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March 25, 2012

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MLP Week Thoughts: Turtle Power

MLPs were roughly flat this week, and so was the S&P 500.  Also, after the big move last week, yield on the 10 year treasury rate was slightly lower this week, down to 2.24%.  Overall, not much moved this week.
Summary performance of the Alerian MLP Index compared with other securities.
The recent lack of volatility is quite the opposite of last August, when volatility was extremely high and stock prices were down sharply.  Back then, I wrote that a flat week felt like a win.  But now, with the S&P 500 bouncing around 1400 points and has been up for 10 out of 12 weeks to start the year, a flat week feels like a big loss for the stock market, especially if its accompanied by new evidence of an economic slowdown in China.
A flat week for MLPs, however, actually is a win after the last few weeks that saw MLPs trade very poorly relative to stocks. As shown below, the MLP Index is down nearly 3% this month, compared with the S&P 500, which is up more than 1.5%.

It seems as though the broader stock market has gotten a little ahead of itself and certainly can’t continue having positive weekly price changes 90% of the time.  In times like this, MLPs usually take the opportunity to catch and pass the S&P 500.  I imagine any sustained drop in broader stocks will produce relative outperformance from MLPs, based on their attractive yields and on the secular production growth story underpinning the need for massive energy infrastructure.  Generally speaking (excluding OXF, CPLP and other high risk, high volatility names), MLPs are steady and somewhat boring investments to some.  But the end results year in and year out for MLP are almost always better than the major stock indexes.  In the sense that they plod along but always beat the more exciting stocks, MLPs are like the tortoise of “tortoise and the hare” fame.  MLPs are viewed as boring by some probably, like the tortoise was boring and slow, but I expect MLPs to win again this year.
To me and to other MLP super fans (which you must be if you are reading this), MLPs are cool.  Taking my turtle analogy further, there was only one period of time when turtles were cool, from around 1987 to 1993, when the Teenage Mutant Ninja Turtles were at their peak.  These 4 humanoid turtles were so cool, there were actually 3 live action movies made starring actors dressed in turtle suits interacting with people, and kicking lots of ninja ass.  Ninja Turtles were so cool that Vanilla Ice even wrote a song about them, called Ninja Rap.
I was reminded of the Teenage Mutant Ninja Turtles this week, when I read that hardcore fans of the turtles were unhappy that Michael Bay was changing the turtles’ origin story.  Yes, it turns out that the man who brought the world a Transformers Movie is going to “re-boot” the Mutant Turtles series with a new live action movie coming to theaters some time in 2013.  Hollywood is officially out of original ideas…

(I was a big fan of the animated show)

All of that is to say that MLPs are doing fine as a sector, even with some really bad trends in the propane, coal and natural gas storage businesses, and even with 4 straight weeks of declines for the MLP Index.
News of the (MLP) World
WPZ Acquisition – $WPZ announced a big acquisition in the Marcellus Shale, with the $2.5 billion acquisition of Caiman Energy.  Good for Caiman Energy (which employs a former Lehman colleague and still close friend of mine that was instrumental in developing the assets for Caiman), good for the investment banking team at Lehman Brothers Barclays (led by former colleagues and bosses of mine) that ran the sell-side process, good for the investment banking team at UBS (led by a former Lehman boss of mine) that advised WPZ.   Bad for investors that bought into the WPZ equity offering from late January at $61.81 per unit (WPZ units are trading under $57 right now).
Caiman Energy has done a great job of building the right assets in the right location at the right time.  The question, and a familiar one for large sell-side processes like this: will WPZ unitholders be happy about the deal and did WPZ pay too much?  Time will tell whether WPZ paid too much, as right now it looks like the multiple paid of current EBITDA is more than 60x, but WPZ expects that EBITDA to grow and by 2014, the multiple paid (including additional capex) is expected to be closer to 9-10x.  WPZ unitholders were not pleased, apparently, as WPZ was down more than any other MLP this week at -7.5%.  Investors seem unwilling to step in to buy WPZ units now just to get mowed down by a tidal wave of equity the partnership needs to issue (press release).
QRE Acquisition – QRE announced a large (relative to its $1.2 billion market cap) acquisition of oily, low decline assets in the Ark-La-Tex area (press release).  Purchase price was $230 million, to be funded with cash and debt.  The deal should be slightly accretive.  Stats on the properties acquired:

  • 1,178 boe per day, 93% liquids production
  • 13 mmboe reserves, 98% proved developed, 95% liquids
  • 150 producing wells
  • 5% decline rate, 30.3 year reserve life
  • $2mm in annual maintenance capex

RGP Equity Offering – $275 million equity offering, used to repay senior credit facility, and to repay up to 35% of aggregate principal amount of its outstanding 9.375% Senior Notes due 2016.  In terms of cash obligations, paying down those notes is accretive at a current RGP yield of 7.2% (press release).
GEL Equity Offering – 5.0 mm unit equity offering, priced at $30.80, gross proceeds of $154 mm (press release).
EROC Warrants Exercised– EROC sells equity for $6.00, a 43% discount to current market prices….Or, put another way, EROC received $19.0 million in gross proceeds from the conversion of 3.2 million common units.  Holders of the warrants had the option to exercise their warrants on March 15.  There is only one more remaining exercise date (May 15th), when the remaining 2.5 million warrants will likely be exercised, for an additional $15.0 million (press release).
EPD Fractionators – EPD announces fractionators 7 and 8 at Mont Belvieu, with capacity of 150,000 barrels per day, bringing total fractionation capacity for EPD at Mont Belvieu to more than 610,000 barrels per day.  Wow (press release).
OXF Affirms Distribution – OXF announced that its distribution would be safe for the remainder of 2012, and the stock recovered 27% this week, and yet is still the worst performing MLP of them all so far this year (press release).
Disclosure: The information in this article is not meant to be financial advice, I am not your financial advisor and I am posting my comments for informational purposes only.  Long EPD, EROC, RGP.

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