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April 23, 2017

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Week Thoughts: Chaotic Commodities Can't Crush MLPs

MLPs showed resilience in the face of sharply lower commodity prices  across the board this week, declining slightly despite oil prices dropping below $50/bbl again.  That resilience was at least partially the reversal of last week’s MLP underperformance vs. strong commodity prices.
Again and again throughout the week (e.g. Monday, Wednesday and Friday), MLPs dropped early with oil prices, then rallied late even as oil languished to close nearly flat.  The equal weight Alerian MLP Index was very close to flat for the week overall.  This is encouraging action on the margin for MLPs, although the midstream corporations fared much worse.
Distribution announcements, solid fundamental results from KMI may have engendered some hope  ahead of MLP earnings season, where the biggest theme could again be the ongoing (not perpetual, hopefully) bottoming of volumes.
Impatient Capital, L.P.
I had a fun time over the weekend trying to explain to my kids the concept of a retail storefront that would rent you a physical copy of a popular film, and how you would need to return it (preferably on time and after rewinding).  I explained how at first, I rented Betamax and eventually VHS movies from the rental section of the Randall’s grocery store at Voss and Woodway (now a Whole Foods).
Video Rental
A few years later, it was VHS and laserdiscs from the Hollywood Video at Woodway and Chimney Rock (now a paint store).  Then it was DVDs from Blockbuster on that same block (now an eye doctor’s office).  Then it was DirectTV, Netflix DVDs by mail, and eventually streaming movies via Netflix, Amazon and iTunes.
As a result of constant disruption by new technology, my kids are growing up in an on-demand, subscription-based, instant world.  They barely know what it feels like to be thirsty.
Society has always wanted things now.  As noted philosophers Freddie Mercury and Veruca Salt each said decades ago: “I want it now!”…The difference today is we usually can and do get what we want almost immediately.
I want it now
With Kinder Morgan, though, we can’t have the old, much higher dividend right now.  High leverage doesn’t solve itself overnight, even with a big payout reduction (see BWP).  This week, KMI’s lack of substantial update with its earnings release on the financing plan for the Trans Mountain expansion seems to have shaken confidence in KMI’s ability to right its balance sheet in the face of fragile commodity price environment.  KMI finished the week as the worst performing midstream corporation (-5.2%).
KMI is a big company and the TMX expansion is a big project, it seems reasonable that a process to find the right partner will take time.  However, the incremental investor making a buy/sell decision today doesn’t seem to be the patient capital that used to dominate the midstream sector.  The pressure is on to produce big results fast, even if that’s just not possible in most cases (especially when a politically charged pipeline project is at stake).
So, here I am for a second straight week preaching patience.  Expect management teams to do the same over the next few weeks, and then we can all go back to holding our breath until the next OPEC meeting.
Winners & Losers
YTD Leaderboard
General Partners & Midstream Corporations
News of the (MLP) World
I was a bit surprised the Antero GP IPO didn’t launch this week, but it should be kicking off soon.  As a result, MLP capital markets were quiet again this week.  One big strategic catalyst came through (WPZ Geismer sale), but the big announcement on KMI’s Trans Mountain financing plan remains pending.  In small-cap MLP news, MLP buyouts are continuing to be held up by tough negotiations from special committees.  This is a positive MLP corporate governance trend that should be applauded, but it is also slowing some much needed rationalization of zombie MLPs.
Capital Markets

  • NuStar Energy (NS) priced $550mm of 5.625% senior notes due 2027 at par (press release)
    • Offering upsized from initial $550mm offered

Growth Projects / M&A

  • Williams Partners (WPZ) announced sale of its interest in Geismer Olefins Facility to NOVA Chemicals for $2.1bn (press release)
    • WPZ to sell Williams Olefins LLC, which owns 88.5% interest in the Geismer facility
    • WPZ also announced long-term agreements with NOVA to supply and transport ethane feedstock on WPZ’s Bayou Ethane pipeline system that feeds the facility
    • Transaction is expected to close in summer 2017
    • Proceeds will be used to pay off debt and to pre-fund capital investments
  • Private equity firm Blackstone Energy Partners announced acquisition of Permian Basin-focused private natural gas gathering & processing operator EagleClaw Midstream Ventures for $2bn (press release)
    • EagleClaw was backed by private equity firm EnCap Flatrock Midstream
    • EagleClaw is the largest privately held midstream operator in the Permian Basin, with 375 miles of gas gathering pipelines, 320 mmcf/d of processing capacity (plus 400mmcf/d more under construction), and long-term dedications of more than 220,000 acres
  • Plains All American (PAA) announced open season for crude oil pipeline transportation capacity from Permian Basin to Cushing under long-term contracts (press release)
    • Combination of new and existing pipelines will move the committed barrels starting in 2019
    • This latest PAA prospective pipeline diverges from other recent announced plans in that its path heads East to Cushing rather than southeast to the Corpus Christi Area
  • PBF Logistics (PBFX) announced acquisition of Toledo, Ohio refined products terminal assets from Sunoco Logistics (SXL) for $10mm cash (press release)
    • The terminal assets are directly connected to PBF Energy’s Toledo refinery
  • Emerge Energy (EMES) announced acquisition of Osburn Materials for $20mm (press release)
    • Located 25 miles outside San Antonio, Osburn produces and sells sports sands and building products but does not yet serve the energy markets
    • Osburn has over 80 million tons of sand reserves, consisting mostly of 40/70 and 100 mesh sand
  • Navios Maritime Partners (NMM) announced acquisition of 14-vessel container fleet from Rickmers for $113mm (press release)
  • MLP Takeout discussions terminated for two smaller, non-traditional asset MLPs due to impasses reached in negotiations with conflicts committees of the MLPs, similar to other MLP takeouts of late (CQH, TLP)
    • SunCoke Energy Partners (SXCP) and its sponsor SunCoke Energy (SXE) (press release)
      • SXCP rallied around 12% when this was announced, also announced quarterly results
    • OCI Partners (OCIP) and its sponsor OCI N.V. (press release)
      • Sponsor owns 79.9% of common units of OCIP
      • OCI N.V. had offered an all-equity exchange of OCIP units into OCI shares at a 0.52x exchange ratio


  • All three proxy advisory firms recommend Energy Transfer Partners (ETP) unitholders vote for merger with Sunoco Logistics (SXL), with the vote scheduled for next week (press release)

Distribution Announcements
Tis the season again for MLP distribution announcements.  This week 26 MLPs and corporations announced distributions. No distribution cuts this quarter.

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