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June 16, 2013

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MLP Week Thoughts: The Thin Red LINE

The MLP Index was down slightly less than stocks overall this week, but was out of synch with the broader stock market.  The Alerian MLP Index was down the first 2 days of the week, then up 3 days in a row to close out the week down 0.7%.  MLPs diverged from the S&P 500 after on Wednesday, when the S&P 500 was down 0.8% and MLPs were slightly higher.  The S&P 500 bounced back Thursday, while MLPs were again slightly higher, then Friday the S&P 500 dropped 0.6% while MLPs were up 0.5%.  The MLP Index is still 4.7% lower than its all-time high on May 22, while the S&P 500 closed the week 2.5% below its all-time high set on May 21.
MLPs appear to be gaining strength relative to the broader market, likely helped by oil price that continues to climb closer to $100/bbl. But that strength may dissipate with a fresh flurry of equity offerings next week.  We’ve now seen the 4%+ weekly drop cycle (that I talked about the last few weeks) play out, with a 4% drop 2 weeks ago, then a bounce back week, followed by another weekly drop.  The historical pattern breaks down after that,
Weekly Review_6-14-13
This Friday, I published a report on the MLP correction.  The part that was missing from the report was how that correction looks relative to the broader equity market, not just relative to treasury yields.  The MLP Index reached its peak a day after the S&P 500, and hit its recent low on June 5th, the same days as the S&P 500.  The MLP correction may just be explained by broader equity sentiment applied to a sector with less liquidity that tends to react more sharply.  Click here to read the report, but below is a chart showing the up and down cycles of the MLP Index the last 4 years, including the 11 corrections of 5% or more the MLP Index has had since the beginning of 2010 (click to enlarge).

2013 Correction

Winners & Losers
It was a wild week for a few MLPs.  Spectra’s big drop down plan jolted SEP’s unit price, which was up 12.9% this week to lead all MLPs.  USAC, GLP and EQM had strong bounce back weeks after recent weakness.  WPZ had a rough week, after an explosion at its Geismar plant killed 2 people and caused an unknown period of downtime for the Louisiana plant that represents 2.1% of U.S. ethylene capacity.  WPZ was down 4.6% this week, but the big loser in the accident (aside from those injured in the accident) was ethane, which dropped 11% this week.  A reduction in ethylene capacity means less demand for ethane as a feedstock, at a time when we are already in the midst of an ethane glut.
Other big losers this week were 3 upstream MLPs (LINE, EVEP, LRE), despite continued crude price strength.  LINE continues to gather detractors that don’t like its distributable cash flow calculation and accounting for puts.  Barron’s highlighted LINE again.  I don’t own LINE and don’t cover it on the research side of the house, so I won’t be taking a side, but I will say that the increased headline risk of LINE makes it hard to justify as a position in the conservative separate accounts we managed.  The train wreck that is LINE stock lately has been very interesting to watch, however, in particular the twitter war that erupted Friday between the Hedgeye team and Jim Cramer, who wrote on twitter that he has blocked everyone on the Hedgeye team, which as one Hedgeye analyst said is the twitter equivalent of taking his ball and going home.  Cramer also called the repeated negative commentary on LINE a “raid” and implied on twitter that the loud negative reports on LINE and ongoing negative twitter commentary by Hedgeye guys was potentially illegal manipulation (see below).  Not sure about that, but its good theater.

Another big loser this week, EVEP, is also a Hedgeye short call.  EVEP continues to drop from its once lofty price when the Utica excitement first began.  There was no news on EVEP and LRE this week and oil was up, so it appears the sell off in those names is a contagion of the LINE issues being applied to other closely followed upstream MLPs.
The 3 MLPs that issued equity this week (VNR – preferred, ARP, and XTEX) did not appear on the loser list this week, which is encouraging for other MLPs that may issue equity in the coming weeks.

Top5Bottom5MLPs_6-14_13

Year to date, the same 3 upstream MLPs above are among the bottom five, led by EVEP’s 37.1% decline (including distributions).  On this list, the dichotomy between the winners and losers widened this week, as the strong performers got stronger and the weak got weaker.

Top5Bottom5MLPs_6-14_13_YTD

MLPs are beating stocks handily this year, but as usual are not matching the returns of their parents (GP holdco’s).  This relationship is a bit like me playing basketball against my kids.  They may make some baskets, but it will be a long time before they can beat me, because of some critical structural advantages I have over them right now.

