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July 18, 2015

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MLP Week Thoughts: Stuffed

MLPs declined 2.7% this week, hurt by weaker oil prices and two equity deals that proved particularly hard for the market to digest.  The back half of the week was brutal, with the index declining 4.4% over the last 3 days of the week, each day more than 1% negative.  Any M&A read through to other MLPs created Monday with the MWE/MPLX merger was gone by Wednesday. The equal weight version of the AMZ was down much more than the AMZ as the MWE and MPLX price movements balance themselves out in an equal weight index and the few remaining upstream MLPs were sharply negative impacting the equal weight index more than the market cap weighted AMZ.
Weekly Review_7-17
We were off the lows last week, but this week, the MLP Index established a fresh 52-week low with Friday’s close.  The MLP Index is 27.9% below (24.6% including distributions) its all-time peak at the end of August last year, 25.1% (20.7% with distributions) below 12 months ago, and 14.1% below its recent peak in May.
Oil was 3.6% lower, grinding lower throughout the week, with the Iran deal most often cited as the reason for the weakness.  But, dollar strength relative to European and Canadian currency didn’t help oil prices.  The rig count released Friday indicated a week over week decline for the US, which helped stem the tide on weak oil.
Meat Reversion
The MLP market did its best to choke down more equity issuance this week, in the face of fund outflows and what appears to be short selling.  The MLP market is finding it increasingly difficult to digest equity of almost any size, and given a lack of new money flowing in, dedicated MLP institutions are having to sell existing MLP positions to fund purchases in offerings, weighing on the entire sector.
In a post published in March of last year, I compared the MLP market to the calf scramble at the Houston Livestock Show and Rodeo.  At the time, there was more money than MLP ideas, and certain stocks were chased higher than they probably should have been.
Fast forward to today and I’m struck by another meat-related image.  The current market can be compared with a competitive eater in the final minutes of the Nathan’s Hot Dog eating contest, trying to squeeze a few last hot dogs into his already stuffed mouth without gagging.
Hot Dog
The balance of fund flows and equity issuance has been a challenge for the sector over the years.  The MLP sector could not have grown as much as it has over the years without growing its investor base.  But there have been brief times when MLPs have issued so much equity in a short period of time that the market gets off balance.  In the calf scramble post, it seemed like the balance had swung too far in the direction of fund flows and MLP prices climbed higher.  We’ve now tipped way in the other direction as limited new investor activity in the face of equity issuance is pressuring prices lower.
Poll Question Recap
Last week, we asked readers to choose which type of MLP they’d want to own in a rising rate environment.  The high-growth MLP with a 2% yield was the winner with 44% of the vote, but was closely followed by the 6% yield, 6% growth MLP that garnered 42% of the votes.   The highest yield MLP with no growth came in a distant third place with 11%.  In the real world this week, the answer was none of the above.
Winners & Losers The most relevant MLPs on the chart below are the biggest winner, MWE, and the biggest midstream loser, MPLX.  The remaining top and bottom 5 MLPs are just noise, with pockets of strength among small cap MLPs and another haircut to upstream MLPs on the downside.
On the year to date chart, DKL dropped from the top spot and TLP dropped from the top 5 altogether, replaced by USAC.
General Partner Holding Companies
In the aftermath of the MWE/MPLX merger announcement, long-rumored potential takeout candidate OKE caught a bid along with other M&A targets SEMG and TRGP.  Not surprisingly, their subsidiary MLPs caught no such bid.  Overall, GPs were ugly this week, and while the median performance was better than the Alerian MLP Index, a cap-weighted average would be much worse, given the biggest GP (ETE) was down the most.
News of the (MLP) World
A staggering amount of news this week, and MLP earnings season hasn’t even really started yet.  M&A activity is clearly ramping up, with nearly $25bn worth of M&A announced this week.  To help finance all that, equity deals had to be executed, and in a market as weak as this, the $600mm of MLP equity issued weighed on the sector like only billions of dollars of equity would have in better times.  Some MLPs that announced better than expected distribution growth saw positive price performance (TEP and CNNX), but the effects were temporary or muted by sector-wide selling.
Capital Markets

  • Sunoco LP (SUN) priced public offering of 5.5mm units at $40.10/unit, raising $220.6mm in gross proceeds (press release)
    • One day marketed offering, with a file-to-price decline of 7.9%, but SUN did outperform in the next session, falling just 0.5% vs. the MLP Index down 1.2%
    • Proceeds to be used to partially fund acquisition of retail assets from ETP (see below)
    • SUN also priced $600mm offering of 5.5% senior notes due 2020
  • Genesis Energy (GEL) priced public offering of 9.0mm units at $43.77/unit, raising $393.9mm in gross proceeds (press release)
    • One day marketed offering, with a file-to-price decline of 5.85%
    • Proceeds to be used to partially fund the acquisition of offshore oil pipeline assets from EPD (see below)
    • GEL also priced $750mm offering of 6.75% senior notes due 2022

