November 20, 2016
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Optimism about OPEC and Old Man Winter swept MLPs higher this week, defying higher interest rates again to finish up 2.1%. It was the first time MLPs traded up 2%+ in consecutive weeks since February. Oil finished the week back above $45/bbl, and the AMZ finished back above 300. MLPs are in good shape heading into the last 28 trading days of the year, which may not have as much tax loss selling pressure than in other years.
While OPEC may again end up disappointing the market and injecting volatility into December trading, at least this time they are scheduled to wait until after Thanksgiving to do so this year. So, rather than frantically checking oil and stock prices the day after Thanksgiving, we can all join the masses at retailers on Black Friday or dig out the Christmas ornaments from the basement.
Shrinking Entitlements
Costs are being cut everywhere, not just in the MLP sector. This week news broke that Canadian brewer Labatt has decided to end the perk of “free beer for life” following retirement of brewery employees. Like MLP incentive distribution rights (IDRs), free beer entitlements at some point grow out of control and prove untenable.
Cost of capital continues to dominate discussions with management teams of the dwindling number of MLPs with IDRs. After admitting they are each evaluating their IDR schemes, MPLX, TLLP, and ETP are now under the gun to make a change. In a world without as many shovel-ready midstream projects (or un-injuncted projects), fat IDR payments don’t make much sense.
There Can Be Only One
Another consistent trope in the MLP sector is that of the orphan MLP. For MLPs that have manufactured high multiples based on manufcatured drop-down growth, the market is quick to drop those multiples when the (sometimes faith-based) sponsor relationship changes. When a sponsor gets acquired and drop-down EBITDA can be diverted from one MLP to another, the other MLP is said to be “orphaned”. Its happened time and time again (EPB, QEPM, CPPL), and this week it happened to WNRL.
But most of the time when two MLP spponsors announce a merger, it’s a reminder how little both MLPs matter to the sponsors. It’s like a marriage between two adults with a child each: one step-child doesn’t get more attention than another, rather they both get less attention overall. When the afterthought MLPs do eventually get attention, its to solve the nuissance of having both of them.
While consolidation of MLPs under larger sponsors is positive for the sector overall, it can be crushing to own one or both impacted MLPs. Clearly the risk is high among refinery-backed MLPs, because literally every publicly-traded refiner has an MLP. The risk exists for producer-sponsored gathering & processing MLPs too, especially with all the M&A among producers we continue to see.
Winners & Losers
DK put the DKL buyback program announced last week to work this week, sending it to the top of the sector this week. CNNX’s drop-down was well-received. NBLX rallied with NBL’s investor day enthusiasm. CEQP and TCP have announced strategic transactions recently and this week got a chance to hit the conference circuit to talk about it with investors.
On the downside, WNRL got the orphan treatment following the merger of its sponsor. SXL and NRP sold off after their big post-election weeks.
Year to Date Leaderboard
Year to date, ARLP fell out of the top 5, replaced by AMID. On the downside, DKL climbed out of the bottom 5, and PSXP fell back into the bottom 5. MLPs are up 13.1% year to date, including distributions, with just 28 more trading days left in the year.
G.P. Holding Companies and Midstream Corporations
GPs and midstream corporations outpaced MLPs this week, with median gains of 4.0%. It was ENLC’s turn to pop, although it’s unclear what drove the pop, other than perhaps management taking to the conference circuit to address funding alternatives for the next installment of the Tall Oak acquisition. TEGP priced a secondary for some of its holders at a 12% discount, and still managed to finish the week positive.
News of the (MLP) World
News flow picked up now that 3Q earnings and the election are in the rearview. Capital markets activity ramped up as issuers and sellers look to take advantage of the tiny window here before Thanksgiving and the OPEC meeting to tap the market. Sellers seemed to be willing to take large discounts to either get their deals done (SPP) or get them done quickly (TEGP’s selling unitholders).
In M&A news, yet again two MLP sponsors have agreed to merge, creating a superfluous MLP situation. It was inevitable in the refining sector where you aren’t really a player unless your posse includes a logistics MLP. DAPL construction remains halted for now, and TRP couldn’t garner adequate support to send gas 3,000 miles to Dawn at discount rates.
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