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November 12, 2017

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Week Thoughts: Astride the Upside Down

For a second straight week, MLP Index price returns and total returns straddled 0%; total returns finished just above zero with the aid of distributions.

Oil price strength continued, reaching its highest level since July 2015 (above $57/bbl), before consolidating late in the week.  An early cold snap hit the northeast, pushing up natural gas prices.
But commodity prices took a backseat to earnings releases that were overall better than expectations, but failed to spell relief for MLP prices.  Expanding capex, questions about project returns and financing plans linger as headwinds to broader MLP enthusiasm.
3Q results did not prove to be a catalyst for the sector overall (in either direction).  So, what’s left as a potential positive catalyst into year-end?  A few things come to mind:

  • Producer capex and production plans for 2018
  • Analyst days of Canadian midstream players (ENB, TRP) and some midstream companies (ANDX)
  • M&A or project/asset sales, like we got this week
  • Further ramp in commodity prices

Any positive catalyst will need to contend with selling pressure from tax loss selling, equity offerings (preferreds mostly, maybe an IPO), possibly some negative commodity price volatility, or a broad equity market correction.
The positive and negative, yin and yang of the MLP market and the two-week stalemate reminded me of the odd premise of Netflix’s “Stranger Things”.  In that show an alternate, very dark dimension exists known as “the Upside Down”, an echo of our normal dimension or something, but with vines and slime and a faceless monster trolling around.  The gate into that dimension is opened in a small Indiana town, and terror, suspense and intrigue ensue.

Poll Question Recap
This week, reporting management teams seemed more wedded to the traditional MLP model (albeit with more preferred than common equity), putting less emphasis on achieving self-funding status.  These more obstinate management comments offered a contrast to last week, but matched up with results from our poll.
Last week, we asked what percentage of Midstream/MLP companies would be “self-funding” the equity portion of their growth capex 3 years from now.  The vast majority (77%) of respondents selected either 25% or 50%, and just 1% thought 100% of the sector would be self-funding.
The closed-ended nature of the question begs wide interpretation.  The results suggest a few potential opinions to me: (1) skepticism that MLPs will stick to the self-funding goals they’ve set, (2) self-funding as a sector-wide goal is unnecessary, or (3) it is necessary, but won’t be achieved within 3 years.
Winners & Losers
CCLP, PAA and DCP posted good results that helped them outperform.  For PAA it was a second straight week in the top 5.  Expectations were finally low enough for NGL Energy to set up a beat, which coupled with asset sales to drive strong performance.

CCLP finally escaped the bottom 5 for the week, with a big bounce, but remains near the bottom YTD. PAA escaped the bottom 5 YTD, replaced by GEL. KNOP’s equity deal sent it to the bottom of the sector leaderboard for the week. CEQP gave back last week’s gains.

General Partners & Midstream Corporations
For Midstream Corps and GPs, PAGP led the group, but LNG and WMB showed relative strength as well. Semgroup’s miss and lowered guidance landed it at the bottom of the group for the week and the year to date leaderboard.

Canadian Midstream Corporations
In Canada, TRP shrugged off weaker than expected results perhaps helped by renewed Keystone XL hopes. Pembina kept pace with TRP and retained its lead year to date. Keyera posted poor results, but hope for a stronger 4Q led to some relief after recent underperformance. IPL and GEI results were sold hard.

News of the (MLP) World
It turned out to be a busy week for transactions, with several announcements slipped into and around earnings releases.  A few trends were reinforced as I reviewed the deals: (1) traditional capital markets are challenged (small deal priced, one pulled), (2) alternative sources of capital are available via preferred market and asset sales.

