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January 29, 2017

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Week Thoughts: American Splendor, Canadian Carnage

A combination of correlation (with oil strength), causality (pipeline executive orders) and seasonality (January effect, distribution capture) sent MLPs shooting 5.5% higher for the week overall, in the best week of trading for the MLP Index since April of last year.  Tuesday and Wednesday were both 2%+, the first back-to-back 2%+ days since that same week in April.
Last week’s post was titled “Wait For It”, and this week’s bounty of deals and catalysts was worth the wait.  Big, third-party M&A and multiple equity deals made for an exciting  If the next two days hold, it will be a very good January that sets up for a big year for MLPs.
However, among the universe of corporations in the U.S. that own midstream assets, the performance has been much weaker thus far in 2017.  WMB melted down on its simplification, EEQ was down more than 20% Friday, and OKE has lost its momentum.  Overall, if you are a foreign investor or averse to K-1s in general, you’ve had a real challenge to capture the same returns that MLP investors have managed thus far.
Canadian Carnage
Once or twice a year, something happens with a large, investment-grade MLP that catches the sector off guard with something non merger related and it sends that MLP into a tailspin that quickly gets out of hand.
This week it was EEP, but in 2016 it was MPLX, in 2015 it was KMI and PAA / PAGP.  Below is a non comprehensive list of such events over the last 4 years, and how the stocks traded afterwards.  In some cases those wash out days marked the bottom, in other cases not so much.
Investment Grade MLPs Gone Bad
ENB continues to take half measures with its American subsidiary MLPs, kicking the can down the road until maybe coverage fixes itself.  This week, after promising a strategic review, then pulling it back when the SE merger was announced, EEP announced something that doesn’t even qualify as a half measure, and coupled it with much loewr than anticipated guidance for 2017 EBITDA and cash flow.
ENB and EEP management will have more opportunities to improve the U.S. strategy or at least the messaging, which may determine whether EEP ends up with green boxes or red boxes as the chart above fills in.
Poll Question Recap
DAPL got a new hype man this week when President Trump called out the pipeline in one of his first executive orders.  Energy Transfer and CEO Kelcy Warren remained silent, but the market was pleased and gave the all clear to sector this week.
Last week, before Trump made pipelines great again, I asked which pipeline of the two ETP is most relying on this year (DAPL and Rover) would be in-service by year end.  The poll results showed that you believe either both (37%) or just DAPL (32%) would be in-service.  However, 25% of you said neither would be in service by year end.  With FERC uncertainty increasing this week, things remain in limbo.
Winners & Losers
Large cap MLPs with Permian oil pipelines (MMP and SXL) made the top 5 this week, despite not being involved in the big Permian midstream deals this week.  MMP may have benefitted from its free ride on PAA’s acquisition of a new source of barrels to push through pipelines jointly owned by MMP and PAA> SXL was helped by the positive DAPL sentiment from the new guy in the White House.  On the downside, EEP and FGP were clear outliers.
TGP and CCLP are making a habit of showing up in the top 5.
YTD Leaderboard
TGP leads all MLPs with a nearly 30% return in 2017.  Improved balance sheet and outlook seems to be the driver.  MEP remains in the top 5 despite its nose dive on Friday following the takeout for a discount from ENB.  Among the few MLPs down this year, EEP has emerged as the biggest loser in the early days of 2017.
FGP fell out of the top 5, while PAA and GMLP climbed up from the bottom.
General Partners & Midstream Corporations
Corporate vehicles underperformed the MLP Index dramatically this week.  Cheniere Energy (LNG) took off on Tuesday, perhaps buoyed by infrastructure enthusiasm generally, perhaps by articles saying the LNG spot market is tighter than many expected given challenges of sourcing gas for heating in Europe, and supply challenges in Australia.  TRGP’s equity deal early in the week was a headwind, KMI action was muted despite the well-attended analyst day in Houston.
TEGP, WGP and EQGP all made it back to back top 5 weeks, a notable few weeks of trading for that group of cleaner GP stories.  ENLC made it two straight weeks in the bottom 5.
News of the (MLP) World
MLP equity capital markets appear to be functioning fairly well, with multiple equity deals and an IPO (Kimbell Royalty) on the road.  Also, third party M&A in the Permian is not just for upstream guys anymore.
Capital Markets

