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August 23, 2015

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MLP Week Thoughts: Triage Fatigue

MLPs had another rough week, with the Alerian MLP Index falling 5.2%, erasing last week’s 5.2% bounce.  Smaller MLPs underperformed (equal weight Alerian -6.0%).  In addition to the continuation of oil (down 5.3% to fresh lows) and NGL routs, MLPs were not helped by very weak broader stock market action.  The S&P 500 dropped 5.8%, which means MLPs outperformed the S&P 500 for a second straight week.  Interest rates tightened on the fear trade, which helped utilities outperform.
Weekly MLP Review_8-21-15
With the Dow Jones Industrial Average entering its first correction (10% drawdown) since 2011, another risk has materialized for MLPs: a broad market selloff.  An ongoing broad market selloff, stoked by questions about global growth, will continue to challenge a commodity price recovery and therefore an MLP stock price recovery.  But after such a deep drawdown, MLPs could catch a relative bid as yield and price appreciation burns off of the broad market.
Relentless MLP Decline
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Triage Fatigue
Over the last 12 months, MLP managers have been in a near constant state of portfolio triage, with increasing intensity over the last few months.  No MLP has been safe enough or had enough liquidity to avoid volatility, and investors are forced to re-evaluate expectations on an almost daily basis based on changing producer activity and commodity prices.  There is no sign of MLP volatility slowing down at this point, but history says it will at some point, and the returns during the rest period after such triage have been very positive.
Winners & Losers
SXE (GP equity commitment, dropdown/distribution clarity) and CNXC (no news) were the top performers this week bouncing back from last week’s inclusion in the bottom five.  MPLX and MWE rallied after filing the merger proxy and HEP rounded out the top five on no news.  The bottom five was once again dominated by E&P MLPs which continue to be under pressure with lower oil prices.  NMM also made the bottom five on no company news although lower oil prices and sponsor earnings this week may have pressured NMM.
The one place where there hasn’t been much volatility the last few weeks has been the YTD winners and losers chart.  Again this week, no changes to the constituents, but the order slightly changed.
General Partner Holding Companies
EQGP and AHGP were the only positive performing GPs for the week which is interesting given one is a natural gas levered GP and the other a coal levered GP.  ATLS went from first-to-worst giving up all gains from last week.  TRGP was downgraded adding to pressure while weakness in other GPs was market related with little company specific news.
News of the (MLP) World
Another MLP sponsor stepped up to support its small-cap MLP this week, with a very positive stock price reaction.  More of both of those (the support and the price reaction) would be welcome.
Also, the deal proxy for MPLX’s merger with MWE was released this week, which highlighted the challenges MWE expected to face as a standalone entity and the risk to its longer-term outlook following deeper and longer than expected NGL price declines.  The other bidders have been identified as SXL and KMI, and there was some discussion by those bidders with regards to the veracity of some of the proxy notes, but it seems like a steep uphill battle for another bidder to win the deal with such a large breakup fee.

  • Southcross Energy (SXE) announced $175mm sponsor equity commitment and updates to growth outlook (press release)
    • SXE sponsors Charlesbank Capital, EIG Global Energy and Tailwater Capital provided a $175mm equity commitment to SXE to enhance liquidity and support anticipated growth initiatives
    • $125mm is committed to Southcross Holdings, SXE’s immediate parent company, to enhance inventory of drop-down assets available to SXE
    • $50mm is committed to SXE to be used to support Eagle Ford shale growth opportunities
    • SXE expects distribution coverage of 1.0x or greater on common units for remainder of 2015 and all of 2016 without any increase in processed volumes
    • SXE’s stock price reacted very positively to the announcement, popping 27.7% on the day the transaction was announced, before falling 10.9% over the next 2 days

M&A / Growth Projects

  • Dominion Midstream (DM) announced $286mm acquisition of interests in Iroquois Gas Transmission System from National Grid and New Jersey Resources (press release)
    • Purchase price funded with 8.6mm common units issued to the seller
    • DM will acquire 25.9% interest in the pipeline system
    • Purchase price represents 9.8x multiple of 2015 EBITDA
    • The 416-mile natural gas pipeline system transports gas from the Canada-U.S. border in upstate New York down through Connecticut and to the Bronx and Long Island
  • Antero Resources Corp (AR) announced $275mm development of 60,000 bbl/d wastewater treatment facility in West Virginia (press release)
    • The facility is expected to generate $55-65mm in annual EBITDA at full utilization three years following in-service date in 2017
    • The facility is subject to Antero Midstream (AM) option to purchase the business, so this enhances the drop down pool for AM
  • Energy Transfer (ETE and ETP) announced that its Lake Charles LNG export project has received FERC’s Final Environmental Impact Statement (press release)
    • The FEIS starts a 90-day review period during which final FERC authorization is expected to be issued
    • Lake Charles LNG project is on track for a mid-2016 final investment decision, which would start the construction phase for an in-service date of mid-2020
  • Sunoco LP (SUN) announced $57mm acquisition of a wholesale fuel distribution business serving the Northeastern U.S. (press release)
    • SUN also acquired 30 fee and leased properties, including company-owned, dealer-operated and consignment sites
    • The business currently distributes 55mm gallons per year
  • VTTI Energy (VTTI) announced that Vitol acquired the remaining 50% interest in its sponsor VTTI BV from MISC Berhad for $830mm (press release)
    • VTTI BV will continue to operate as an independent, standalone company under the leadership of Rob Njist, CEO of both VTTI an VTTI BV
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