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December 10, 2011

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Week Thoughts: Deck the Halls with MLP Equity

Another week, another billion dollars of MLP equity issued.  Its sort of like when a month ago, I accidentally placed the same large Christmas gift order from Amazon 6 times (I never got to a confirmation page, so I just kept clicking, never a good idea…).  Over the course of the next week following the order, the boxes (filled with the same stuff) kept piling up.  We eventually printed all the return slips and made several trips to UPS to send the boxes back, but for a while it felt like it would never end (and it confused the hell out of my young kids, as if Christmas wasn’t confusing enough already).
The MLP equity deals seem like they won’t stop either.  There were 4 this week: 2 IPOs (MEMP and RRMS) and 2 follow-ons (EPD and NS), for a total of $1.035 billion in gross proceeds.  Nonetheless, MLPs had a decent week, continuing the recent trend of barely flinching in response to mountains of new paper.  The MLP Index finished the week flat, compared with a slightly positive week for the S&P 500, despite back to back 20+ point S&P 500 days to end the week as the not so bad economic news here remains in conflict with the mess in Europe.

The two follow-ons traded well, particularly EPD, which closed Thursday above issue price, despite strong market headwinds that sent the MLP Index down 1.3% (although EPD represents a fairly large percentage of the MLP Index, and it was down from the prior close more than 2%).  The IPOs both traded poorly, although RRMS was at one point up 4.5% before drifting all the way back down to its IPO price.
Poor IPO trading is evidence of some fatigue in a IPO market that has been very busy this year.  Its not over, either, with 2 more IPOs  set to price next week for a combined $428 million in planned gross proceeds.   With the late flurry of IPOs, this year will be tied with 2007 for the most active ever for pure MLPs (i.e. not including GP holding company IPOs that proliferated in 2006) with 13 total MLP IPOs.  6 of those IPOs will have come in the 4th quarter, and 4 in the last month, tying this month for the most active 30 day period in the history of the sector, only surpassed in gross proceeds by the October / November period of 2007, as shown in the table below.

If the 2 announced IPOs get done next week at the midpoint, a total of $4.6 billion in equity will have been raised in the 4Q2011, more than twice as much as was raised in 3Q2011, and in-line with 1Q2011.  I’ll have the full year stats in year-end wrap up posts planned for early January, but it’s safe to say that 2011 will go down as the largest equity year in the history of the sector, with almost $20 billion in equity raised.  In a favorable market climate, MLP equity raised should continue to grow year after year, as the sector market cap grows and distribution growth drives an ever increasing need for equity capital as a result.  Obviously the MLP sector can’t grow forever, but record equity issuance years should be no surprise going forward for the next few years.

These record years are not much more than confirmation that the market is open for MLPs, which is a positive indicator for MLPs in 2012, as MLPs generally don’t raise and spend capital unless its for capital projects with attractive returns.  A glut of equity issuance usually portends growth in the coming quarters for MLPs.  From all indications via recent management presentations, there are some MLPs with assets in the right basins that are limited in their growth only to the extent they can access capital.
The 2 IPOs that are slated to price this week are Mid-Con Energy Partners (MCEP) and Inergy Midstream (NRGM).  MCEP is an oil rich E&P MLP backed by Yorktown, priced at the same range and distribution as the last two E&P MLPs, LRE and MEMP.  Both of those settled around $19 per unit, but with its oil focus, maybe MCEP can price higher.
NRGM is the natural gas storage and transportation subsidiary of Inergy.  NRGM has just one incentive distributions rights tier (50%) that starts immediately above the initial quarterly distribution, and NRGM does not have any subordinated units, so doesn’t seem too unitholder friendly.  We’ll see if the 7.4% yield at the midpoint is enough to compensate potential IPO investors for the slanted structure.
Winners and Losers
RNO and TLLP biggest winners this week.  TLLP released some positive guidance, no obvious news piece to justify the 11.8% move for RNO.  It is interesting to note that another coal name, OXF, was on the other end of the spectrum this week, down 8.1%, also on no obvious news.  STON continued to recover from last week this week (up 3.8%), and BWP finally started moving up, after largely sitting out the recent move by the MLP index.  It appears investors are searching for some value here with names like RNO and BWP, which look cheap after the run the rest of the sector has had of late.

Bunch of News Again this Week, Highlights:
EQT to File for MLP IPO in early 2012 (press release)

  • Would own portions of the assets of Equitrans, LP, EQT’s interstate pipeline subsidiary.
  • EQT will be GP, which would own IDRs, as well as a substantial portion of the MLP’s common units
  • EQT will use the funds to further accelerate Marcellus development
  • MLP will focus on providing transmission and gathering services to producers in the Marcellus

Southern Union Shareholders Approve ETE Merger (press release)

  • 98% of the shares voted in favor of the deal, votes represented 80% of total outstanding shares
  • Expected to close in first quarter of 2012

Cardinal Gas Storage (Joint Venture Partially Owned by MMLP) Announces Storage Project (press release)

  • 10 year agreement with Shell Energy to construct a depleted reservoir storage facility
  • Expected in service in 2013, with design capacity of 17 bcf
  • MMLP also announced $25 million of additional capacity on its revolver this week

Regency Energy Partners and JV Partners Announce New Processing Facility (press release)

  • 2 plants to be built to process natural gas from Bone Springs and Avalon Shale in West Texas
  • 25 mmcf/d refrigeration plant and 100 mmcf/d cryogenic processing plant
  • $100 million cost ($33.3 million each to RGP, APC and CHK)
  • Full facilities complete by 4Q2012
Enbridge Energy Partners To Expand Bakken Crude System (press release)
  • $145 million cost
  • Expands capacity at Berthold Terminal by 80,000 barrels per day and rail car loading facility
  • Project is in addition to $480 million Bakken Expansion Program and Bakken Access Program
  • 70% of rail capacity committed
  • Project to be completed in early 2013
NuStar Prices Equity Offering at $53.45, a 4.1% Discount to Prior Close (press release)
  • 6.0375 million units, $322.7 million in gross proceeds
  • NS had not issued equity since May 2010, but unfortunately for unitholders, that deal in 2010 was priced at $56.50, so things are moving the wrong direction there.
Enterprise Products Prices Equity Offering at $44.68, a 2.7% Discount to Prior Close (press release)
  • 10.35 million units, including overallotment, raising $462 million in gross proceeds
  • Attractive pricing for EPD appears to be the driver for the timing of this deal.
  • After 3 equity deals in 2010 for the largest MLP, EPD had not issued equity this year
  • Many were expecting an offering at some point in early 2012, but despite the thin discount, EPD traded well in the aftermarket.
Inergy (NRGY) Announces Cash Tender Offering (press release)
  • NRGY will purchase up to $300 million in principal of its 6.875% notes due 2021 and 7% notes due 2018
  • Contingent on successful close of NRGM IPO
Disclosure: The information in this article is not meant to be financial advice, we are not your financial advisor and I am posting my comments for informational purposes only. Long MMLP, EPD, NRGY.

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