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April 5, 2015

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MLP Week Thoughts: Signs of Seasonal Strength

In a holiday shortened week, the Alerian MLP Index (AMZ) traded up 1.0% to make it three straight positive weeks.  MLPs seemed to be helped by higher commodity prices and no equity issuance this week.  MLPs outperformed the S&P 500 (+0.3%) slightly while underperforming utilities (+1.7%).
Weekly Review_4-2-15
Despite the market holiday on Friday, the U.S. jobs report for March showed the lowest amount of job growth in 15 months, which calls into question the strength of the economic recovery and may call into question the Fed’s plan to raise short term interest rates.  A weaker recovery in the U.S. doesn’t bode well for much-needed commodity demand, but lower for longer interest rates may steer yield-hungry investors towards high dividend stocks like REITs, utilities and perhaps MLPs.
Oil price finished slightly higher, making it 3 straight positive weeks for oil prices as well.  Oil prices rallied Wednesday after data from the EIA showed that oil production declined week over week by 0.4%, the first weekly decline since January.  Oil storage continued to build in the U.S. to record levels, but the addition to inventory was less than last week.  Natural gas remains volatile week over week, but remains well below $3/mmbtu.
Status Update
We passed through another month and quarter this week, which gives us an opportunity to take stock in where we are.  March saw the MLP Index decline 4.2%, making it 6 negative months out of 7.  The index declined 5.2% over the first 3 months of the year, a second consecutive negative quarter.  Taken together, the most recent two quarters trail only the second half of 2008 for the worst 6 month stretch in MLP history.  In the 5 years that followed, the MLP index produced average annual returns of 29.5%.  It’s doubtful that a rally like that is pending, but it is logical to expect some relief at some point.
Monthly Check_3-31
If investors are seeking relief, history suggest April is the month that offers it.  The MLP Index has produced positive returns in April for 10 consecutive years and 15 of the last 17 years.  The broader stock market has enjoyed success in April as well, with the S&P 500 averaging +1.3% return in April since 1928, making it the third best month on average.  As shown below positive streaks for MLPs are quite rare these days.  If April finished negative there will be only one month left with more than 1 year in a row of positive returns.
Consecutive Months
Winners & Losers
Each of the top 5 represents MLPs that operate fundamentally different assets along the energy value chain, and none of the top 5 announced any company-specific news this week.  On the downside, however, negative company-specific news impacted stocks like CELP and SDLP.
Top5Bottom5_4-2-15
No repeats among winners or losers this week, a testament to the lack of follow through and the way MLPs have been trading in fits and starts.
Weekly Review_4-2-15_chart
Smaller MLPs continue to dominate the top of the year-to-date performance table.  Upstream MLPs dominate the bottom 5.
Top5Bottom5_4-2-15_YTD
DLNG dropped out of the top 5, replaced by fellow marine transport MLP CPLP.  ARLP climbed out of the bottom 5, replaced by fellow coal MLP NRP.
Top5Bottom5_4-2-15_YTD_chart
News of the (MLP) World
With Good Friday, it was a quiet week for MLP press releases.  Although there were some interesting drop-downs, and a few new midstream JVs with companies just outside the U.S.
Equity

  • CNX Coal Resources (CNXC) filed initial registration statement to raise up to $250mm in an MLP IPO (filing)
    • Formed to manage and develop all of CONSOL Energy’s thermal coal operations in Pennsylvania

M&A / Growth Projects

  • Dominion Midstream (DM) announced acquisition of Dominion Carolina Gas Transmission from sponsor Dominion for $495mm (press release)
    • Funded with $200mm of DM units and a two year note to Dominion
  • Kinder Morgan (KMI) and Keyera Corp (TSX: KEY) announced plans for a JV to construct a new crude oil terminal in Edmonton (press release)
    • The JV owners have entered into long-term, firm take-or-pay contracts with customers to build 4.8mm bbls of crude oil storage at the facility
    • KMI’s investment will be CAD$342mm for an initial 12 tank build-out to be completed by 2H 2017
    • KMI will invest an additional CAD$69mm outside the JV for connecting pipelines and related infrastructure
  • Delek Logistics (DKL) announced acquisition of crude oil logistics assets from sponsor Delek US Holdings (press release)
    • The assets, purchased for $61.9mm, include an oil storage tank adjacent to Delek US’s Tyler refinery and rail offloading racks adjacent to Delek US’s El Dorado refinery
    • The assets are expected to produce $6.7mm of annual EBITDA (8.2x implied EBITDA multiple)
  • ONEOK Partners (OKS) announced pipeline JV with Mexico City-based natural gas Infrastructure company Fermaca to construct export natural gas pipeline to Mexico (press release)
    • Pipeline will extend from OKS’s WesTex Transmission pipeline system in Coyanosa, TX to an international border crossing connection at the U.S. and Mexico border where it will connect with Fermaca’s Tarahumara gas pipeline
    • The project is expected to cost $450-500mm and to be completed in 3 phases, with the final phase expected in 2019

Other

  • Breitburn Energy (BBEP) announced $1bn capital infusion by private equity firm EIG Global Energy Partners (press release)
    • Capital consists of $350mm of perpetual convertible preferred equity and $650mm of senior secured notes
    • BBEP also announced a further 50% distribution cut
    • BBEP will likely be removed from the Alerian MLP Index as a result of this second distribution cut, leaving just 3 E&P MLPs (LGCY, MEMP and LINE)
  • Enterprise Products (EPD) announced CEO Michael Creel to retire by at the end of 2015 (press release)
    • Creel has been CEO of EPD since 2007, and has held the position for longer than anyone else since EPD’s IPO
    • Creel will be replaced by Jim Teague, EPD’s COO, who will be the 5th EPD CEO since its 1998 IPO
    • EPD also announced that Randy Fowler will be appointed to new role of Chief Administrative Officer, and Bryan Bulawa will take over as CFO
  • Seadrill Partners (SDLP) announced receipt of early termination for West Sirius contract and extends West Capricorn contract (press release)
    • SDLP received notice from BP for termination of the contract for the West Sirius, SDLP agreed to lower day rate and decrease term to July 2017
    • BP extended West Capricorn lease with SDLP by two years at an increased day rate to make up for the West Sirius cash shortfall through 2017
    • SDLP expects no material impact to cash flow over the contract period through 2017
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