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March 1, 2015

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MLP Week Thoughts: Toddling Through the Jungle

After a positive week last week, MLPs declined 1.4% this week.  The MLP Index has been unable to string together two consecutive positive weeks in more than 2 months.  The market was (understandably) unable to soak up $1.7bn of new MLP equity this week without MLP prices declining.  It didn’t help that PAA, which represents 7.5% of the index, was down 3.1% this week after executing a $1.1bn equity offering (its first marketed equity offering in more than 3 years).
Weekly MLP Review_2-27-15
MLP trading lately has reminded me of a toddler who is just beginning to try to walk.  He takes a step, teeters, takes another step, loses his balance and falls on his butt.  Ultimately he either learns to walk or breaks down crying after one too many failed attempts.
Similarly, MLPs trade up, seem to be getting momentum, but quickly lose their balance and fall back again.  The challenge for MLPs is that the floor keeps tilting back and forth with changes in commodity prices, de-stabilizing equity offerings, and other risks like producer distress.  Ultimately, with time, MLPs should emerge from this lengthy correction with reset expectations, positioned to produce attractive total returns off a lower base.
Jack Jack
Monthly Checkup
Despite ongoing choppiness for MLP stock prices, MLPs did manage to post positive monthly performance, breaking the longest streak of negative months (5) in the 20 year history of the MLP Index.  Despite the positive month, MLPs remain 14.6% below their end-of-August peak.  MLPs are still down so far in 2015, but with another positive month, MLPs may still close 1Q in positive territory.
Monthly Check_2-27
Winners & Losers
RRMS, CMLP and DKL all reported 4Q results this week that pleased the market.  RRMS’s beat and 3 year top tier distribution guidance sent it 8.7% higher on Friday.  CMLP rebounded this week after resetting expectations for growth, but also calming the market with respect to maintaining its distribution.  DKL put up another strong quarter of results and reiterated its almost top tier growth trajectory.
On the downside, TEP’s equity offering and GP IPO filing sent its stock price reeling.  CNNX re-defined top tier growth a bit lower than we did here the last two weeks, and that was not well received by the market on Thursday and Friday, despite very strong quarterly results.
Top5Bottom5_2-27-15
TEP and CMLP flip flopped vs. last week, but no other repeats in a very inconsistent MLP market so far in 2015.
Top5Bottom5_2-27-15_chart
For the year so far, FISH dropped from first last week to off the board this week, replaced by CLMT, EROC and LINE.  On the downside, TOO crept up from the bottom spot to 3rd worst, while GMLP replaced fellow shipping MLP TGP in the bottom 5 this week, after falling 8 out of the last 9 days.
Top5Bottom5_2-27-15_YTD
Top5Bottom5_2-27-15_YTD_chart
News of the (MLP) World
Lots of capital markets action this week, including more than $6bn of bonds and $1.7bn of equity.  That’s a lot of paper for an MLP market that is still teetering and lacks the trading volume and daily flows from retail investors that provided tailwinds to the sector the last few years.  It’s now an all-out war to attract investors, now that the overall pie isn’t growing quite so fast.
News-of-the-World
Equity

  • Tallgrass Energy GP, LP (TEGP) filed initial prospectus for IPO of up to $862mm (filing)
    • TEGP will own all of the IDRs of Tallgrass Energy (TEP) and whatever the total amount of “acquired units” ends up being
    • Use of proceeds from the offering will be used to purchase TEP units from Tallgrass Development (the “acquired units”)
    • TEGP is structured as a partnership, but plans to pay federal taxes and produce a 1099 (like PAGP)
      • By comparison, the other filed GP IPO (EQM’s GP) is choosing to be a partnership and to be taxed as a partnership (like WGP)
  • Tallgrass Energy (TEP) priced public offering of 10.0mm units at $50.82/unit, raising $508.2mm in gross proceeds (press release)
    • Overnight offering, priced at 3.9% discount to prior closing, and traded down an additional 3.7% the next trading session
  • Plains All American (PAA) priced public offering of 21.0mm units at $50.00/unit, raising $1.05bn in gross proceeds (press release)
    • Overnight bought deal, priced at a 4.9% discount to the prior session’s closing price, and traded down an additional

Debt

  • Magellan Midstream (MMP) priced $500mm of senior notes (press release):
    • $250mm of 3.2% senior notes due 2025 priced at 99.871% of par
    • $250mm of 4.2% senior notes due 2045 priced at 99.965% of par
  • Cheniere Energy Partners (CQP) announced that Sabine Pass Liquefaction, LLC has priced $2.0bn of 5.625% Senior Secured Notes due 2025 (press release)
  • MarkWest Energy (MWE) priced additional $650mm of 4.875% senior notes due 2024, priced at 101.625% (press release)
  • Williams Partners (WPZ) priced $3.0bn of senior notes (press release):
    • $1.25bn of 3.6% senior notes due 2022
    • $750mm of 4.0% senior notes due 2025
    • $1bn of 5.1% senior notes due 2045

M&A / Growth Projects

  • Valero Energy Partners (VLP) announced $671mm drop-down acquisition from sponsor (press release)
    • Purchase priced represents attractive multiple of 9.0x expected EBITDA
    • Financed with $211mm in cash, $360mm of debt, and $100mm of equity issued to Valero Energy Corp
    • Acquisition includes 2 oil and refined products terminal facilities with combined storage capacity of more than 13mm barrels that support a refinery in Houston and one in Louisiana
  • Plains All American (PAA) announced formation of JV with Magellan Midstream (MMP) to construct previously announced Saddlehorn Pipeline project (press release)
    • Saddlehorn is a 550-mile pipeline that will transport oil from the DJ Basin to storage facilities at Cushing, OK
    • Volumes associated with PAA’s marketing activities in the region are expected to help the pipeline owners realize “meaningful upside to base level returns”
    • The pipeline is expected to cost $800-$850mm and to be operational by mid-2016
  • Plains All American (PAA) announced acquisition of crude oil terminal in the Bakken that is currently under construction (press release)
    • 500,000 barrels of existing storage, but is permitted for up to 2.0mm barrels
  • Cypress Energy (CELP) announced $52.6mm drop down acquisition (press release)
    • CELP acquired remaining 49.9% interest in Tulsa Inspection Resources entities that it did not previously own from Cypress Energy Holdings, LLC
    • Purchase price, expected to be financed with borrowings, represents 7x EBITDA
  • Enterprise Products (EPD), MarkWest Energy (MWE), DCP Midstream (DPM) and Anadarko form JV for Panola NGL Pipeline (press release)
    • EPD will assign 45% ownership interest in its wholly owned Panola Pipeline Company, LLC to the JV partners, distributed evenly among the three new partners
    • The JV will fund an expansion of the pipeline by 50,000 bbls/d by 1Q 2016
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