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September 11, 2016

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Week Thoughts: A Pipe in the Ground is Worth Two in Limbo

It was a short, action-packed week.  MLPs caught a wave of positive M&A vibes and higher commodity prices that carried the sector higher through Thursday, then crapped out with the rest of the market on Friday to finish the week down 1.0% overall.  MLPs outperformed the S&P 500 and utilities, which were both down 2.4%.  Friday was the worst day for the MLP sector in more than a month.
School started this week here on the East Coast, and in so many ways it was a shock to my system.  Instead of just me gearing up for work in the morning, it’s a row of 4 backpacks, lunches, water bottles, etc. that need to be packed and loaded (after breakfast and tooth brushing).  The lazy summer days are gone, and by Friday after two nighttime school events, I was beat.
This week in the MLP market felt like a similar shock.  Back from a peaceful August and holiday weekend, news came in fast.  M&A, equity deals, rising rates and rising regulatory risks need to be assessed and dealt with.  By Friday, even in a holiday-shortened week, the market was beat, collapsing in a heap after a very long short week.
The incredible four days of news started off with a massive $30bn merger of two companies that combine to have direct interests in 4 MLPs combined, plus a Canadian income vehicle (ENF).  Then, we were treated to some déjà vu when WMB, a large MLP suitor and an activist investor took their negotiations public.
Also, the equity and IPO machine has been turned back on, and it seems to be working better than it did in August, with 3 follow-on offerings that traded well and an IPO on the road.  Oh, and news broke on Friday that the executive branch of the federal government may cause another huge pipeline to slip into limbo following protests by the Sioux Indian tribe along the pipeline route.
M&A Thoughts
On M&A readthroughs, the ENB/SE deal was a surprise, because SE has been discussed as a strong potential suitor to buy other distressed midstream entities, rather than be acquired itself.  So, while the tendency is to look for the next big merger (EPD/WMB perhaps, ETE/somebody, somebody/OKE, somebody/PAA, etc.), this deal takes another potential buyer out of the picture.
The pool of potential consolidators appears to be shrinking, at least until the massive deals by the big Canadian players get paid for and digested.  The bigger MLPs are either too risk averse or need to solve cost of capital challenges before they can go hunting.  But the pool of buyers extends beyond just MLPs and KMI, at least for targets with contracted natural gas assets.   But there aren’t many large natural gas pipeline footprints left to be acquired.
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Touch Me and I’ll Sioux
What the Canadian midstream corporations have clearly realized is that M&A may be necessary to backfill growth and buy pipelines already operating.  As the last few weeks have shown, it is an increasingly challenging environment within which to attempt construction of a new pipeline.  In his presentation at the Barclays conference this week, EPD CEO Jim Teague colorfully pointed out the irony of millenials loading up their Yeti plastic coolers to go protest pipelines that would transport the feedstock that helps make possible the materials that went into that cooler.
Winners & Losers
NRP’s big week pushed it back into the universe of MLPs that comprise the charts below (i.e. back above $250mm market cap).  Not sure what the catalyst was besides general commodity price strength, and the realization by someone that NRP is a way to play them.  MEP’s 19% spike can be attributed to commodity prices and some positive vibes from the mega merger of its ultimate parent.
On the downside, ETP was definitely the largest MLP on the list of losers this week, perhaps the result of the mounting uncertainty around the Bakken Pipeline.  SMLP’s equity deal landed it at the bottom.  Overall, however, for a 1% declining week, the volatility was fairly tame on the downside.
Year to Date Leaderboard
NRP displaced USDP in the top 5, while PSXP joined the bottom 5 in place of VLP this week, as high growth drop-down MLPs continue to languish.
General Partner Holding Companies
SE was the surprise of the week and maybe the year so far.  The all equity deal was very well-received by the market, with both ENB and SE rallying hard.  It was very similar to the reaction when CPGX announced its acquisition by TRP earlier in the year.
SEMG’s oil beta helped drive a 10% move this week, while WMB’s baked in M&A premium remains quite sticky.  GPs naturally outperformed MLPs this week, with the M&A mania helping to extend what had been fairly drastic outperformance by this group vs. MLPs over the summer.
News of the (MLP) World

