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May 11, 2013

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Week Thoughts: Deals, Earnings Send Most MLPs Higher

MLPs powered higher this week, with the MLP Index rising 2.5% including distributions.  The S&P 500 continued to rise as well, up 1.3%.  Commodities were generally weak, which many were commenting had to do with USD strength.  Gold continued its slide, down 1.9%. Natural gas dropped below $4.00/mmbtu again, propane and ethane prices were weak and oil prices were flat.  10-year treasury rates popped as well.  It was the 5th week that the MLP Index was up more than 2% in a week so far this year, compared with only 8 such weeks all of 2012 and 12 in 2011.  MLPs stand at fresh all-time highs again.

Weekly Review_5-10-13

It was a bad week all around for any gloom and doomers still left.  For the month of May so far, the MLP Index is up 1.9%, on pace to break its streak of 3 straight horrible May’s, and making most MLP prognosticators (myself included) look silly… Earnings season is largely behind us, and this week we’ll enter follow-on equity offering season again.  But if fund flows continue into the MLP space, those follow ons may get sucked up by MLP buyers.
Anticipation is starting to build for the big NAPTP conference at the end of the month.  Should be another very big turnout and lots of discussion of MLP valuations and where we’re headed for the rest of the year.  Certainly a different conversation that in the last few conferences when volatility and MLP weakness were the topics du juor.
Winners & Losers
PSE had the biggest week, after PSE disclosed a buyout offer it received from PXD.  It is amazing that the upstream MLP with the least hype and investor interest gets a buyout offer this week and is all of a sudden the one upstream MLP worth owning this year relative to the MLP Index.  After the CPNO buyout when it seemed CPNO was destined to pay a flat distribution indefinitely makes me think maybe we ought to start taking a harder look at MLPs that haven’t raised distributions in years, but probably not given that these were both pretty unique cases.
Other big movers were MWE (up on earnings release and M&A news), GEL and TCP on no news, and NRGY on the big news of the week that it will be teaming up with Crestwood (and First Reserve), and dramatically increasing IDR cash flow.  On the downside, NRGM investors weren’t thrilled with the idea of dilution and a flood of NRGM units being distributed to NRGY investors, and maybe a slight reaction to adding gathering volume risk to their list of risk factors with the CMLP addition.  The team of LNCO and LINE had another rough week, despite their best PR efforts on Monday with an appearance on Mad Money.  It should be noted that LNCO (+8.5%) and LINE (+3.6%) are up for the year.  Please don’t ask me my opinion of either one (unless you’re a client, of course), I can only say that I have consulting clients that own LINE, and in my discretionary accounts we do not own LINE or LNCO as of now.


The YTD 40% club swelled this week to 14 MLPs, the top 5 of which are listed below.  Liquids and refined products transportation MLPs are doing well (DKL, BPL, GEL, GLP, TLLP, BKEP), but natural gas pipeline MLP EQM leads everyone.  GEL broke into the top 5 this week, replacing TLLP.  On the downside, the same 5 are on the bottom 5 list as were there last week, although OKS was up this week and is close to escaping the cellar.


For the year, MLPs are dominating, and extended their lead over the S&P 500 year to date with another big week.  MLP GPs are doing even better, which has typically been the case when MLPs are strong.


IPO Update
The IPO wing of the MLP sector is starting to heat up.  Emerge Energy Services (EMES) priced its IPO this week, the first variable distribution oilfield services MLP to go public.  Tallgrass Energy Partners (TEP) hit the road this week, expecting to price early next week at a midpoint yield (5.23%) that would be the second lowest MLP IPO yield of all time.  Also, QEP Midstream, a midstream MLP formed by QEP Resources, filed its initial S-1 for an MLP IPO this week.
Below is an updated list of the 2013 IPOs to date and the backlog of IPOs.  There have been 6 MLP IPOs already this year, which is an unusually high number for a sector that usually starts slow with its IPOs, but early 2013 action was driven by MLPs that didn’t have a chance to get out in the very crowded late 2012.  In 2012 by this date, there had been only 1 MLP IPO, and we went on to see a total of 13 MLP IPOs in 2012.
Another difference between 2012 and this year: MLP IPOs aren’t popping like they did last year.  In 2012, on average MLP IPOs saw their prices pop 11.3% in the first day of trading, 13.4% if you average just the 10 traditionally structure (vs. variable) MLPs.  So far this year, MLPs have averaged negative price action in the first trading day (-1.2%).  4 of the 6 MLP IPOs have closed below their IPO price on the first trading day, compared with only 1 of 13 in 2012 and 5 of 13 in 2011.
One more thing to note, we aren’t seeing the highest quality assets coming to market or at least that’s the market perception.  I’ll try to prove this point with IPO yields.  The highest quality assets with the most growth potential tend to produce MLPs with the highest MLP IPO yields.  MPLX at 4.77% is the record low, other 7% or lower IPOs since 2011 include TLLP, EQM, OILT, TLLP, GMLP.  In 2013, we’ve seen no MLP with an IPO yield at 7% or below.  That will change with Tallgrass pricing next week, but will that mean a meaningful pop from Tallgrass?  I guess we’ll see.

