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February 5, 2017

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Week Thoughts: FERC IDRs

MLPs were up for a 3rd straight week (on a total return basis), edging out the S&P 500 and utilities.  NGL prices shot higher, while natural gas prices dropped, improving processing economics and helping commodity-levered gathering & processing MLPs.  The Alerian MLP Index has produced 7.9% total return so far this year, and the total return index is at its highest point since July 2015.
Two major things happened this week: OKE announced the OKS buyout and FERC approved two large natural gas pipelines with previously uncertain timelines (Rover and Atlantic Sunrise).  Simpler structures and less cumbersome regulations should continue to be positive catalysts for MLPs.
IDR and MLP Elimination Game On
Another set of IDRs and another MLP are going away.  OKS, which went public in 1993 as Northern Border Partners, is leaving the structure and snatching their tax basis back from long-term unitholders, OKS chose the Kinder and Targa path, rather than the Plains and Williams path.  OKE had traded at a large premium to OKE and was expected to use that premium to buy something, the surprise was that it chose to buy itself and grab a new tax basis..
The sector continues to reshape itself.  As the energy downturn has extended and captial has become more challenging to find, MLPs continue to work towards an MLP 2.0 model that includes lower leverage, higher coverage and no IDRs (as discussed in our whitepaper here).  That model should allow for more sustainable distributions that require less capital markets access.
Earnings season continues next week, and we’ll see if the simplifications continue, but it does feel like enough IDRs have been eliminated such that pressure to remove them will start to weigh on those that staunchly defend their IDR structures.  That might lead to more IDRs being eliminated before they reach peak maturity, or maybe the market will begin to pressure MLPs that have announced plans to remove the IDRs once they get finished with all the growth planned for the MLP.  It will be on investors to make that happen.
FERC Settles All Business
The actions by FERC late this week reminded me of a few pop culture things, but the one I like the best was that FERC was like Oprah giving out gifts to members of her audience.  The FERC was like, “You get a certificate, and you get a certificate, everybody gets to build a pipeline!”.
Maybe MLP investors will feel like lucky audience members if these positive catalysts keep coming, but it is a little concerning that for some MLPs the approval of a single pipeline has become such a binary outcome for their businesses.  It can probably be blamed on the organic growth capital boom that began about 10 years ago.
Building pipelines within a high payout MLP structure puts the MLP on a treadmill if its base business falters in the development stage before cash flow ramps up.  MLPs did not start as pipeline developers, and absent a true MLP 2.0 structure, its hard to justify large scale development projects.
Status Update: January
We passed through the end of the first month of the year this week, and it was a good one.  At +4.9%, it was the best month since June 2016.  January is usually a strong month for MLPs, but it has been mixed the last few years.  This year’s January was the best since 2013.
It was also the 3rd straight positive month for MLPs, and the 9th positive month of the last 11.
Winners & Losers
OKS was the big winner on the week, but that didn’t slow market enthusiasm for NBLX, up another 7.1%.  ENLK rallied 7%, perhaps on speculation they might follow OKS into the IDR simplification mania.  EEP’s sell-off followed through from last Friday with another bid drop Monday before levelling off, but it still led the MLPs on the downside for the week.  SMLP dropped 8% on the equity offering from its private equity sponsors.
Aside from EEP’s repeat at the bottom, there were no repeats among the top or bottom 5.
YTD Leaderboard
One MLP is already up 30% YTD, and 3 others have posted better than 25%.  Only one MLP is down more than 15% for the year so far.
General Partners and Midstream Corporations
GPs and midstream corporations outperformed MLPs by a wide margin.  Just one GP was negative for the week overall.  Similar to last week’s action in Cheniere Energy (LNG), ENLC was up sharply on no direct news.  Perhaps NGL prices and improving processing economics were the driver, but a readthrough of the accretion math for ENLC to do a similar transaction to OKE was the more likely driver.   ETE was strong Friday after the Rover approval announcement.
Outside of the OKS news and earnings that dominated the week, there was a bit of capital markets activity worth noting, including a variable pay minerals MLP and a small equity offering.  And then, at the last possible opportunity, FERC sprang into action and started approving pipelines Thursday and Friday.  Also, two more MLPs filed for bankruptcy protection.  Who knows what news we’ll get next week, but that’s the fun of it all.
Capital Markets

  • Summit Midstream (SMLP) priced public offering of 4.0mm shares at $24.00/unit, raising $96mm for selling unitholder Summit Midstream Holdings (press release)
    • Overnight offering, priced at 8.2% discount to prior close
    • Selling unitholder to receive all proceeds, no new shares, just new public float for SMLP
  • Kimbell Royalty Partners (KRP) priced IPO of 5.0mm units at $18.00/unit, raising $90mm in gross proceeds (press release)
    • Priced $1/unit below the price range, but traded up and closed the day at $20.64/unit, up 14.7% from IPO price

Growth Projects / M&A

  • ONEOK (OKE) announced acquisition of remaining public stake in ONEOK Partners (OKS) for $9.3bn in all-stock merger (press release)
    • Each OKS common unit will receive 0.985 shares of OKE, which represented a 26% premium to prior day’s close
    • OKE will issue 168.9mm shares, representing 44.5% of total shares outstanding of the pro forma combined entity
    • The transaction will be immediately accretive and double-digit accretive to OKE’s DCF from 2018-2021
    • Through 2021, management does not expect OKE to pay cash income taxes and plans to increase the dividend 9-11% annually
  • On the final day of having a quorum before the resignation of Norman Bay, FERC issued two important certificates approving two high profile Northeast natural gas takeaway pipeline projects, including:
    • ETP’s Rover Pipeline without blanket construction approval (FERC filing)
    • WPZ’s Atlantic Sunrise Pipeline (press release)
  • Per a Bloomberg article citing North Dakota Senator John Hoeven, the U.S. Army Corp is expected to imminently issue the necessary easement for the Dakota Access Pipeline (Bloomberg)


  • Two MLPs filed for Chapter 11 this week, including:
    • Vanguard Natural Resources (VNR)
    • Azure Midstream (AZUR)

Distribution Announcements
Distribution announcements_2-3-17

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