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February 25, 2018

Viewed 2943 times

Week Thoughts: Bottom of the Barrel

Midstream had another week of underperformance. MLPs gave up last week’s modest gains and more.  The weakness had little to do with fundamentals. Oil prices rallied, and earnings results were strong overall, especially from ETP and Pembina.  The weakness came from reminders of persistent structural headwinds: complicated simplifications (EQM this week), and stubbornly high leverage driving distribution cuts (MIC this week).

The MLP Index hit its lowest point since 12/7 and is just 5.2% above its 11/29 low, although that’s better than the S&P 500 (+4.6%) over that time.  Distributions add another 2% for 7.2% return off the bottom.  So, through that slightly wider lens, MLP performance hasn’t been terrible, but the 12.6% decline from the 1/23 peak has been pretty terrible.

Poll Question Recap
Thanks to all who voted on last week’s poll question.  The responses were abundant, and the results interesting.  While most said the primary reason they still care about MLPs for their exposure to energy infrastructure themes (57% of respondents), 36% of respondents said it was the MLP structure itself.
It’s good to know there is more than one reason for people to concern themselves with MLPs.   It’s also good to know that so many of you out there that still care about MLPs.
Winners & Losers
The top 5 MLPs this week included no traditional midstream MLPs (two marine transportation MLPs, two compression MLPs, and CELP).  Those outliers were likely driven by ongoing recovery of compression fundamentals and oil prices.  The bottom 5 had clearer catalysts.  SMLP reported underwhelming results and guidance.  EQM disappointed with its complification strategic announcement that offered no IDR simplification and no valuation details on the series of planned transactions announced.  ENLK hit pre-announced results, but was likely hurt by sponsor Devon’s results and selloff.  GEL and MMLP likely sold off on their association with “bottom-of-the-barrel” businesses that gave Macquarie (MIC) serious trouble.

TOO showed up near the top for a second straight week.  MMLP went from top 5 to bottom 5 from last week to this week.  On the YTD leaderboard looks very similar to the weekly top 5, with non-traditional and non-index MLPs dominating.  SMLP and EQM joined the bottom 5 this week, while BWP and VLP escaped the bottom 5.

General Partners & Midstream Corporations
The GP and midstream corporation group underperformed MLPs and Canada this week.  I don’t include MIC as a midstream corporation, because of its wide-ranging portfolio of assets that include private airport and utility assets and a shrinking amount of midstream contribution.  That being said, MIC (and its 39% weekly decline) was clearly a factor in midstream trading this week, because its midstream assets were the cause of the 31% dividend cut announced this week.  MIC is a large weight in the AMEI index that I refence above as a reasonable proxy for midstream overall, and it was obviously a big driver of that index’s dramatic underperformance this week.

OKE announced $2.3bn of projects and was one of two positive names in the group.  SEMG dropped more than 10% Thursday as the market searched for readthroughs from the MIC announcement.  TEGP repeated in the bottom 5, and has overtaken the bottom spot YTD.

Canadian Midstream Corporations
Pembina’s strong results sent it to the top of the group in Canada for this week.  Recent enthusiasm in KML trading abated this week, sending its shares down 4.7%.

On the YTD leaderboard, ENB and IPL remain down double digits for the year, while KML remains the only positive return in the group for the year.

News of the (Midstream) World
Trends reinforced by this week’s MLP news: Limited capital markets activity, new project announcements, ongoing efforts to simplify MLP structures, asset sales and environmental challenges to pipeline projects.

Capital Markets

  • Western Gas (WES) priced public offering of $1.1bn of senior notes (press release)
    • $400mm of 4.50% notes due 2028 at 99.435% of par
    • $700mm of 5.30% notes due 2048 at 99.169% of par
  • Williams Partners (WPZ) filed $1bn common unit shelf (S-3)

Growth Projects / M&A

  • EQT Corp (EQT) announced restructuring plan to separate its upstream and midstream businesses creating a standalone public traded corporation (NewCo) that will control the midstream business (EQGP and EQM) (press release)
    • EQT shareholders will retain shares of EQT stock and receive a pro-rated share of NewCo
    • EQT will drop down remaining assets to EQT Midstream (EQM)
    • EQM will acquire outstanding public units of Rice Midstream (RMP)
    • EQT GP Holdings (EQGP) will purchase RMP IDRs from EQT
    • EQGP will retain EQM IDRs
    • EQGP and EQM will remain separate publicly traded entities
    • Contracts between EQT and EQM will remain in place following the separation
    • Additional details will be provided “in the near future”
    • IDR collapse likely the end game after the series of steps above are completed and accretion flows up to EQGP
  • ONEOK (OKE) announced plans to invest $2.3bn through 2020 for additional NGL and natural gas infrastructure (press release)
    • Projects, which are expected to be built at 4-6x EBITDA, include:
      • Arbuckle II Pipeline, a 400,000 bpd NGL pipeline from Oklahoma to Mont Belvieu, TX
      • MB-4, a 125,000 bpd NGL fractionator in Mont Belvieu
      • Demicks Lake plant, a 200 MMcf/d natural gas processing facility in the Williston Basin
    • OKE does not expect to issue additional equity following its recent $1.6bn offering and expects to fund the projects with retained cash and debt
  • Energy Transfer (ETP) had a permit revoked by a federal judge for Bayou Bridge Pipeline, halting work on a portion of the pipeline project following protests by local environmental groups (Reuters)
    • Bayou Bridge is a $750mm pipeline project owned 60% by ETP and 40% by PSX
  • Semgroup Corporation (SEMG) announced sale of its UK petroleum storage business to Valero Energy Corporation (press release)
  • Delek Logistics (DKL) and Green Plains (GPP) announced the formation of a 50/50 JV (DKGP Energy Terminals LLC) to operate light products terminals (press release)
    • DKGP will purchase two light product terminals from American Midstream (AMID) located in Caddo Mills, TX and North Little Rock, AR for $138.5mm
    • DKL will contribute assets valued at $24mm and $57.3mm in cash to DKGP while GPP will contribute $81.3mm in cash
    • Assets are expected to generate 2019 EBITDA of $19.2mm, implying an 8.5x multiple based on total $162.5mm value
  • Alliance Holdings GP (AHGP) and Alliance Resource Partners (ARLP) jointly announced an agreement where AHGP would become a wholly owned subsidiary of ARLP (press release)
    • ARLP common units held by AHGP will be distributed to AHGP unitholders in exchange for their AHGP common units
    • Based on ARLP’s last quarterly distribution of $0.51/unit, ARLP will issue 1.3mm in exchange for these interests approximately upon closing
    • It was a matter of time before this transaction was announced after Alliance eliminated its IDRs in 2017
  • Tellurian (TELL) announced open season for Haynesville Global Access pipeline, a natural gas pipeline connecting the Haynesville and Bossier shale production region to Southwest Louisiana (press release)
    • Pipeline is expected to cost $1.4bn, have capacity of 2 Bcf/d, and begin construction in 2022
  • Plains All American (PAA) announced Cactus II Pipeline is fully committed with long-term third-party contracts totaling 525,000 bpd (press release)