  • Targa Resources (TRGP) priced public offering of 8mm shares at $57.65/unit, raising $456mm in gross proceeds (press release)
    • Priced at 4% discount to prior close
  • Ferrellgas (FGP) priced private placement of $175mm of 8.625% senior notes due 2020 at 96% of par (press release)
  • GasLog Partners (GLOP) priced public offering of 3.75mm shares at $20.50/unit, raising $77mm (press release)
    • Overnight offering, priced at 7% discount and traded up 0.5% from pricing in the following session
  • Teekay LNG (TGP) announced a $35mm add-on to its existing unsecured bonds due October 2021, priced at 103.75% (press release)
    • TGP also announced a $685mm sale-leaseback with ICBC Leasing for four LNG carrier newbuilds and a $220mm long-term debt facility relating to its 30% interest in the Bahrain regasification facility

Growth Projects / M&A

  • Targa Resources (TRGP) announced acquisition of Permian-based gathering and processing assets from Outrigger Energy for up to $1.5bn (press release)
    • TRGP will make an initial cash payment $565mm, representing ~9x 2017E EBITDA, plus two potential earn-out payments to Outrigger in 2018 and 2019 totaling $935mm (subject on realized gross margin from existing contracts and multiples)
    • Acquisition adds 250,000 dedicated acres in Delaware and Midland basins, gas and crude gathering assets
    • TRGP plans to connect the Delaware assets to its existing Sand Hills system and plans to connect the Midland assets to its existing WestTX system
    • TRGP funded the first payment with public offering (see above) and additional revolver borrowings
  • Plains All American (PAA) announced acquisition Permian Basin crude oil gathering system from Concho Resources (CXO) and Frontier Midstream Solutions for $1.2bn and agreed to sell $380mm in assets (press release)
    • The gathering system, Alpha Crude Connector (ACC), is located in the northern portion of the Delaware Basin and is supported by 315,000 dedicated acres from several active producers
    • PAA paid a current EBITDA multiple of more than 20x, but that could compress to single digits before 2020 depending on rate of production ramp
    • PAA was put on review for possible downgrade from Moody’s following the announcement
    • PAA announced $380mm of asset sales which are included in management’s plans of $670mm worth of sales in 1H17
  • Enbridge (ENB) announced acquisition of outstanding common units of Midcoast Energy Partners (MEP) for $170.2mm at $8.00/unit as part of Enbridge Energy Partners’ (EEP) strategic review (press release)
    • Transaction represents a 5.5% premium to the trailing 30 day VWAP, but an 8% discount to prior closing price and a 56% discount to IPO pricing in late 2013
    • ENB will own approximately 25% of MEP after this transaction, but the remainder will continue to be owned by EEP
  • BridgeTex Pipeline, 50/50 JV between Magellan Midstream (MMP) and Plains All American (PAA), announced 100 Mbpd expansion in capacity to 400 Mbpd (press release)
    • The additional capacity is expected to come online in 2Q17
  • Sprague Resources (SRLP) made two acquisitions this week, including;
    • E. Belcher’s terminal and storage assets in Springfield, MA for $20mm expected to generate $3-4mm in EBITDA (5.7x) (press release)
    • Refined product terminal asset from Capital Terminal in East Providence, RI for $23mm (press release)
      • SRLP plans to expand the terminal for an additional $8mm, then generate $6mm EBITDA annually (4.6x all-in multiple)
  • VTTI Energy (VTTI) acquired terminal assets in Panama (press release)


  • President Trump signed an executive order directing the Army Corps of Engineers to expedite the approval of two critical pipeline projects: DAPL and Keystone, to the extent permitted by law (Wall Street Journal)
    • The pipeline executive orders focused attention on the sector and seemed to be a major catalyst for the sector this week
    • On the heels of Trump’s order and invitation to reapply, TransCanada (TRP) announced re-application to build Keystone XL (Wall Street Journal)
  • DCP Midstream Partners (DPM) changed its name to DCP Midstream, LP (DCP) (press release)

Distribution Announcements
70 midstream companies and MLPs have announced dividends and distributions so far this quarter, including 31 this week.
Distribution announcements_1-27-17

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