Capital Markets

  • KNOT Offshore (KNOP) priced public offering of 3mm units at an implied price of $21.90/unit, raising $65.7mm (press release)
    • Overnight offering, priced at 5.8% discount, and traded down 2% in the following session
  • Summit Midstream (SMLP) priced public offering of 300,000 of its 9.5% Series A Fixed-to-Floating Rate Cumulative Perpetual Preferred Units at $1,000/unit, raising $300.0mm in gross proceeds (press release)
    • Distributions fixed at 9.5% through December 2022 (5 years), then switch to 3-month LIBOR +7.43%
  • Other MLPs are launching their offerings of Series A Fixed-to-Floating Cumulative Redeemable Perpetual Preferred Units, including:
    • Energy Transfer Partners (ETP) (filing)
    • DCP Midstream (DCP) (filing)
  • Buckeye (BPL) priced public offering of $400mm of 4.125% senior notes due 2027 at 99.503% of par
  • Enterprise Products (EPD) filed S-3 to register $1.7bn of new common units and to $838.5mm of previously registered and unsold units (filing)
    • This filing appears to re-load the DRIP and ATM programs, and provide EPD with flexibility for M&A, but optically it runs counter to self-funding goals discussed on the 3Q call
  • TransMontaigne (TLP) launched a public offering of 2.875mm common units, seeking to raise approximately $100mm in gross proceeds, then pulled the offering (press release)
    • TLP management cited “equity market conditions that are not conducive for an offering on terms that would be in the best interests of the partnership’s unitholders”

Growth Projects / M&A

  • NGL Energy (NGL) and SemGroup (SEMG) announced the sale of their respective 50% interests in the Glass Mountain Pipeline for $300mm each to private equity buyers (press release)
    • BlackRock Inc.’s Global Energy and Power Infrastructure Fund in partnership with Navigator Energy Services was the buyer
  • NGL Energy (NGL) also announced the sale of certain retail propane businesses for $200mm in cash to DCC LPG (press release)
    • NGL will retain the sold propane businesses and their estimated $20mm in EBITDA through closing which is scheduled for March 31, 2018
    • NGL will still have its retail propane businesses located in the northeastern, Mid Atlantic, and southeastern parts of the US
  • Andeavor Logistics (ANDX) announced $445mm drop-down acquisition from sponsor Andeavor (ANDV) (press release)
    • Acquired assets, which include 3.9mm barrels of crude oil, feedstock, and refined products storage among other assets, are expected to provide annual EBITDA of $50-55mm implying a multiple of 8.5x
    • Financed with $400mm in cash via revolving credit facilities and $45mm in common units issued to ADNV
  • TransMontaigne (TLP) announced the acquisition of two West Coast refined product and crude oil terminals from Plains All American (PAA) for $275mm (press release)
    • 10x 2018 EBITDA, $20mm of additional capex planned, which would bring the multiple down over time
    • Management doesn’t anticipate any regulatory hang-ups like those Valero experienced when originally agreeing to buy these assets from PAA
    • Deal will be financed 100% with debt, given the under-levered balance sheet TLP has (2.8x leverage this quarter) and unattractive equity funding costs
  • American Midstream (AMID) announced dropdown of the natural gas Trans-Union Interstate Pipeline from ArcLight Capital Partners, LLC for $48mm (press release)
    • Funded by $15.5mm in borrowings and $32.5mm from non-recourse debt
  • Delek US (DK) announced the acquisition of the remaining 18.4% of outstanding units of Alon Partners (ALDW) not already owned by DK (press release)
    • ALDW holders will receive 0.49 DK shares for each common unit of ALDW, implying a 2.9% premium to the prior day’s closing price
    • ALDW went public in 2012 at $16.00/unit as part of the variable distribution MLP IPO boom from 2011-2013
    • ALDW still holds the record for highest implied IPO yield for an MLP at 32.50%, and IPO investors have received $9.72/unit in distributions since IPO, which isn’t bad
    • Another of the long list of largely irrelevant MLPs will go away after this transaction, as rationalization of the universe continues
  • Oasis Midstream (OMP) announced plans to construct a second Wild Basin natural gas processing plant with 200 mmcf/d capacity (press release)
    • Plant is expected to cost $140mm and be in-service in late 2018
  • Keyera Corp (KEY-TSX) announced $120mm North Wapiti Pipeline System connecting the privately-owned Pipestone Oil Corp. in the Montney region to Keyera’s Wapiti gathering complex (press release)
    • Backed by a long-term, take-or-pay contract and is expected to be online in 2H 2019


  • U.S. Court of Appeals dissolved an administrative stay on construction of the Atlantic Sunrise Pipeline, less than two days after the granting the stay, enabling Williams Partners (WPZ) to resume construction (press release)
  • Plains All American (PAA) announced that CEO Greg Armstrong will retire at the end of 2018 and named Willie Chiang as successor (press release)
    • Chiang is currently PAA’s EVP and COO
  • Sunoco LP (SUN) announced Joe Kim as CEO effective January 1, 2018 (press release)
    • Kim, currently COO, is replacing Bob Owens who announced his retirement in June


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