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November 23, 2013

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Week Thoughts: All Eyes on Dallas

The Alerian MLP Index traded up for the second consecutive week, gaining 0.3%, but the Alerian MLP Equal Weight index was slightly negative.  The Cushing 30 and Alerian MLP Infrastructure indices, both more concentrated and midstream-focused than the AMZ, were both up more than the more inclusive indices.  But, as has been the trend for the last few months, the Alerian MLP Index underperformed the S&P 500, which had a slightly better than flat week (+0.4%), closing at an all-time high that broke 1,800.  The implied yield on 10-Yr U.S. treasuries was volatile this week, spiking 8 basis points Wednesday and breaking above 2.80% on Friday, but finished just 4 basis points higher than last week.
Weekly MLP Review_11-22-13
Oil prices were basically flat week over week, as a bullish inventory report was balanced against this week’s less bullish market sentiment, based on Fed minutes and taper timing.  Natural gas prices were higher week over week, as colder weather led to a larger than expected withdrawal to natural gas inventories of 45 bcf in the week ended 11/15, according to the EIA’s weekly inventory report (EIA). Natural gas prices closed the week at their highest point in over a month. Ethane prices went along for that ride, up 4.0%, while propane prices were flat, but remain near the highs of the year.
MLP Arms Race
There’s been quite a bit of reflection on the Cold War era this week on the anniversary of the assassination of John F. Kennedy, who by many accounts saved the world from nuclear warfare due to mutual assured destruction in the Cuban Missile Crisis.


In the MLP space, there is an ongoing MLP arms race among larger MLPs, and in particular between the Kinder Morgan and the Energy Transfer MLP Families.  KMI bought El Paso, ETE bought SUG.  ETP bought SXL, KMP bought CPNO, etc.  In some ways it reminds me of the Dr. Suess Cold War classic The Butter Battle Book (1984).  This week, the “Boys in the Back Room” in Dallas cooked up something new for Energy Transfer CEO Kelcy Warren, and it captivated the MLP sector.
ETE’s plan is to spin off its existing regasification facility into a new MLP that then raises external financing for the ~$1.5bn in equity proceeds that will be a combination of common units and PIK units, all of which ETE will get paid incentive distribution rights on.  In addition, the deal carries little development risk for ETE/ETP.
As usual, the math is in ETE’s favor.  There were follow up reports from analysts that ascribed to ETE $7-$15/unit of market value today for the LNG conceptual development plan that will not produce cash flow until 2020.  The market agreed, with ETE’s units rising $6.00+ this week.  Management put a lot of detailed expectations out there, and the execution risk of this project will now hang over ETE for the next 7 years.
Winners & Losers
The biggest declines came from 3 MLPs involved in the 4 equity deals this week: OILT, TLLP and HCLP.  Equity deals are an additional supply of MLP units, which tends to push down prices for equity issuers.  Sometimes if an MLP is simultaneously announcing an acquisition or growth project, the selloff is muted.  TLLP and OILT both traded very weakly following pricing of their deals, which in my opinion is indicative of how tired the MLP equity markets are after 6 MLP IPOs so far this quarter on top of record YTD issuance through 3 quarters.  We will probably have a reprieve from the heavy equity flow for the remainder of 2013, as I expect to see little to no equity deals next week and the publicly-filed IPO backlog is at its lowest point in more than 2 years.
We only highlight MLPs in the above chart, but the biggest positive move in the broader MLP space this week came from ETE, which jumped 8.6% after its latest financing engineering exercise that could potentially result in yet another MLP and IDR stream for ETE.  The ETE pop was balanced by another G.P. holding company (ATLS) that was down 8.8% on no news.
No material changes in the top 5 and bottom 5 year to date this week.  Fish leapfrogged SXE, but nothing else changed.
News of the (MLP) World
It was an active news week on all fronts: 2 big M&A deals, 2 big growth project announcements (OKS and ETE/ETP), 4 equity offerings (3 of them on Monday, which was unusual), and 3 debt offerings.  Expect the pace of news releases to slow this week with the pending holiday season, but there will still be a few more weeks after Thanksgiving when the capital markets will be open.



  • Memorial Production (MEMP) prices public offering of 7.1mm common units owned by Memorial Resource Development (MRD) at $19.34/unit, raising $136.6mm in gross proceeds to the selling unitholder (MRD) (press release)
    • Overnight offering priced at 5.4% discount to prior close
    • MEMP units traded up 0.2% from pricing the next trading session
    • 100% secondary offering, no additional unit
  • Oiltanking (OILT) prices public offering of 2.6mm common units at $61.65/unit, raising $160.3mm in gross proceeds (press release)
    • Overnight offering, priced at 4.4% discount to prior closing price
    • OILT traded down an additional 6.7% from pricing in the next trading session
    • Proceeds to be used to fund ongoing growth projects
  • Tesoro Logistics (TLLP) prices public offering of 6.3mm common units at $51.05/unit, raising $321.6mm in gross proceeds (press release)
    • Overnight offering, priced at 3.7% discount to prior closing price
    • TLLP closed the next trading session down an additional 2.1% from pricing
    • Proceeds to be used to fund a portion of the cash consideration of the announced acquisition of logistics assets from Tesoro Corp
  • Hi-Crush (HCLP) prices public offering of 0.7mm common units owned by Hi-Crush Proppants LLC at $31.15/unit, raising $21.9mm in gross proceeds for the selling unitholder (press release)
    • After the offering, Hi-Crush Proppants (the sponsor) will still own 13.6mm subordinated, 3.75mm class B units and the incentive distribution rights of HCLP
    • In August 2012, HCLP went public by selling 12.9mm common units (including the underwriters overallotment option) to the public, while maintaining the 0.7mm common and 13.6mm subordinated units, so this offering represents the sale of all of the registered and listed shares that the sponsor could sell at this time
  • Spectra Energy Partners (SEP) files equity distribution agreement to sell up to $400mm of common units at the market (SEC filing)


