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March 16, 2012

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MLP Week Thoughts: Spring Break-Down

Most Texas schools are on Spring Break this week.  Other folks are turning their attention to NCAA tournament brackets for the beginning of a 4 week stretch during which people acknowledge that college basketball exists.  Others still are drinking their faces off and dipping french fries into green ketchup to celebrate St Patrick’s Day.  The rest of the country spent the week either blogging about SXSW from a 4G homeless hotspot (see below), or were eagerly buying AAPL stock while awaiting the launch of the newest iPad.

The few people paying attention to MLPs this week were not treated to much green, unless it was served with their Burger King fries, or unless they were holders of Atlas Resource Partners, which was up 25% this week.  The lack of green for MLPs mirrored losses in other yield oriented sectors, as a result of a general un-easing feeling from the Fed this week.
The chart below of the 10-year Treasury rate is the result.  The interest rate spiked 26 basis points week over week to close at 2.30%, the highest the rate has been since August 11, 2011.  With no Europe to worry about, and no QE3 pending, treasuries seems to be attracting less interest, which means those that are interested get more interest.

So, rates were up, stocks were up, oil was flat, and MLPs and Gold were way down this week.  MLPs should generally be fine in a slowly rising interest rate environment, but weeks like this one when we see sudden spikes in rates are going to have a negative impact on MLPs.  When rates rise and bonds get hit hard, MLP distribution growth gets discounted in the short term and MLPs get hit hard too.  Its the same thing when oil prices have drastic moves.
Generally speaking, even in a rising rate environment, I still believe MLPs are a good investment, I remain intrigued by the businesses they own and the secular oil and gas production growth story behind them.  I do not primarily invest in MLPs as an alternative to bonds or strictly based on the income they generate, although I recognize that is why many buy MLPs.  I am buying them as a risk asset, and I make every effort to create total return for my clients, which is why I have been happy to own certain GPs, even at sub-4% yields.

Despite lower MLP prices, it was a very active week of deals in the MLP sector, with 2 equity offerings, and several new projects and M&A announcements.
Kinder’s Rockies Express Pickle
Kinder Morgan gets tentative approval, but must sell Rockies Express, other assets (Fuelfix BlogBloomberg).  The Federal Trade Commission gave tentative verbal approval for the $23.8 billion merger based on the company’s agreement to sell its 50% interest in the Rockies Express Pipeline, along with its Kinder Morgan Interstate Gas Transmission, Trailblazer Pipeline Co., Casper-Douglas natural gas processing and West Frenchie Draw treating facilities.
Rockies Express pipeline was going to be a tough sell under normal circumstances, as evidenced by the unsuccessful attempts of ConocoPhillips and Sempra to sell their respective stakes.  With the added pressure of the EP merger hinging on the sale, KMP will be eager to make a deal at any price.  That might create a great opportunity for whoever the buyer ends up being, speculation is that Spectra Energy would make sense.  I haven’t read any other names.  The market caught on to Kinder’s conundrum and discounted the implied fire-sale price of the Rockies Express Pipeline, sending KMP’s units down 5.6% this week.
Interesting Articles:

Other News of the (MLP) World:

  • ATLS completes spinoff, Atlas Resources (ARP) announces acquisition
    • ATLS distributes shares of ARP, an MLP that will own most of ATLS’s E&P assets (press release)
    • ARP announces $197 mm acquisition for $0.69 per mcfe and announces 2013 distribution expected to be 45% higher than 2012 guidance (press release)
  • CHK and EVEP involved in $900 million partnership for Utica midstream buildout (press release)
    • Chesapeake Midstream Development to invest and own 59%, EVEP a 5% partner
    • Complex will include gathering and compression facilities, and cryogenic processing facility with capacity of 600 mcf/d.
    • NGLs will be delivered to its NGL hub complex with an initial storage capacity of 870,000 barrels of and fractionation capacity of 90kbpd
  • Markwest Energy Partners (MWE) priced 5.9 million equity offering at $59.64 per unit, raising $352 mm in gross proceeds (press release)
  • Amerigas Propane Partners (APU) priced 7.0 million unit marketed follow-on equity offering at $41.25, raising $289 mm in gross proceeds (press release)
    • APU also announces intention to raise distribution 5% next quarter (press release)
  • Rhino Resource Partners (RNO) announces lease deal with CHK for its Utica acreage (see my post from earlier this week)
  • Howard Energy Partners announces acquisition (press release)
    • Chris Helman on GE’s participation (Forbes)

Disclosure: The information in this article is not meant to be financial advice, I am not your financial advisor and I am posting my comments for informational purposes only.  Long RNO, KMI, EVEP.

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