February 26, 2017
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MLPs declined late in the week as equity issuance overwhelmed the sector. For the week overall, MLP Index was down 2.1%, the worst week for the Index since the week preceding the election in November. It was also the first weekly decline of more than 2% for the MLP Index so far this year. Despite some volatility this week, volatility remains miles better than last year. In 2016, MLPs dropped more than 4.0% in four separate weeks of the first six week of the year.
Equity issuance accelerated throughout the week, culminating in $1.7bn Friday. MLPs have been accessing the equity market with more frequency and with better results (tighter discounts, better after-market performance), indicating that capital is returning to the sector, but there is a limit to the amount of equity the sector can absorb on a given day or week.
Positive takeaway from this week: that limit appears to be higher than it was last year, and MLP equity capital markets no longer feel like a zero sum game. Healthy capital markets encourage more equity issuance, and enables financing of more acceretive acquisitions and growth projects to get done.
Two of the big offerings this week were clean up trades: one to clean up the balance sheet, one to clean up a major holder’s stake. Expect more clean up trades as preferred offering buyers from the last few years look to exit, as sponsors look to exit, and as MLPs continue to clean up balance sheets.
Those trades can disrupt the market, but if they are going to happen, it can be better to rip the band aid off as opposed to slowly peeling it off.
Offering Outpacing Last Year
At this point in 2016, there had not been a single MLP equity offering, and in total in 1Q there were only 3 deals that combined to raise $634mm. So far this year, there have already been 10 MLP offerings for $1.6bn. Also, WMB and PAGP combined to raise an additional $3.2bn from their corporate vehicles, bringing the total public offerings to $4.8bn so far this year.
The chart below shows that MLPs were able to tap the market in 2016 in a limited fashion. With another month left in the first quarter, overall 1Q issuance should put us well ahead of last year’s pace. But with more MLPs migrating to the corporate structure over time and with the rise of ATM usage among large MLPs, its unlikely that we will return to the annual rate of $20bn+ MLP follow-on offerings from 2011-2014 anytime soon.
Poll Question Recap
Last week, after two straight flat weeks for the sector, I posed the question of what might spark the next move up for MLPs. The overwhelming winner at 42% of responses was “No spark needed, MLPs grind higher on positive trends”. I read that answer as basically a call for patience while the sector consolidates after a strong up move since the middle of December.
20% of respondent expect MLPs to linger until actual volume growth shows up, which several MLPs (per their guidance) expect to happen in the second half of this year. For some investors, MLPs are a show me story and promises of future growth are discounted until they show up. That makes sense, but at that point, the price of admission is likely to be higher.
Winners & Losers
MMLP got some follow through from last week’s trifecta of earnings, drop-down and equity deal to lead all MLPs. Other small cap MLPs populated the top 5, but notably only 3 MLPs were up more than 3% this week. 2 MLPs were down more than 10% on no news, including CNNX, which was down 7.7% on 600% of usual volume.
Propane MLPs continue to struggle on the extreme warm weather we’re all enjoying, including FGP and SPH.
YTD Leaderboard
The top 3 so far this year all picked up more gains this week, all 5 of the top 5 are up 20%+ already. On the downside, all 5 of the biggest losers are down more than 10%, without much change among the constituents.
General Partners and Midstream Corporations
Median performance for GPs and corporations was better than the MLP Index this week, but only 3 of them were positive. AROC and SEMG were down on their earnings announcements. A selling shareholder put some pressure on TRGP with a marketed block trade. The large equity deal PAGP announced, on the other hand, was a positive catalyst that helped PAGP avoid the Friday selloff (or maybe was a part of the reason for the selloff).
LNG rebounded a bit from last week, while TEGP got the rare follow through from a strong week last week on the back of its strong results and guidance.
News of the (MLP) World
Clean up trades for PAGP and TRGP dominated action late in the week. ETP/SXL, TEP and WES announced new growth projects as natural extensions of their existing footprints as well placed assets and strong customer/sponsor relationships continue to generate opportunities for midstreamers to deploy capital.
Capital Markets
Growth Projects / M&A
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