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November 22, 2015

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Week Thoughts: Early Black Friday for MLPs

MLPs declined for the second straight week, but were actually more than 1% positive on the week heading into Friday’s 2.6% decline. In a week that saw the biggest gain in the S&P 500 in months and saw no change in the interest rate on the 10-year, its incredibly frustrating to see MLPs remain under intense selling pressure. It appears that hedge funds are specifically targeting positions of closed end funds, and shorting them to force leveraged selling like we saw at the end of September. Retail fund flows are not there, for whatever reason (tax loss selling is the chorus you hear most often), to provide support and keep hedge funds from targeting the sector.
Weekly Review 11-20-15
Time Has Passed
A fellow PM friend of mine asked me at the end of the week: are there any positives we can take away from this week, any reason to feel optimistic?
It’s a great question, and in the medium term, there is plenty to feel positive about with regards to MLPs and their ability to sustain distributions and develop assets. In the short term, however, as in this week, this month and the rest of this year, the main positive to emerge from this week is that we are one week closer to the end of the year and tax loss selling, one week closer to the oil market balancing, one week closer to the positive medium term catalysts. Also, we cleared another $1bn or so worth of equity from the sector’s backlog.
On the other hand, we just finished another week of low commodity prices impacting existing operations, and we are one week closer to volume declines, one week closer to potential bankruptcies among producer customers, and one week closer to interest rate hikes.   And in the next week, I don’t expect much will have changed on any of the above counts, except that an additional week will have passed, but at least during that week we will have hopefully enjoyed a peaceful, non-OPEC impacted Thanksgiving break.
Winners & Losers
SUN was the big winner this week as the market reacted positively to the dropdown acquisition from ETP.   USDP closed a previously announced acquisition this week and benefited from insider buying while news among the other top and bottom performers was light.
Among the YTD performers, USAC jumped ahead of SRLP displacing it from the top five while AZUR joins the bottom five replacing SXCP. Notably, only 3 MLPs have double digit total returns this year, while on the other end, the bottom 5 are all down more than 80%.
Overall, GPs performed in-line with LPs this week although performance was quite varied across the group. WMB and ETE rallied in the wake of the ET analyst day while SEMG clawed back some of last week’s losses.
News of the (MLP) World
It was a very active week of news for MLPs, with resolution on some key issues (SUN equity overhang, ETP funding needs, DJ Basin pipeline project consolidation), while the MPLX / MWE saga continues and the IPO market remains closed. Expect the next 7 days to be significantly less active for MLP investor relations teams.
Capital Markets

  • Noble Midstream (NBLX) postponed IPO, citing adverse market conditions (press release)
  • Valero Energy (VLP) priced offering of 4.25mm units at $46.25/unit, raising $196.3mm in gross proceeds (press release)
    • Bought deal, priced at 7.0% discount to prior closing price
    • VLP opened well below offer price (down 3.8% from offer price or 10.6% from prior close at the low), but rallied late in the day to close down just 0.3% from offer price (-7.4% from prior close)
  • Sunoco LP (SUN) announced private placement of $750mm worth of units at $31.00/unit (press release)
    • The units were purchased by private investors ($685.5mm) and by ETE ($64.5mm)
    • Discount on the PIPE was 6.4% based on prior closing price
    • The PIPE and the concurrently-announced drop down transaction were well-received by the market, SUN units traded up 5.5% on the day, or 12.8% from the PIPE price

M&A / Growth Projects

  • Sunoco LP (SUN) announced acquisition of the remaining retail assets of Energy Transfer (ETP) for $2.226bn (press release)
    • SUN will acquire the remaining 68.4% interest in Sunoco, LLC and 100% interest in the legacy Sunoco retail business
    • Financed with $194mm worth of SUN units issued to ETP, $750mm in new units issued to private investors ($685.5mm) and ETE ($64.5mm), and borrowings
  • Magellan Midstream (MMP) and NGL Energy (NGL) announced combination of competing DJ Basin pipeline projects (press release)
    • MMP’s Saddlehorn Pipeline (owned 40% by MMP, 40% by PAA, 20% by Anadarko) and NGL’s Grand Mesa Pipeline will combine into a single joint interest pipeline
    • The pipeline will have capacity of 340,000 bbls/d, with Saddlehorn retaining 190,000 bbls/d of capacity and Grand Mesa retaining 150,000 bbls/d
    • Each interest owner will be responsible for their own commercial activities, including contract terms and tariffs
    • Two pipelines in one, but Saddlehorn retains the right to expand the pipeline at its cost and retain any expanded capacity
    • The pipeline will transport various grades of oil from the DJ Basin in Colorado to storage facilities in Cushing, Oklahoma
  • MPLX announced revised terms for merger with MarkWest Energy (MWE) that includes an increase in the cash component of the merger (press release)
    • MPLX raised the cash component of the merger to $6.20/MWE unit, up from $5.21/unit offer made 11/10, and from the original $3.37/unit announced in July
    • The offer now includes $6.21/unit in cash and 1.09 MPLX unit per MWE unit, for total consideration of $51.74/MWE unit based on 11/16 MPLX price
    • Former CEO John Fox continued to lobby for unitholders to vote against the deal, with multiple press releases (see here and here)
  • Enterprise Products (EPD) announced additional long-term contracts for LPG export capacity (press release)
    • EPD adds 125mm barrels of LPG over 7 year period, bringing total commitments to 90% of estimated operating capacity through 2019
  • EnLink announced acquisition of remaining 50% interest in Deadwood natural gas processing facility from Apache for $40mm (press release)
    • The Deadwood facility is located in Glasscock County in the Permian Basin in Texas, and has capacity of 58 mmcf/d
    • Increases ENLK’s net processing capacity in the Permian Basin to 343 mmcf/d
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