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October 23, 2016

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Week Thoughts: Early Results are In

MLPs rallied 1.4% this week, outperforming the stock market and oil prices, which were both positive as well.  In fact, basically everything was up slightly on the week, including the US dollar and U.S. Treasuries, everything was up (except natural gas prices).
MLP/midstream earnings season kicked off with KMI.  While it is still too early to call given KMI earnings is the equivalent of the trickle of absentee ballots in an election, there were some positive read-throughs to be gleaned from the results that may portend a solid round of quarterly results.
Each week oil prices hold above $50/bbl adds incremental comfort that oil prices might hold there going forward, which when combined with hopefully solid 3Q results vs. still low expectations, MLPs can grind higher through year end.  The MLP Index is up 15% year-to-date, but remains negative on a price basis over the last 12 months, so plenty of recovery still possible.  But for now, like a pipeline through tribal land, the broader market seems to be stuck in pre-election limbo.
Kinder on Repeat
KMI earnings commentary is nothing if not consistent.  Each quarter, Rich Kinder spends the first few minutes evangelizing about natural gas.  This quarter was no different.  Kinder called out three areas of natural gas demand that are seeing high growth with high year over year growth in each bucket: natural gas demand for electricity generation at the expense of coal, natural gas exports to Mexico, and natural gas pipeline demand for LNG exports.
Natural gas is likely this year to surpass coal to become the single biggest source of fuel for producing electricity.  Acoording to the EIA, natural gas has gone from just 16.7% of generation in 2003 to 32.7% in 2015, a CAGR of 6.2%.  12 years of steady growth that has nothing to do with the price of oil.
Exports to Mexico via pipeline have grown 16x since 1999, and 2.5x in the last 10 years (13.2% CAGR).  In terms of scale, exports to Mexico at 2.7 bcf/d in 2015 are equal to 10% of the demand for natural gas for electricity generation (27.5bcf/d), so exports to Mexico while fast growing aren’t as big a component of U.S. natural gas consumption.  Finally, LNG exports are here finally in 2016, and they are additive to the natural gas demand story, but the cost advanatage of the U.S. vs. the rest of the world has been dampened by lower oil prices.
Institutional investors in MLPs are always looking for the next theme for the sector.  But the themes that end up garnering the attention can be short-lived.  Its nice that every quarter Rich is there to remind us of the enduring natural gas demand theme that continues to drive infrastructure development (to the extent regulatory bodies allow it).
Wharton Energy Conference
This Friday, I will be moderating the midstream panel at the 2016 Wharton Energy Conference in Philadelphia.  Click here to see the rest of the agenda which includes speakers and panels on a wide range of energy topics.  Hope to see you there.
Winners & Losers
AM made it two straight weeks in the top 5 with a nearly 8% gain.  Fellow Marcellus gathering MLP RMP joined AM near the top.  WES continued its recent positive momentum, up another 5.7% this week.  The bottom five was down much this week, with KNOP down the most at just -3.4%.  The bottom 5 was dominated by smaller MLPs with outside the fairway assets…and SHLX.
Year to Date Leaderboard
PSXP joined SHLX as MLPs that have grown distributions 5%+ each quarter this year and yet find themselves in the bottom 5 of the sector.  On the upside, no changes, although each of the top 5 were positive this week, with a big move Friday for CNNX (+6.8%) on no news.
G.P. Holding Companies and Midstream Corporations
GPs and midstream corporations outperformed the MLP Index by a wide margin this week.  In fact not a single one was negative.  WGP led the way by a wide margin, as sentiment has clearly turned on the Western Gas complex.  We saw some rebound week over week in names that underperformed last week, like ETE, WMB and SEMG.
News of the (MLP) World
More noise out of FERC this week.  FERC is evaluating another area of the MLP sector that has been assumed to be set in stone (liquids pipeline inflation escalator).  Nothing is set in stone any more, and it can cut both ways (lifting oil export ban: good), but mostly it seems like more and more negative challenges to MLP status quo from the IRS (drop-down treatment), FERC, or the Department of Justice.
Some capital markets activity this week, limited to high yield bond issuance but in fairly large amounts that indicated strong demand.  We got some MLP to MLP M&A action at the asset level, which the market didn’t seem too impressed by.  We still need more MLP to MLP M&A action at the corporate level to rationalize some of the weaker MLPs in the sector.

  • NGL Energy (NGL) priced private placement of $700mm of 7.50% senior notes due 2023 at par (press release)
    • The offering was upsized from $400mm original size
  • Enviva Partners (EVA) priced private placement of $300mm of 8.50% senior notes due 2021 at par (press release)
    • Net proceeds will be used to partially fund the acquisition of wood pellet manufacturing facility in Sampson County, NC

Growth Projects / M&A

  • NuStar (NS) announced acquisition of Corpus Christi terminalling assets from Martin Midstream (MMLP) for $93mm (press release)
    • Acquisition expected to close by the end of the year
    • NS expects the assets to generate $13.5mm on average over the next 4 years (~7x multiple)
    • NS is acquiring 1.15mm barrels of storage, including 900,000 bbls of crude oil storage and 250,000 bbls of refined products storage
    • No discussion of the financing plan for the acquisition, but I assume they’ll clear that up by the time the purchase closes in December
  • Enviva Partners (EVA) announced acquisition of wood pellet production plant in Sampson County, NC (press release)
    • Final purchase price is being negotiated, but is expected to fall between $170-180mm
    • The facility is supported by a 10-year, 420,000 tons per year off-take contract with Dong Energy and a 15-year 95,000 tons per year off-take contract with an affiliate of EVA’s sponsor entity
    • The facility is expected to produce $22mm in EBITDA in 2017, then $27mm once full production is achieved


  • Crestwood Equity (CEQP) and Williams Partners (WPZ) announced agreement to restructure gathering & processing agreements with Chesapeake in the Powder River Basin (press release)
    • CEQP and WPZ are 50/50 JV partners in the Bucking Horse natural gas processing plant and Jackalope gathering system in the region
    • New 20-year fixed fee agreement will replace the existing cost of service agreements starting on 1/1/17
    • As a result of the new contract and incremental confidence in basin productivity, Chesapeake indicated at its analyst day this week an intention to run 1-2 rigs in the area in 2017 (vs. 0 today) and the potential to ramp up to 6 in the next few years
  • FERC announced formally a revised schedule for the environmental impact statement (EIS) for the Atlantic Sunrise pipeline project being developed by WMB/WPZ (FERC notice)
    • 12/30/16: Issuance of Notice of Availability of the final EIS (revised from 10/21/16 originally)
    • 3/30/17: 90-day Federal Authorization Decision Deadline
    • While WPZ has provided for some cushion in the timeline, this delay may effectively eat up all the cushion for an in-service in early 2018
  • FERC announced it is seeking comments on potential modifications to its policies for indexing methodology for rates on oil pipelines (press release)
    • FERC is evaluating whether to cap rates if they exceed costs by a certain percentage
    • This relates to pipelines that are allowed now to have ceiling rates that are annually (each July) adjusted by a PPI inflation escalator
  • 28 distribution announcements as of 4:30pm Friday:


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