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June 28, 2015

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MLP Week Thoughts: Seeking Strategic Alternatives

MLPs were slammed again, and it seems that interest rates were the primary culprit this week.  Interest rate on the U.S. 10-year treasury rose 21 basis points, to 2.47%, sending utilities down 2.4%, and throwing cold water on the MLP sector again, which couldn’t maintain a rally this week, even with a clear scale-grabbing consolidation trend well underway that could make smaller MLPs M&A targets.
The weekly energy related data points were generally benign, including natural gas storage (lower injection that expected), oil storage (large inventory draw), and rig counts (oil-directed rigs still going down).  Oil finished flat, while natural gas and NGLs finished higher.
Weekly Review_6-26
This week, benevolent ETE swooped in to save the MLP structure!  Rather than allow WMB to merge with WPZ and exit the MLP space like KMP did, ETE has stepped in for the good of the sector to keep WPZ alive, even if the transaction is dilutive to ETE…  (I don’t really believe ETE is acquiring WMB for the good of the sector, but the proposed deal does look dilutive at least prior to commercial synergies and potential ETE asset swapping magic among its existing MLPs).  These two entities have tangled in the past (see my post from almost exactly 4 years ago regarding the Southern Union bidding war between ETE and WMB).
Poll Question Recap
Last week, we asked readers to choose one single reason that they perceive to be most responsible for the recent MLP decline.  “Fundamentals (including NGL prices)” was the reason chosen most often (35%), followed by Anti-MLP or Anti-Energy Sentiment (25%), Interest Rates (24%), Weak Fund Flows (15%), and Equity Issuance (1%).  The mixed results reflect the broad tapestry of negative factors holding MLPs down.
Poll Question
Given the news this week, this week’s poll question asks for your opinion on what appears to be a binary outcome at this point.
Sorry, there are no polls available at the moment.
Winners & Losers
The sector’s attention turned to the GP holding company universe following the late Sunday chatter of a rejected offer for WMB and then ETE’s confirmation of an all-stock offer.   So, we start with the GP chart first.  Merger-arb players were hurt if they were playing for WMB to close the WPZ merger, and merger-arb players quickly got to work selling ETE and buying WMB.   EQGP was up this week as the quiet period ended for research analysts from banks involved in the IPO and initiation reports hit.  Also, OKE caught a bid this week, separating from its MLP (OKS -1.4%).
Top5Bottom5GPs_6-26-15
Only 4 GPs were negative this week, and only 3 underperformed the MLP Index.  Outside of WMB and EQGP, which each had catalysts, the rest seemed to catch a bid based on hopes for additional consolidation.
Top5Bottom5GPs_6-26-15_chart
In terms of MLP winners, SMLP had a very strong week, along with TLLP/QEPM and AMID.  GLOP moved sharply lower on its equity offering, despite simultaneous drop down acquisition and distribution growth announcements.
Top5Bottom5_6-26-15
NSLP went from near the bottom last week to the top of the chart this week, as volatility week to week for smaller MLPs continues.
Top5Bottom5_6-26-15_chart
Year to date, NGL was replaced in the top 5 by EROC.  No other changes among top 5 or bottom 5 constituents this week.
Top5Bottom5_6-26-15_YTD
Top5Bottom5_6-26-15_YTD_chart
News of the (MLP) World
The back and forth between ETE and WMB dominated headlines this week.  There was some other activity outside of the traditional midstream sub-sector, including a follow-on to fund a drop-down in the marine space, and two IPOs that struggled to fill their order books.  One of the signs we can look forward to for a sustained recovery of MLPs is when follow-on offerings start to trade up from pricing.
News-of-the-World
Capital Markets

  • GasLog Partners (GLOP) priced public offering of 7.5mm units at $23.90/unit, raising $179.3mm in gross proceeds (press release)
    • Overnight offering, priced at 4.4% discount to prior closing price, and traded down an additional 4.4% from pricing in the next trading session
  • Green Plains Partners (GPP) priced IPO of 10.0mm units at $15.00/unit, raising $150mm in gross proceeds (10.7% yield based on MQD) (press release)
  • CNX Coal Resources (CNXC) revised its IPO pricing from $20/unit to $15/unit and its offering size down to 8.0mm units, and is now expected to price its IPO next week (prospectus)
    • New price implies 13.7% yield at IPO

M&A / Growth Projects

  • Williams (WMB) announced receipt and rejection of offer to acquire WMB from unidentified suitor, contingent on breaking up announced acquisition of WPZ (press release)
  • Energy Transfer Equity (ETE) announced all-stock offer for WMB that values the company at $53bn, and outlined plans for the combined midstream family of MLP in an investor presentation (presentation)
  • GasLog Partners (GLOP) announced drop-down acquisition of 3 vessels from sponsor GLOG for $483mm (press release)
    • The 3 acquired vessels are modern LNG carriers built in 2007, each with 145,000 cubic meters of capacity
    • The vessels are contracted to BG Group, with remaining contract lives of 4.5 years, 5 years and 5.5 years, respectively
    • GLOP expects to earn $50.8mm in EBITDA from these vessels in the next 12 months, implying a 9.4x multiple
    • GLOP expects to raise distributions by 7-10% next quarter based on the acquisition
  • Magellan Midstream (MMP) announced that its Saddlehorn oil pipeline project will add a 50-mile extension to Carr, CO (press release)
    • Expected to add another $80-100mm in additional capex to the project
  • Howard Energy Partners announced open season for 200-mile natural gas pipeline from Texas to Monterrey, Mexico (press release)
    • Howard is backed by EnLink Midstream (ENLK) and private equity firm Alinda Capital

Other

  • OCI Enterprises, Inc. evaluating strategic alternatives for its stake in OCI Resources LP (OCIR) (press release)
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