  • Noble Midstream (NBLX) launched IPO of 12.5mm common units, seeking to raise $250mm at $20.00/unit, the midpoint of the pricing range (prospectus)
    • At $20.00/unit, the implied initial yield is 7.5%, up from 6.25% on the last attempted IPO by NBLX in late 2015
    • Sponsor Noble Energy (NBL) will retain the Incentive Distribution Rights and a 60.7% L.P. interest in NBLX following the IPO (assuming no upsize of the base offering)
    • Business as usual: NBLX and the bankers involved had a real opportunity with this offering to make structural change to the MLP model, whether through some improvement in IDRs or governance as a potential differentiator, but that didn’t happen with this transaction, as far as I can tell
  • Summit Midstream (SMLP) priced public offering of 5.5mm common units at $23.20/unit, raising $123mm in gross proceeds (press release)
    • Overnight offering, priced at 6.7% discount to prior closing price, and closed the day down just 4.6% overall (+2.2% from pricing)
    • Proceeds to reduce borrowings
  • Western Refining Logistics (WNRL) priced public offering of 7.5mm common units at $22.32/unit, raising $167.4mm in gross proceeds (press release)
    • Bought deal, priced at 8% discount to prior closing price, and closed the day down 8% overall
    • Proceeds to partially fund drop down acquisition
  • NextEra Energy Partners (NEP) priced public offering of 10.4mm units at $29.48/unit, raising $307mm in gross proceeds (press release)
    • Bought deal, priced at 4.0% discount to prior closing price, and closed the day down 4.9% overall
    • Proceeds to be used to fund acquisition of 24% indirect interest in Sunlight Investment Holdings, LLC
  • Antero Midstream (AM) priced $650mm offering of 5.375% senior unsecured notes due 2024 at par (press release)
    • Upsized from $500mm originally offered
  • Magellan Midstream (MMP) priced $500mm of 4.25% senior notes due 2046 at 98.762% of par to yield 4.324% (press release)
    • Proceeds to be used to repay 5.65% senior notes due in October 2016

M&A / Growth

  • Enbridge (ENB) and Spectra Energy (SE) announced combination through all stock merger that values SE at $28bn (press release)
    • SE shareholders will receive 0.984 shares of the combined company for each SE share, or a $40.33/share value based on last Friday’s price (11.5% premium)
    • Transaction to close in 1Q 2017, subject to shareholder approvals by both sets of shareholders
    • Management indicated that given the large combined backlog ($57bn), the combined entity will be able to continue to grow dividends by 10-12% annually through 2024
    • ENB indicated that EEP/EEQ and SEP would remain outstanding and separate (i.e. that SEP wouldn’t be used to “solve” EEP in some way)
  • Western Refining Logistics (WNRL) announced drop-down acquisition of certain terminalling, storage and other logistics asset for $210mm (press release)
    • WNRL will pay $195mm in cash and $15mm of WNRL common units
    • The acquired assets are expected to produce $24.7mm in EBITDA, implying an 8.5x multiple
    • The EBITDA is backed by a 10-year agreement with certain minimum volume commitments
  • MPC, sponsor of MPLX, announced that MPLX will directly invest in the Bakken Pipeline as opposed to previous announcement of MPC acquiring an interest in the pipeline (slide presentation)
    • In other news, a judge affirmed the DAPL project, but the Department of Justice appears to be helping to keep the pipeline from completion (read more at the Wall Street Journal)
  • Williams (WMB) announced engagement of bankers in formal process to explore monetization of Geismer Olefins Facility (press release)
    • May result in a sale or a long-term, fee-for-service tolling agreement
    • WMB owns 88.5% of the facility
  • Enterprise Products (EPD) announced it has withdrawn its indication of interest in Williams Companies (WMB) regarding a potential merger (press release)
    • EPD’s unit price had struggled amid a broader MLP rally since the initial rumors surfaced in mid-August, which is a problem for EPD, which continuously funds it capital program via its ATM
    • Then, WMB responded to say they had a ton of stuff going on and were still reviewing the indication of interest with their board, including 3 new members, so they were surprised (press release)


  • Alerian announced changes to its index series (press release), including:
    • Alerian MLP Index: Rice Midstream (RMP) and Teekay Offshore (TOO) added, Archrock Partners (APLP) and Global Partners (GLP) removed
    • Alerian MLP Infrastructure Index: Cheniere Energy Partners (CQP) removed
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