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November 20, 2016

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MLP Week Thoughts: Two Steps Forward

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.
weekly_11-18-16
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.
stepbrothers
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.
top5bottom5_11-18-16
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.
top5bottom5_11-18-16_chart
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.
top5bottom5_11-18-16_ytd
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.
top5bottom5gps_11-18-16
top5bottom5gps_11-18-16_chart
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.
News-of-the-World
Growth Projects / M&A

  • CONE Midstream (CNNX) announced acquisition of remaining 25% interest in the Anchor System for $248mm (press release)
    • First drop-down for CNNX since IPO in September 2014
    • Funded with $140mm in borrowings and 5.2mm units issued to sponsors (CONSOL Energy and Noble Energy)
    • Implied EBITDA multiple of ~7x EBITDA, attractive price for a cash flow stream still expected to grow over time
  • Plains All American Pipeline (PAA) and Plains GP Holdings (PAGP) announced closing of previously announced “simplification” transactions (press release)
    • PAA no longer has IDRs, but it does have 245.5mm additional common units outstanding (34% of pro forma units outstanding)

Capital Markets

  • Tallgrass Energy GP (TEGP) priced secondary offering of 9.0mm units at $22.00/unit, raising $198mm in gross proceeds to the selling unitholders (press release)
    • Selling unitholders were Kelso & Company and The Energy & Minerals Group, TEGP received no proceeds from the offering
    • Early AM speed offering, priced at 12.2% discount to prior closing price, traded up 11% from pricing in the next session
    • Increases the float of TEGP by 19%, to around $1.4bn at today’s prices
  • NuStar Energy (NS) priced offering of 8.0mm of its 8.5% Series A fixed to floating rate cumulative perpetual preferred units at $25.00/unit, raising $200mm in gross proceeds (press release)
  • TransCanada (TRP) and Enbridge (ENB) both announced upsized preferred unit offerings this week
    • TRP to issue 40mm (upsized from 20mm) redeemable preferred units at $25.00/unit (4.90% yield), raising $1.0bn in gross proceeds (press release)
    • ENB to issue 30mm (upsized from 20mm) redeemable preferred units at $25.00/unit (5.15% yield), raising $750mm in gross proceeds (press release)
  • Sanchez Production Partners (SPP) priced public offering of 6.6mm units at $11.00/unit and private placement of 2.3mm units at $11/unit, raising $97mm in total gross proceeds (press release)
    • Marketed offering, priced at 16.8% discount to prior closing price and well below initial price range of $14-16/unit
    • Offering size was below 8.8mm units originally offered, but Sponsor Sanchez Energy purchased the other 2.3mm units in a concurrent private placement
  • Emerge Energy Services (EMES) priced public offering of 3.4mm units at $10/unit, raising $34mm in gross proceeds (press release)
    • Overnight offering, priced at 8.5% discount to prior closing price
    • Offering upsized from original 2.75mm units offered

Other

  • Monday it was confirmed that the Obama Administration would not allow DAPL to proceed, effectively punting the decision to the Trump Administration in early 2017 (politico)
    • Energy Transfer (ETP) fired off a press release requesting the court grant approval (press release), but that’s not going to happen any faster than 1Q 2017
    • Opponents of the pipeline organized national protests on Tuesday, including here in the Philadelphia area, which has lately become a hotbed of protest activity (philly.com)
  • TransCanada (TRP) announced that its Canadian Mainline natural gas open season failed to generate enough interest from shippers to warrant proceeding (press release)
    • TRP was seeking commitments for its new, long-term, fixed-price proposal to flow natural gas on the Mainline from Empress in Alberta to Dawn hub in Southern Ontario
    • The open season had been announced on October 13th, and it proposed offering service under a 10-year contract with tolls ranging from $0.75/mcf to $0.82/mcf, depending on commitment level
    • The lack of support was discussed by analysts as a positive for pricing at the Dawn hub and a positive for pipelines under development to send gas to that hub (NEXUS and Rover)
  • Sponsors of two MLPs, Tesoro Corp and Western Refining, announced $6.4bn merger, setting up another uncertain MLP situation involving the subsidiary MLPs (press release)
    • Similar to when TransCanada bought Columbia Pipeline and when Enbridge bought Spectra, the MLPs for now are being left alone
    • Long-term, it would seem more logical to have 1 MLP subsidiary rather than 2, as TransCanada determined
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