MLPs_World_6-14_13_YTD

News of the (MLP) World
Very busy news week, with some nice surprises out of SEP and WES (a previously undisclosed option to JV with EPD on a contracted growth project), and with some not very nice surprises for WPZ and any MLP that was counting on ethane recovering at some point.
NRGY and NRGM will be in the spot light this week when they distribute the 56.4mm NRGM units it owns to its unitholders on Tuesday.  The transaction is not dilutive to NRGM and should not impact its operating results in any way, but NRGM may see some selling pressure this week as a result.  The transaction is step 1 in the 5 step process to consummate the CMLP GP and LP merger announced in May.
Equity

  • Vanguard Natural Resources (VNR) prices offering of 2.2mm 7.875% Series A Cumulative Redeemable Perpetual Preferred Units at $25.00/unit, raising $55mm in gross proceeds (press release)
    • Only preferred issue in the MLP space I believe, will trade under ticker VNRAP [Update: my friends at V&E remind me of TOO’s listed preferred issue, so VNR is #2, but they continue to push the MLP status quo within upstream MLP space – they were the first MLP to go to monthly distributions, right?]
  • Enbridge Energy Partners (EEP) files S-1 for $500mm IPO of subsidiary MLP Midcoast Energy Partners, which will own 40% interest in EEP’s natural gas and NGL midstream business.  EEP to retain IDRs and G.P. interest (press release)
    • IDRs on top of IDRs has been done before, but is aggressive financial engineering, just like it was when PNG went public (PAA is the GP) and when ETP bought SXL’s GP
  • Crosstex Energy (XTEX) prices public offering of 7.2mm common units at $20.33/unit, raising $146.4mm in gross proceeds (press release)
    • 7.2mm common unit offering, upsized from 6.0mm units initially offered
    • Gross proceeds of $146.4mm, net of which will be used to for growth projects (Cajun-Sibon) NGL pipeline extension
    • Overnight transaction, priced at 3.6% discount to prior close
  • Atlas Resource (ARP) prices public offering of 13.0mm common units at $21.75, raising $282.8mm in gross proceeds (press release)
    • 13.0mm common unit offering, upsized from 12.25mm units initially offered
    • Gross proceeds of $282.8mm, net of which will be used to partially finance EP Energy acquisition
    • One day marketed offering, 5.6% file-to-price decline

Debt

  • Summit Midstream (SMLP) prices public offering of $300mm of 7.5% senior notes due 2021 at par (press release)

M&A / Growth Projects

  • Spectra Energy Corp. announces plan to drop-down all of its remaining US Transmission and Storage assets to SEP by year end 2013 (press release)
    • Transaction will lead to SEP raising its distribution increases from 1 cent per quarter from 0.75 cents per quarter
    • More details to come on SEP’s second quarter conference call on August 6
  • Atlas Resource (ARP) announces acquisition of 466bcf of natural gas reserves from EP Energy for $733mm (press release)
    • ARP to acquire 466bcf of 100% natural gas reserves that are 93% proved developed from EP Energy E&P Company
    • Transaction expected to close in 3Q 2013, and is expected to be immediately accretive to distributable cash flow
    • Assets located in Raton (New Mexico) and Black Warrior (Alabama) basins
    • Asset Details:
      • Current net production on acquired assets of 119 mmcf/d
      • Annual decline rate of 8-10%
      • Production costs of approximately $0.90/mcf, ad valorem taxes of approximately 9%, transportation and gathering expense of approximately $0.35/mcf
  • Kinder Morgan Energy (KMP) announces new business that will own, lease, acquire natural resource properties (press release)
  • Western Gas (WES) announces $285mm in new growth projects (press release)
    • Two projects: (1) a JV with EPD to own two fractionation trains at Mont Belvieu, TX and (2) new processing train at Lancaster plant in DJ Basin
    • These projects in addition to $575mm growth capex budget for 2013
    • WES exercised option to invest in and own 25% interest in JV with EPD
      • $120mm expected capital contribution in 2013 to JV
    • WES to build a second 300 mmcf/d processing train at Lancaster plant
      • $165mm capital investment, with 50% spent in 2013
      • 200 mmcf/d contracted with APC
      • Expected to be in service by 1Q 2015
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