  • Calumet Specialty Products (CLMT) prices $350mm private placement of 7.625% senior notes due 2022 (press release)
    • Upsized from original offering size of $225mm
  • Breitburn Energy (BBEP) prices $400mm add-on offering of 7.875% senior notes due 2022 at 100.25% to yield 7.823% (press release)
    • Add-on to existing $450mm of 7.875% senior notes due 2022
    • Up-sized from original announced offer of $300mm
  • Cheniere Energy (CQP) prices offering of $1.0bn of 6.25% senior secured notes due 2022 at par (press release)
    • CQP will use net proceeds to reduce commitments under the four credit facilities of Sabine Pass Liquefaction, LLC

M&A / Growth Projects

  • Energy Transfer Equity (ETE) announces the acquisition of Trunkline LNG Company (TLNG) from Energy Transfer Partners (ETP) for the redemption of 18.7mm ETP units owned by ETE (8-K Filing)
    • Represents purchase price of approximately $1.0bn based on 11/18 ETP price
    • Transaction expected to close in early February 2014
    • TLNG owns a 2.1 bcf/d LNG import and regasification facility that’s been operating since 1982
      • Regas operations are supported by a long-term take-or-pay contract with BG LNG Services that is expected to generate $185mm in EBITDA in both 2013 and 2014
      • ETP will receive incentive distribution rights (IDR) subsidies totalling $180mm from 2016 to 2019 to support ETP’s accretion on this inter-company transaction
  • ETE/ETP to develop LNG export facility and to potentially create new standalone LNG MLP (discussed at length in analyst day presentation)
    • ETE / ETP formed Trunkline LNG Export, LLC (owned 60% by ETE and 40% ETP) to develop the Lake Charles LNG
    • Lake Charles LNG is expected to be a 3 train LNG liquefaction and export facility backed by a 20 year contract with BG Group
    • The facility is expected to cost $11bn to construct and ETE expects it to be financed with 75% debt and 25% equity
    • A portion of the $1.5bn of equity may be raised by taking the development company public as an MLP with its first asset being the existing regasification facility
    • Train 1 to be completed in mid-2019, train 2 by early 2020, and train 3 by late 2020
    • Distributable cash flow for the facility is expected to come online in 2021 at a rate of more than $1.1bn per year
    • Key point: development costs of the LNG facility will be externally financed, and these transactions help isolate the development costs and development risks outside of ETE/ETP
  • Tesoro Logistics (TLLP) announces the acquisition of the remaining Los Angeles logistics assets owned by a subsidiary of Tesoro Corporation for $650mm (press release)
    • Acquired assets include:
      • Two marine terminals with 285,000 bbls/d of throughput
      • 100+miles of active crude oil and refined products pipeline systems connecting Tesoro’s Los Angeles refining complex with the marine terminal facilities to be acquired and with TLLP’s L.A. area refined products terminal and storage facilities (throughput of 550,000 bbls/d)
      • Dedicated crude oil and refined products storage terminals with a capacity of 2.0mm bbls
      • Petroleum coke handling and storage facility with 2,600 metric tons/day of throughput
    • Assets expected to contribute $60-$65mm of EBITDA in its first full year of operation (resulting in a 10.4x multiple)
      • $65-$75mm annual EBITDA contribution expected thereafter (9.3x implied EBITDA multiple)
    • In addition to the equity issued in the above public offering, TLLP plans to issue $65mm worth of equity directly to TSO to help fund the transaction.
    • Drop-down came a bit earlier and was a bit cheaper than most analysts expected
  • ONEOK Partners (OKS) announces additional Williston Basin growth projects expected to cost $650-$780mm (press release)
    • OKS to spend above capital between now and 2Q 2016 to:
      • Build a new 200 MMcf/d natural gas processing facility (the Lonesome Creek plant) in McKenzie County, ND
        • The 6th new natural gas processing plant in the region since 2010
      • Complete second expansion of the Bakken NGL Pipeline, which will increase capacity to 160,000 bbls/d from 135,000
    • These projects go into the overall organic growth project pool at OKS which now totals $6.0bn to $6.4bn through 2016, which as a whole is expected to generate EBITDA at a rate of 5-7x capital / EBITDA multiples
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