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April 29, 2012

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MLP Week Thoughts: Watch for Creeping Staleness

Before I get into this week’s news and thoughts, I want to take  minute to reminisce on the last 365 for MLPs and the market.  Last year, on April 28, 2011, the MLP Index closed at 390.0, its highest close for 2011.  The next five trading days were down, chopping 6.6% off the index in the process.  MLPs continued lower throughout the summer, bottoming at 315.9 in August, a full 19.0% below the 4/28/11 closing level.  A remarkable fall and Christmas rally sent the MLP Index back above 390 on the first trading day of 2012. Will this May bring back the downside volatility?  Probably not without a tax scare or an interest rate spike back above 3%, but its always good to remember that volatility happens, even if MLPs have proved quite stable year to date.  The S&P 500 peaked in 2011 on April 29th at 1363.6, and had a similar slide after that, bottoming 19.4% lower at 1099.2.  Stocks recovered slower than MLPs, but the S&P 500 finished 2011 14.4% higher at 1257.6, still 7.8% below its late April peak.

Back to this week’s more recent history.   MLPs finished up 0.4% in a week that saw virtually every asset class rise.  The S&P 500 finished above 1400 again after a 1.8% rise week over week.  U.S. treasuries rose, sending the benchmark interest rate down to 1.93%.  Gold and oil were up a bit, and natural gas futures jumped 13.5% all the way to $2.19, so still a long way to go back to most research analyst’s long term natural gas price decks (~$4.00 per mcf).  MLPs continued their restrained volatility (see my earlier commentary on how few days in 1Q MLPs changed in price by more than 1% in a day, a near record); the 0.4% move trailed most stocks, including energy stocks (XLE, +2.7%) and utilities (+1.4%).

MLP earnings results were inline or positive, and NRGY took a major step towards fixing its problems (more on that below), so why the under-performance?  My guess is that in these weeks when risk assets are rising, investors get more excited about other sectors and less interested in dividend stocks and MLPs.  But even the Dow Jones U.S. Dividend 100 Index was up 1.0% last week.  Maybe there is some investor saturation after the massive equity issuance levels for MLPs over the last 2 quarters.  By investor saturation, I mean perhaps we are nearing the point where most everyone that knows about MLPs and likes them is already invested in them, and without a step change in institutional interest, MLPs may be range bound as a sector.  Of course, there are always individual MLPs popping and dropping by large amounts, but this year those pops have been offset by drops of other MLPs, and larger cap MLPs that dominate the MLP indexes have mostly stagnated or sold off this year.
Maybe MLPs have just gone stale compared with other securities.  According to Merriam Webster, the definition of stale is (1) tasteless or unpalatable from age, (2) tedious from familiarity, or (3) impaired in vigor or effectiveness.  Sounds about right, but its usually times like this when everything is calm that the bottom drops out.
Earnings Recap

  • LINE – beat analysts’ expectations
    • Lower interest expense and capex than expected, higher production from acquisitions, good coverage
    • 100% of current natural gas production hedged through 2017, that’s almost 6 years!!
    • 100% of current oil production hedged through 2015
    • Solid results out of Hogshooter wells, which are really expensive ($8-$10mm) by MLP standards, but apparently carry really high returns 100%+ IRRs
  • GEL – inline or slightly better than analyst’s expectations
    • Less than expected volumes from Gulf of Mexico pipeline
  • APU – beat analysts’ expectations
    • Benefited from lower wholesale propane costs with higher retail propane margins
  • WPZ – beat analysts’ expectations
    • Solid volumes for pipeline and gathering businesses
    • NGL production was up 18% yoy, but margins were down 13% quarter over quarter
  • TCP – below analysts’ expectations
    • Weak volumes on Great Lakes system due to warm weather, high storage inventory
  • NS – below analysts’ expectations
    • Weak asphalt results
Long WPZ, no other positions in names mentioned above.

Upcoming Earnings


News of the (MLP) World
No capital markets transactions this week, but aside from earnings releases above, there were a few news items of note.

  • NRGY Announces Effective Distribution Cut Smokescreen with Sale of Propane Business Accompanying 46.8% Distribution Cut (press release)
    • NRGY sells propane business for $1.8 billion, moving one more big step closer to transforming completely into a GP holding company with very lucrative IDRs
      • After drop down of remaining midstream assets, transformation will be complete
      • No word yet on when NRGM buys out the IDRs of NRGY in a merger akin to what NRGY did when it bought NRGP, but at some point those 50% flat IDRs are going to cut into NRGM’s cost of capital…and the financial engineering dance will continue
    • NRGY unit price popped 20.4% on the week, still 52.5% lower year over year
    • NRGY also announced 46.8% decrease in quarterly distribution.  Distribution cut was expected, and the announced $0.375 distribution was above most analyst expectations, which mostly called for a 50% cut in distribution to $0.3525
    • Analysts universally praised the sale and distribution strategy going forward, and there were several analyst upgrades
    • The deal was sort of similar to the deal back in 2004 when NRGY purchased the propane assets of troubled MLP Star Gas.  This time, SPH gets to play the savior role, and the number of MLPs operating retail propane assets has dwindled down to 3 majors (APU, SPH and FGP).  This is quite a change from 1994-1996 when 8 propane MLPs went public in 2 years.
  • Petrologistics (PDH) files Updated S-1 with Pricing (filing
    • This is going to be a very large IPO.  Base deal calls for $700 million IPO (35.0 million units at $20.00 per unit midpoint).  This would make it the largest MLP IPO ever (not counting KMI, which is a corporation), surpassing EPB’s $500 million IPO in 2007.
    • PDH will not have a minimum quarterly distribution, instead PDH will vary its cash distributions with variances in its quarterly cash flow.  The S-1  estimates that PDH will distribute $2.20 per unit, which would equate to an 11% yield at the midpoint IPO range.
    • PDH will have $343.0 million in debt pro forma the IPO, and $47.3 million in cash, for enterprise value of $3.1 billion
    • 8.3x EV / projected 2013 EBITDA at IPO
    • 33.5 million units ($670 million) are being sold by its PE sponsors Lindsay Goldberg and York Capital (through a subsidiary Propylene Holdings)
  • BBEP Announces $98 million Acquisition (press release)
    • BBEP arrives fashionably late to the 2012 E&P MLP acquisition party
    • 5.9 mmboe proved reserves in Wyoming
    • 100% oil production of approximately 600 boe/d, 20+ year reserve life

MLP CEO Compensation Review
The final annual proxy statements were filed this week, so we now have compensation data for all MLPs.   Stay tuned later this week for my annual review of MLP CEO compensation.  A quick preview: the top 3 base salaries in the MLP space went to GLP’s Eric Slifka ($800,000), ATLS’s Edward Cohen ($750,000), and LINE’s Mark Ellis ($746,154).  The top 3 highest in total compensation: ATLS’s Edward Cohen ($20.9 million), APL’s Eugene Dubay ($9.4 million), and LINE’s Mark Ellis ($9.0 million).  As you can see, there is no correlation between market capitalization of a given MLP and its CEO’s compensation.  GLP and APL/ATLS are not even in the Alerian MLP Index that includes the 50 largest MLPs (roughly 50, there are some companies with multiple Index constituents, like KMP/KMR and ETP/ETE).   LINE compensation numbers make more sense.  LINE is the 9th largest MLP and far and away the largest E&P MLP.  Also, Mark Ellis is not a founder of LINE.  MLP founder CEOs tend to have lower salaries and instead reap massive profits from GP and LP ownership (e.g. Rich Kinder’s famed $1 salary).

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