M&A / Growth Projects

  • MPLX (MPLX) and MarkWest Energy (MWE) announce $20bn merger (press release)
    • MWE will become a subsidiary of MPLX via a unit-for-unit transaction, plus a one-time cash payment to MWE unitholders
    • MWE unitholders will receive 1.09 MPLX units for each MWE plus a one-time cash payment of $3.37/unit
    • Purchase price (prior to price movements) represented 32% premium for MWE
    • Agreement includes a $675mm breakup fee, which should limit potential topping bids, despite the lower implied premium after MPLX units sold off after the announcement
    • MPLX reiterated 29% 2015 distribution growth, announced 25% annual distribution growth through 2017 and “peer-leading growth profile thereafter”
    • Transaction is expected to close in 4Q2015
  • Genesis Energy (GEL) announced acquisition of offshore oil business from Enterprise Products (EPD) for $1.5bn (press release)
    • Acquired assets include 36% interest in the Poseidon Oil Pipeline System, a 50% interest in Southeast Keathley Canyon Oil Pipeline System (SEKCO) and a 50% interest in Cameron Highway Oil Pipeline System (CHOPS)
    • The acquisition consolidated ownership of the pipelines, as prior to the acquisition, GEL owns 28% of Poseidon, 50% of SEKCO and 50% of CHOPS
    • GEL management indicated the assets will produce $200mm in EBITDA, implying a 7.5x forward multiple
    • Acquisition is expected to close in July 2015
  • Sunoco LP (SUN) announced the acquisition of 100% of Susser Holdings Corp for $1.94bn from sponsor Energy Transfer Partners (ETP) (press release)
    • SUN will pay $970mm in cash and will issue approximately 22mm units to ETP
    • The acquired assets consist primarily of retail operations of convenience stores in Texas, New Mexico and Oklahoma under the Stripes brand name
    • All income from the acquired assets is non-qualifying and therefore the assets will be contributed to SUN’s corporate subsidiary PropCo.
    • According to management, the acquisition is breakeven to distributable cash flow for SUN in 2015 and significantly accretive thereafter
  • Energy Transfer Equity (ETE) and Energy Transfer (ETP) announced $1.2bn exchange of Sunoco LP (SUN) IDRs (press release)
    • ETE will acquire 100% of the IDRs of SUN in exchange for retiring 21mm ETP common units and an extension of $35mm annual IDR subsidiary for an additional 2 years (through 2017)
    • ETP to realize cash flow accretion of more than $0.30/unit, while ETE acquires IDRs at an attractive multiple relative
  • Arc Logistics (ARCX) announced the acquisition of UET Midstream, LLC from two private companies for $76.6mm (press release)
    • To be funded with $44.3mm in cash, $32.3mm in units issued to sellers at $18.50/unit
    • Assets include the Pawnee crude oil terminal (200,000 bbls of storage capacity) and nearby development property in Weld County, Colorado
    • The terminal produces contracted annual EBITDA of $9.0-9.5mm, implying an 9.5x multiple including $11mm in capex
  • Kinder Morgan (KMI) announced acquisition of remaining 49% interest in Elba Liquefaction Company from Shell for $630mm (press release)
    • Shell subscribes to 100% of the LNG offtake capacity (planned at 2.5 million tons) of the facility, which is yet to be constructed and awaits non-FTA approval for LNG exports
    • Overall project cost expected to be $2.1bn, with initial production expected in late 2017
  • Kinder Morgan (KMI) announced plans to move forward with Northeast Energy Direct pipeline project (press release)
    • KMI announced board approval to proceed with $3.3bn pipeline investment to supply natural gas to natural gas and electric utilities in New England
    • KMI has contracted for roughly half of the expected 1.3bcf/d capacity on the pipeline and expects to continue to sign up customers as the project progresses
  • Energy Transfer Equity (ETE) disclosed that it has indeed signed a confidentiality agreement to join the WMB sale process (Bloomberg)
    • The CA does not have a standstill provision, and apparently the confidentiality part does not extend to talking about the confidentiality agreement


  • Distribution increases: TEP +11.5%, DM +7.1%, WGP +6.2%, AM +5.6%, CNNX +3.5%, WES +3.4%, KMI +2.1%, OCIP +1.2%
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