown more resilience than ethane prices given its multiple demand sources (as a cooking / heating fuel and as a petchem feedstock.

The glut in ethane is clear from the next chart, which is Mont Belvieu spot ethane prices.  Ethane is down 55.5% year over year, and sits at $0.326 per gallon compared with $0.734 per gallon a year ago.

News of the (MLP) World

  • TLLP prices $350.0mm private placement of 5.875% senior notes due 2020 at par (press release)
    • Upsized from original $310.0mm launch
  • KMI reaches settlement in lawsuit brought by former EP shareholders (bloomberg article)
    • KMI to pay $110mm to settle
    • Goldman Sachs agreed to forego $20mm of its advisory fee as part of the settlement
    • Uncertainty removed, KMI should trade higher on the news
  • OILT $70.0 Appelt II crude storage expansion (press release)
    • 3.3mm barrels of new crude oil storage capacity at its Houston terminalling facility
    • 5-7x EBITDA multiple
    • Expected to be in service in 3Q and 4Q 2014
  • CQP files mixed shelf registration statement for up to $3.0 billion (filing)

Equity Offerings

  • NS priced 6.2mm unit offering at $48.94 per unit, raising $303.4mm in gross proceeds (press release)
    • Priced at lowest price since April 2009 (see chart below)
    • Chairman Bill Greehey bought ~$24mm of the offering directly vote of confidence
    • Priced at 4.0% discount to last close, traded down 0.6% from offer price the next day, closed the week $0.01 above offer price
    • First equity offering of 2012, average one offering per year since 2008, each of the last 3 year’s equity deals were priced higher than this one

  •  TGP priced 4.6mm unit offering at $38.43 per unit, $176.8mm in gross proceeds (press release)
    • 3.8% discount to last close, finished the week below issue price
    • First equity deal since November 2011 (which priced at $33.40 per unit)
  • BBEP priced 10.0mm unit offering at $18.51 per unit, $185.1mm in gross proceeds (press release)
    • 4.0% discount to last close, finished the week at $18.64, 0.7% above issue price
    • Second follow on deal of the year, last deal in February priced at $18.80 per unit
  • EEP priced 14.0mm unit offering at $28.64 per unit, raising $401.0mm in gross proceeds (press release)
    • 3.6% discount to last close, finished the week slightly higher than issue price
    • 1st equity offering of 2012, 3rd equity offering in last 12 months, each of the last 2 deals was priced higher than this one

You can see a trend that has become increasingly prevalent in the MLP space: pricing successive equity deals at lower prices.  Of the 3 deals this week, only one (TGP) priced at a higher level than its previous equity deal.  That’s the problem with distributing out all of your cash flow and needing to access the capital markets when it may not be an ideal time.  MLPs that plan well enough or have assets well-positioned enough to be opportunistic about equity offerings are the ones you want to buy.
The other trend in follow-on offerings is the tendency for the deals to trade lower than the offering price when the market opens.  This limits the incentive for smaller investors to participate in underwritten equity offerings if they can buy them in the aftermarket and do fine.  But, the rub is that if you don’t play in the underwritten follow-on deals, you won’t get units in the hot MLP IPOs when they come out (like EQM and HCLP most recently).  Cheaper offering prices aren’t always bad, at least they give you an opportunity to buy a name that you may have wanted to buy at a higher price.  Like Bill Greehey, if you liked NS at $52 per unit, you should love it at $48.94, I guess…
Four equity deals in a short week, probably at least that many this week.  It starts to feel like Russian Roulette for your MLP portfolio, with each afternoon (when deals are usually launched) representing another pull of the trigger.  At some point the MLPs in your portfolio will launch an equity deal.  I’ve got a column coming out tomorrow at where I discuss this inevitability and what investors can expect after an equity deal gets announced.  The synopsis: almost all MLPs issue equity frequently, and it doesn’t mean death for your portfolio.  Sometimes it can even be a good thing, as reduction of overhang (the expectation of a pending equity deal), higher public float and less leverage can all be positives for the MLPs you own.

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