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December 16, 2011

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Week Thoughts: Flat MLPs Outshine Gold

MLPs finished flat and near the highs of the week simultaneously, again serving as a safe haven in a difficult market for equities, treasury strength and dropping yields probably helped MLPs outperform.  The theme of the second half of the year (and a previous title for one of my weekly posts) fits this week as well: flat can feel pretty great.  With the equity hose likely shut off for the remainder of the year, seems like a relief rally for MLPs may happen next week just to celebrate a week without drowning in paper.

The broader market (S&P 500) was off this week 2.8%, after 2 straight slightly positive days to finish the week.  There were some positive signs out of Europe and yields dropped for European bonds.  Domestically, initial unemployment claims fell to 366k, lowest since May 2008 (people have stopped firing people, maybe no one left to fire?), refinancings are rising (according to MBA), and treasury auctions saw strong demand.  The Fed and the European Central Bank did not hit the print button this week, which may have had something to do with the big story of the week: gold’s break below its 200 day average.  GLD finished the week down 6.7% after a rally Friday of more than 3%.

This week was the second $1.0 billion plus equity week in a row, with MWE’s massive equity offering accounting for more than half of the total equity raised.  It was the busiest combined two weeks of this record year for MLP equity issuance.  Its worth noting that each of the last two weeks was smaller than the most active week of the quarter, which occurred in early November after the market bounced hard in October and management teams seemed to be tripping over themselves to get equity done before stocks dropped again.

MWE was first out of the gates this week, with what was the MLP’s second follow-on equity deal of the quarter and fourth overall in 2011.  In total, MWE has raised $1.1 billion in equity in 2011 including $804 million this quarter.  MWE is now tied with ETP for the most equity offerings since 2008 with 8 deals (although MWE is 6th in total gross proceeds during that time).  There seems to be no end to the demand for MWE units, which have traded up approximately 25% so far this year.  Contrast that to the other 2 issuers who have sold more than $1.0 billion in equity in 2011: ETP (-13%) and PAA (+4.8%).
Winners and Losers
PSE was the unfortunate victim of timing this week, launching its equity deal alongside MWE’s, and was hammered this week, down 13.7%.  Both deals run by the same bookrunner, Citigroup, so PSE had even more of an opportunity to get lost in the shuffle, particularly given that it was a partial primary / partial secondary issuance.  There was no runaway winner this week, but OKS finished Friday up 3.8%, helping it lead the way for the week.  NRGM finished its debut up 3.8%, recovering strong after slipping below issue price for a few hours Friday morning.
The losing MLPs this week were small caps with high commodity price exposure.  Small caps were mostly lower on the week (42 out of the 68 MLPs I track were down), but most of the MLPs in the Alerian (larger caps) had positive weeks.

One more note before the news summary: I have written way too much about MLP equity issuance of late. The next few weeks, I’ll be writing on broader MLP topics, including the tax Q&A with Tim Fenn as promised, a few MLP Basics posts, something about weather (it hasn’t snowed at all in Boston in November and December, not great for propane and heating oil MLPs or natural gas prices), and of course a wrap up of 2011 and thoughts on 2012 trends to expect.
News of the (MLP) World:
Markwest Announces Acquisition of Remainder of 49% Interest in Liberty Joint Venture in Marcellus Shale, and does massive 10.0 million unit equity issuance in 1-day book build

  • Acquisition (press release)
    • Consideration was $1.0 billion in cash and 19.95 unregistered class B units, which will covert to common units over a 5 year period
    • MWE indicated deal is immediately accretive and up to 6% accretive to distributable cash flow (DCF) in 2013 and beyond
    • MWE raised its guidance for 2012 DCF to a midpoint of $510 million, a 24% increase
    • Estimates for the multiple are around 15x 2012E EBITDA and 10x 2013E EBITDA
  • Equity Offering (press release)
    • Priced at $54.25, $542.5 million in gross proceeds
    • One day book build, first marketed equity offering of 4Q
    • Given that MWE was able to upsize the deal by $108 million and its units traded well leading up to pricing, MLPs that have a compelling story around a particular equity issuance may do more marketed equity offerings (as opposed to overnight deals) in 2012
    • MWE also did a non-deal roadshow last week, which certainly helped build interest

Cheniere Energy Partners ($CQP) announces 20-Year LNG sale and purchase agreement (press release)

  • GAIL (out of India) to purchase 3.5 million per year for Phase 2 of its Sabine Pass LNG terminal
  • 20 year agreement with extension option for up to 10 years
  • LNG (CQP’s parent) took the opportunity given positive momentum, to launch an equity offering, catching many off guard and pricing at a 10.6% discount to last close

Inergy Midstream ($NRGM) prices IPO at $17.00 per unit, below the range, 15% off of the midpoint of the filing range of $20.00 per unit (press release)

  • 8.7% yield at pricing
  • Discussed here in greater detail

Mid-Con Energy Partners ($MCEP) prices IPO at $18.00 per unit, below the filing range and 10% below midpoint price of $20.00 per  unit

  • Highest MLP IPO yield at 10.6% since 2000, second highest ever (not counting variable distribution MLPs, like fertilizer ones)

Western Gas ($WES) announces $483 million drop down acquisition from Anadarko ($APC) of gathering and processing assets in southwestern Wyoming (press release)

  • Funded with combination of mostly cash and debt with some equity to parent:
    • $160 million of cash
    • $300 million of borrowing on credit facility
    • 632,783 common units and 12,914 GP units at $37.38 (roughly 2% discount to last close)
  • WES indicated the purchase price was 7x next 12 months EBITDA, and would be immediately accretive
  • 2nd drop-down from Anadarko announced by WES this year, 3rd acquisition this year (WES bought $303 million of assets in July in a third party acquisition)

Pioneer Southwest Energy Partners ($PSE) prices 4.4 million unit equity offering at $29.20 for $75.9 million in gross primary proceeds, and $52.6 million in proceeds to selling unitholder

  • 4.1% discount, traded off 3.25% from pricing to close on Wednesday
  • 2.6 million primary units
  • 1.8 million secondary units sold by a subsidiary of Pioneer Natural Resources ($PXD)
  • PXD owns 52.4% of outstanding L.P. units after the offering

Kinder Morgan (KMP) announces another rounding error project (press release)

  • $130 million project to build petroleum condensate processing facility in Houston Ship Channel
  • Will complement recently announced $220 million crude / condensate pipeline project
  • Will be immediately accretive when completed in 2014

Crestwood Midstream ($CMLP) to enter the Marcellus with help of its GP sponsor First Reserve (press release)

  • CMLP will construct a new gathering system expected to cost $70 million and to be completed by 4Q2012
  • Mountaineer Keystone, a First Reserve portfolio company, will be the anchor producer for the new system

Williams Partners (WPZ) filed an application with FERC (Federal Energy Regulatory Committee) new project (press release)

  • Natural gas pipeline project to expand existing Transco Pipeline in Pennsylvania and New Jersey
  • Estimated cost: $341 million.

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.

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