MLP IPOs to Date_5-11

(click to enlarge)

Also interesting this week in light of another midstream MLP consolidation: with a lack of midstream IPOs so far this year, and the increase in consolidations, we might see the end of 2013 end with fewer midstream MLPs than we started with.  With Tallgrass and QEP coming to market and others in the queue, that’s unlikely, but it would have been a really interesting phenomenon if it were to happen.  That just highlights how we might be reaching saturation in terms of the number of individual MLPs it takes to own the available (i.e. not owned by major corps.) midstream infrastructure in the U.S.
Below is the pipeline of pending MLP IPOs.  Quicksilver announced that they were cancelling their MLP IPO process, not a surprise given the last updated prospectus was dated June of 2012.  Also not listed below is Tallgrass which is on the road now.  Several others haven’t updated their S-1s in at least 10 months.  So, the visible MLP IPO queue is 2 at this point, but there are several other companies planning MLP IPOs.  Some of those may already be filed confidentially.
Pending MLP IPOs
Final Note before News: Financial writer Alan Abelson died at age 87 this week.  He had worked at Barron’s since 1956 and started writing his weekly column in 1966, 47 years ago!  I was 28 when I started writing my blog, will I still be writing it in 47 years?  Will any of you still be reading it? Will I still be alive? Will MLPs still be around?  Who knows, but it was an amazing run for a very popular financial writer that has helped Barron’s remain a viable weekly print publication in a digital world.
News of the (MLP) World


It was an enormous week of news in the MLP space, kicked off by the Crestwood / Inergy combination announcement, but also included several other M&A announcements, growth projects and IPO news.  Combined with all the earnings releases and it was a pretty exhausting week.  Expect more of that to come in the next few weeks.

  • Atlas Resource (ARP) files prospectus to sell up to $25mm in common units at-the-market ()
    • 9 banks on the cover seems like overkill here…
  • QEP Midstream (QEP) files initial S-1 registration statement for planned MLP IPO to raise up to $400mm in IPO proceeds (filing)
    • Owns interests in four gathering systems and two FERC regulated pipelines
    • GP owned by QEP Resources
    • Structured as traditional MLP with IDRs
  • Emerge Energy Services (EMES) prices initial public offering of 7.5mm common units at $17.00/unit, below the price range, raising $127.5mm in gross proceeds at 16.5% next 12 months distribution yield
    • First oilfield services MLP IPO structured with variable distribution
    • Backed by Insight Equity, a private equity firm
  • Brookfield Infrastructure (BIP) prices offering of 5.7mm common units at $37.75/unit, raising $214.3mm in gross proceeds
  • Tallgrass Energy (TEP) launches MLP IPO with midpoint IPO yield of 5.23%, expected to price May 13 and to raise $287.1mm in gross proceeds


  • Targa Resources (NGLS) prices offering of $625mm of 4.25% senior notes due 2023 at par
  • PVR Partners (PVR) prices upsized private placement of $400mm of 6.5% senior notes due 2021 at par (upsized from $300mm)
  • Atlas Pipeline (APL) prices private placement of $400mm of 4.75% senior notes due 2021 at par

