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March 7, 2015

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MLP Week Thoughts: Supply and Supply

MLPs were volatile this week, trading in a different direction each of the five trading days.  Down Monday, up Tuesday, down Wednesday, up Thursday, and down Friday.  The price action reflects commodity price uncertainty that is leading to growth capex uncertainty.  Growth capex has been the principal driver of distribution growth the last few years (outside of the drop down set of MLPs).  The Alerian MLP Index (AMZ) traded down 2.5% for the week, and is down 3.9% over the last 2 weeks.
Weekly MLP Review_3-6-15
The S&P 500 (-1.6%) and utilities (-4.3%) were each lower this week for a second consecutive week. Oil price was flat this week, although it trended lower in the final two sessions of the week (-3.7% during that time).  Natural gas prices recovered this week, but remains below $3.00 in the near-term futures market.  NGLs fell back after rallying the last few weeks.  The 10-year U.S. treasury rate rose 25 basis points this week, which didn’t help MLPs or utilities, and seemed to have a strong effect on the top tier growth MLPs on Friday.
Oil Storage Threat Level Rising
Prominent MLP management teams, sell-side research analysts, commodity consultants and even the Wall Street Journal (see here) are all discussing the level of storage in the Cushing, the U.S. overall and the world.  The idea is that if we keep adding oil to storage, eventually we will run out of oil storage, leading to another leg down in oil prices.
Running out of storage has quickly become a consensus opinion, but the oil price has not yet collapsed, which indicates that there is a clear chance that we don’t reach capacity.  The storage issues is a complicated triangulation between capacity limits, supply that is trying to slow down (but not fast enough), and demand growth (refinery downtime and strikes not helping).
Below is a snapshot of the U.S. storage picture as we sit today.  If we continue to build storage at the same rate we’ve built the last three weeks, the U.S. will run out of capacity in 9 weeks, or early May.
Oil Storage Monitor
Some caveats are necessary, however.  One, the capacity listed on this chart is as of 9/30 per  This data gets updated every 6 months, and in the 6 months prior to 9/30, the U.S. added 13 mmbbls of storage, including around 3 mmbbls in Cushing and around 8 mmbbls on the Gulf Coast.  So, there is probably some additional storage that has come online since 9/30, which may add a week or two to the countdown.  Also, now that pipeline capacity has been built out between storage hubs, any one area of the overall U.S. storage picture (e.g. Cushing) is less important than it once was.  Finally, in each of the last 5 years, during the 9 week period we are entering now, there has been at least one week where there was a draw (rather than a build) in oil from storage. So, it’s unlikely that the current pace of storage builds will continue for the next 9 weeks.
Winners & Losers
MMLP took the top spot for the week, as the market continues to gain comfort around MMLP’s distribution, which was oddly in question the last few months (at least based on their 11%+ yield at some point).  SXE’s earnings this week struck a positive chord with investors.  NGL led all MLPs to the downside, after it piled onto itself with an equity deal at the end of an already bad week of trading.
CNNX made the bottom 5 for the second straight week, as investors continue to vote with their feet after 2015 guidance redefined top tier distribution growth as sub 20%.  No repeats among the top 5, as it continues to be difficult to maintain price momentum in this market.
For the year so far, MLPs that at some late last year had their distribution sustainability questions are leading the way to the upside.  MMLP wasn’t even in the top 5 last week, but finds itself sitting atop of the sector at this point.
CNNX’s fall the last two weeks put it into the bottom 5 for the year overall.  DPM’s fall from investment grade has landed it in the bottom five as well.  SXE and CAPL popped out of the bottom 5 this week.
Light news week, but we had a second consecutive week of an MLP doing an equity deal without a clear transaction to use the proceeds for.  The offerings help lockup financing for 2015 capex, but doing so now after the selloff the last few months speaks to the bearishness of MLP management teams on the outlook for a sustained rally in MLPs.

  • NGL Energy (NGL) priced public offering of 6.25mm units at $27.57/unit, raising $172.3mm in gross proceeds (press release)
    • Overnight bought deal transaction, priced at 4.9% discount to prior closing price
    • Proceeds to be used to repay revolver borrowings and to fund capex


  • Energy Transfer (ETP) priced $2.5bn of senior notes, including (press release):
    • $1.0bn of 4.05% senior notes due 2025 at 99.918% of par
    • $500mm of 4.9% senior notes due 2035 at 99.81% of par
    • $1.0bn of 5.15% senior notes due 2045 at 99.772% of par

M&A / Growth Projects

  • NGL Energy (NGL) announced acquisition of 3 saltwater disposal wells (8-K filing)
    • Consideration of 1.3mm common units issued to seller, implying approximately $37mm purchase price
  • Western Gas (WES) announced IOU acquisition of 50% interest in the Delaware Basin JV gathering system from Anadarko (press release)
    • WES will pay nothing at closing, but has written an IOU to Anadarko whereby they agree to make a payment in 2020 equal to 8x the average EBITDA from 2018 and 2019 (purchase price expected to be $283mm)
    • WES expects to receive $15-25mm EBITDA from this acquisition in 2015
    • Creative structure enables WES to maintain its 15% distribution growth target for 2015, and highlights the value of a truly supportive sponsor


  • TEP closed acquisition and announced recommendation to board of 15% distribution growth over the next 2 quarters (press release)
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