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July 17, 2016

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MLP Week Thoughts: Say Anything

MLPs resumed their rally this week, the MLP Index hit a new year-to-date high and outperformed oil prices again.  MLPs also beat the S&P and utilities, despite a 22 basis points increase in the U.S. 10 year rate week over week.  MLPs reacted positively to company-specific announcements that offered clarity to cloudy situations (PAA) or highlighted execution towards a healthier financial position (KMI).  Other MLPs rallied on the hope of positive strategic announcements still pending (WMB/WPZ, EEP/MEP).
Major strategic announcements have been positively received, as some level of certainty is preferred over looming issues in need of a fix.  See below for a list of major strategic announcements this year (several of which were accompanied by distribution cuts) for evidence.

  • PAA elimination of IDRs and distribution cut
  • SEMG/RRMS merger
  • ETE terminating merger agreement with WMB, and announcements prior regarding tax opinions
  • KMI de-leveraging transactions for Utopia and Southern Natural Gas pipelines
  • MPLX supportive drop down acquisition from MPC
  • CEQP distribution cut and JV/asset sale with major utility
  • NGL and APLP distribution cuts

Last year, strategic announcements, notably Targa’s rollup and MPLX’s acquisition of MWE were both met with heavy selling.  Teekay’s surprise distribution cuts across its MLP complex was likewise not appreciated by the market.
This year, clean up trades have been almost universally positive.  There are a few MLPs that remain “broken” to some degree, either with regards to financing capital plans, covering their distribution or high leverage.  Based on the recent trend, regardless of what lever these MLPs choose to pull, they will likely find the market receptive.
Poll Question Recap
Midstream earnings season is back, starting with KMI’s release on Wednesday night.  Next week starts earnings season, which should prove to be very interesting given that production declines are ongoing, producer budgets for 2017 are at least a quarter away, but light (i.e. growth in throughput) is beginning to emerge at the end of the tunnel.
Last week we had a poll that asked what the biggest theme would be for 2Q earnings season.  Balance sheet concerns (equity needs and leverage) was the winning choice with 35% of the vote.  Addressing balance sheet and funding concerns has been rewarded lately (see KMI), so further execution towards lower leverage targets should be welcomed by the market.
2Q16 Themes
Beyond balance sheet, the next winner was medium term growth (22% of vote), which would be a continuation of what we saw last quarter where MLPs are starting to look forward towards a resumption in production activity that could lead to volume growth in certain regions.  Growth outlook earned more votes than near-term volume declines, which is inline with what I would expect, that while the market will be concerned with near-term volume trends, they will be willing to look beyond the near-term to tangible signs of activity resumption and volume growth.
Winners & Losers
Small cap MLPs dominated the top 5, with not much of a pattern, other than some of the recent MLPs that have rallied have been heretofore overlooked in the initial re-rating of MLPs since the lows early this year.  Larger MLPs SXL and WES made the bottom 5 this week, but the downside movements weren’t very large across the board.
Not pictured here is PAA, which rallied 6.1% week over week, including more than 10% on the day it announced the simplification transaction and distribution cut.  For the second straight week, very small MLPs have dominated the top 5, an indication that some MLP buyers have extended their search for value beyond the most prominent names.
Year to date, SXCP’s wild ride continued this week, with another top 5 weekly finish that ballooned its YTD lead.  CNNX rejoined the top 5.  On the downside, CPLP gained on the rest of the sector with a big week, but remains the worst performer so far this year.
General Partner Holding Companies
PAGP was the big winner in the sector this week, as it was confirmed PAA would be the acquirer of the GP interest at a premium as opposed to the recent trend of GPs buying in MLPs.  WMB was also a strong performer, perhaps helped by the PAGP announcement, then clearly helped further by reports of interest in their Canadian asset sale process.
KMI (not pictured below) rallied 13.4% this week, popping on its announcement Monday and grinding higher the rest of the week.  The rest of the GPs traded within a reasonably tight band.  ENLC and NSH underperformed the group again this week, while TEGP made it two straight weeks in the top 5.
News of the (MLP) World
It was a heavy news week in the MLP space, with basically $1bn+ worth of M&A activity announced or reported on each day this week.  Another big utility JV and another IDR elimination transaction were the biggest news items.
Action north of the border was pretty intense as well, with a $1.1bn pipeline changing hands and reports of bidding for WMB’s Canadian assets moving the market Thursday.  Canadian midstream companies held up better than MLPs over the last 18 months and their relative financial strength has positioned them well to pick off assets and whole companies (see CPGX).