M&A / Growth Projects

  • Crestwood Midstream (CMLP), Inergy (NRGY) and Inergy Midstream (NRGM) announce merger to be consummated in a series of transactions over next several months: Crestwood Holdings to acquire NRGY’s GP, fold CMLP’s IDRs and GP Interest into NRGY, and exchange all CMLP L.P. units for NRGM units and a $35mm cash payment (press release)
    • Crestwood Holdings will acquire the GP of NRGY for $80mm (mid-June)
      • Prior to closing this transaction, NRGY will distribute to its unitholders the 56.4mm of NRGM units it owns
    • Upon closing, Crestwood Holdings will contribute the IDRs and GP interest of CMLP to NRGY in exchange for NRGY units
    • In the final transaction, expected late in calendar 2013, CMLP will be merged with a subsidiary of NRGM
      • CMLP unitholders will receive 1.07 common units of NRGM per CMLP unit they own (5% premium to 20-day VWAP)
      • CMLP public unitholders will also receive a one-time cash payment at closing of approximately $35mm ($10mm paid by Crestwood Holdings and $25mm paid by NRGM)
      • CMLP Chairman, President and CEO Robert Phillips will assume the role of Chairman, President and CEO of the combined entity, NRGY/NRGM Chairman & CEO John Sherman and President Brooks Sherman to step down from day-to-day management
  • Eagle Rock Energy (EROC) announces dedication of 150,000 gross acres in the Texas Panhandle through a fee-based gas gathering and processing agreement with Monarch Natural Gas (press release)
    • EROC entered into new fee-based gas gathering, processing, and purchase agreement with Monarch Natural Gas
    • Monarch has dedicated to EROC all of its gathered natural gas volume from wells within an area of more than 150,000 gross acres, located in Hemphill, Lipscomb and Ochiltree counties in the Texas Panhandle
    • Monarch will gather natural gas in the area and deliver it to EROC at central points for further gathering and processing
  • MarkWest Energy (MWE) announces $245mm acquisition of midstream assets in the Anadarko Basin from Chesapeake Energy Corp. (press release)
    • MWE to acquire certain midstream assets in the Anadarko Basin from subsidiary of Chesapeake Energy Corp (CHK)
    • Assets consist of: 200 mmcf/d cryogenic gas processing plant (Buffalo Creek Plant), 22 miles of gas gathering pipeline in Hemphill County, TX and 30 miles of rights-of-way for future trunk line, An amine treating facility and 5 mile gas gathering pipeline in Washita County, OK
    • In conjunction with the acquisition, MWE executed long-term, fee-based agreements with CHK
    • MWE forecasts EBITDA of $30mm for the full-year 2014, increasing to more than $50mm by 2017 from the assets
    • MWE expects to invest $90mm over the next five years for completion and expansion of associated infrastructure
  • Pioneer Southwest (PSE) announces buyout proposal from Pioneer Natural Resources Company (PXD) whereby PXD would acquire all outstanding public units of PSE for 0.2234 PXD shares per PSE unit (press release)
    • PSE announced that PXD has proposed a buyout of all publicly-held PSE common units through a stock-for-stock exchange, whereby PSE unitholders will receive 0.2234 shares of PXD for each PSE unit they own
    • Price represents an 18.1% premium from PSE’s closing price prior to the announcement
  • Crosstex Energy, Inc. (XTXI) announces $25mm in a third natural gas compression and condensate stabilization facility in the Ohio River Valley
  • Seadrill Partners (SDLP) announces acquisition tender rig T-15 from Seadrill Ltd for $210mm
  • Sunoco Logistics (SXL) announces plans to develop a propane export/import facility backed by a long-term agreement with Shell (press release)
    • SXL has executed agreements with Shell Trading US Company to move forward with a LPG export / import facility
    • Project will be called Mariner South, with Shell as an anchor customer
    • Project will integrate SXL’s existing Nederland, TX Marine Terminal and pipeline from Mt. Belvieu, TX to Nederland with the Mt. Belvieu fractionation and storage facilities of LoneStar NGL LLC (JV of Energy Transfer and Regency Energy)
    • Mariner South will have an initial capacity of 6mm  bbls per month and will be designed to load LPG carriers with an approximate capacity of 550,000 bbls
    • Project expected to be operational by 1Q 2015
  • Blueknight Energy (BKEP) announces plans to re-activate 200-mile oil pipeline from Longview to Houston, TX in JV with Silverado Pipeline
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