  • EnLink Midstream (ENLK) priced $500mm of 4.85% senior notes due 2026 at 99.859% of par (press release)
    • Upsized from original $400mm offering size
  • Dominion Midstream (DM) filed equity distribution agreement to sell up to $150mm worth of common units at-the-market (filing)
  • Holly Energy Partners (HEP) priced $400mm of 6% senior notes due 2024 (press release)

M&A / Growth

  • Plains (PAA and PAGP) announced simplification transactions and distribution reduction (press release)
    • In “simple” terms, PAA is buying out the IDRs with PAA units, PAGP will remain outstanding as essentially a 1099-issuing security that tracks PAA
    • PAA’s general partner agreed to permanently eliminate PAA’s incentive distribution rights (IDRs) in exchange for 245.5mm newly-issued PAA common units and assumption of $593mm of outstanding debt
    • PAA also announced a 21% distribution reduction, effective with 3Q distributions (November 2016)
    • Transaction expected to close in 4Q 2016
    • Unlike the January preferred equity offering, PAA did not title its slide deck “One and Done”, but management did hint that further deleveraging could be accomplished by issuing equity in chunks on its ATM program
  • Kinder Morgan (KMI) announced strategic joint venture with Southern Company (SO) that includes partial sale of Southern Natural Gas (SNG) pipeline system (press release)
    • SO to acquire 50% of SNG, although KMI will remain the operator
    • Both parties commit to “cooperatively pursue specific growth opportunities to develop additional natural gas infrastructure for the strategic venture”
    • Implied equity value for 50% stake is $1.47bn, which will accelerated KMI’s de-leveraging efforts
  • Magellan Midstream (MMP) announced construction of new terminal on Houston Ship Channel to handle refined products (press release)
    • Project is expected to cost $335mm and is supported by a long-term customer commitment
    • Project includes construction of 1mm barrels of refined products and ethanol storage, a new marine dock on 200 acres of newly acquired land
    • MMP will construct a 36-inch pipeline to connect the facility to MMP’s Galena Park facility
    • New facility is potentially expandable to 10mm barrels of storage and up to 5 docks
  • Devon Energy (DVN) announced sale of 50% of Access Pipeline to Wolf Midstream for $1.1bn (press release)
    • Wolf Midstream is a portfolio company of Canada Pension Plan Investment Board
    • The agreement includes the potential for an additional $120mm payment following DVN’s sanctioning of a new thermal project on DVN’s Pike lease in Alberta, Canada
    • DVN has agreed to dedicate its thermal oil acreage to Access Pipeline for 25 years
    • DVN has been seeking a sale of its interest in Access as part of its asset divestiture program, and will use the proceeds to fund accelerated development on its best U.S. acreage (STACK and Delaware Basin)
  • Valero Energy Corp (VLO) announced acquisition of remaining 50% interest in Parkway Pipeline LLC from Kinder Morgan for an undisclosed price (press release)
    • Parkway Pipeline is a 141-mile, 16-inch products pipeline with 110,000 bbls/d of capacity, expandable up to 200,000 bbls/d
    • The pipeline runs from VLO’s 305,000 bbls/d St. Charles refinery in Louisiana to Collins, Mississippi to supply the Plantation pipeline system (51% owned by KMI)
    • This acquisition adds to the pool of midstream assets that VLO can sell down to subsidiary MLP VLP over time
  • Reports indicated that the Canadian unit of Williams Companies (WMB) has attracted interest from at least 7 bidders and could sell for as much as $2bn (Reuters)
  • CrossAmerica Partners (CAPL) announced acquisition of fuel distribution assets in Illinois for $45mm (press release)
    • Assets consist of 59 fee sites that combine to sell over 60mm gallons of fuel annually
  • Sunoco Logistics (SXL) wins court decision regarding use of imminent domain in Pennsylvania for Mariner East 2 pipeline project (press release)


  • Distributions:
    • AM: $0.25, +6.4% quarter over quarter, +31.6% year over year
    • CINR: $0.567, +0.5% QOQ, +4.1% YOY
    • PAA: flat this quarter, -21% next quarter
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