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June 24, 2017

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Week Thoughts: Friday I'm in Love

MLPs made it a 5th straight 1%+ decline weeks, the longest such streak since October 2008, pushed lower by falling commodity prices.  MLPs have never been down 1%+ for 6 straight weeks, and the late week bounce offers hope the streak will end.   But late week hope doesn’t always carry over, MLPs have had their best day of the week on Friday each of the last 3 weeks.

MLPs hit a 52-week low on Wednesday, but rallied 3.2% through the end of the week, including 2.2% Friday.  The MLP Index is down 4.7% for June so far, down 10.2% for the quarter so far and down 6.6% YTD.  If MLPs are flat next week, it will be the worst month since January 2016 and the worst quarter since 3Q 2015.  MLPs clearly have room to run if investors warm up to the sector.
This week’s action basically followed lyrics from the Cure’s big hit:

  • Monday you can fall apart (AMZ -0.9%)
  • Tuesday Wednesday break my heart (-2.6%, -0.7%)
  • Oh, Thursday doesn’t even start (+1.0%)
  • Its Friday I’m in Love (+2.2%)

Do You Have to, Do You Have to, Do You Have to Let it Linger?
Keeping with the musical theme, in 1993 the Cranberries had a grating hit called Linger.  The lyrics of the song seem relevant to this week’s big merger of two MLP sponsors.  EQT Corp announced a merger on Monday with Rice Energy.  Both entities have MLPs, and Rice’s MLP (RMP) was effectively orphaned (and on the day after Father’s Day!).  RMP dropped 26.9% on Monday.
EQT was up front about diverting drop-downs (for which RMP had a right of first offer until the merger agreement) to EQM, but they let RMP’s future linger.  It seems to me EQT could have taken the one additional step of proposing a clean-up of RMP concurrent with the merger announcement.
There is a sequence to these transactions.  Step one is acquire the GP and divert drop-downs.  Step two is the fold in of the orphaned MLP (often after bleeding coverage down over the course of a few quarters). History shows that despite the initial shock for the “orphaned” MLP, eventually the orphaned MLPs get taken out prices that are at slight premium to pre-orphaned prices, even if it takes several quarters.
These transactions are painful reminders that L.P. unitholders serve at the pleasure of the GP.   LPs are second class citizens, riding along in steerage as the GP reaps outsized benefits.  As well understood and accepted as the structure has been, the recent trend towards simplification and IDR collapses is a sign that it isn’t quite so palatable to a new institutional class of MLP investors.  I am pro MLP consolidation, simplification and rationalization, but the sector remains in a transition period where the path to a healthier sector is fraught with landmines along the way.
Taking a longer-term view, a group of larger, more integrated businesses should emerge, and should attract long-term investors.  Independent board members and conflict committees are pushing back more than in the past, which may help smooth the transition for today’s brave L.P. unitholders.
Winners & Losers
This week’s winners and losers chart is very interesting.  RMP was the big loser in the EQT/RICE transaction, clearly, but did bounce 9.5% of the lows from Monday to finish down 24.2% on the week.  EQM traded up 5.4% on the week, buoyed by new drop-downs added to the pool and progress on the Mountain Valley Pipeline.

PSXP and VLP made the top 5 this week on what appears to be some rotation away from producer-sponsored high growth MLPs into more traditional drop-down stories.  Investors seemed less concerned with capital markets overhang with those names in light of potential risk from being orphaned owning producer-sponsored MLPs (like HESM, CNNX, AM which all underperformed).  AMID’s sharp move up last week faded this week.

Year to Date Leaderboard
As we approach mid-year, the leaderboard seems pretty well established.  OKS fell out of the top 5 this week, replaced by SUN.  AMID rejoined the bottom 5.  Other than that, not much change among the YTD winners and losers.

General Partners & Midstream Corporations
Median performance of GPs and midstream corps lagged the MLP Index.  EQGP led the group by a wide margin, with good reason as EQGP was a major beneficiary of the additional assets and growth potential at EQM.  OKE went from first last week to worst this week, with the OKS merger expected to close within the next week or so.  SEMG continues to slide following its big acquisition a few weeks ago.  ENLC’s rally late in the week helped push it up 5%.

News of the (MLP) World
Outside of the big upstream merger, there were a few interesting midstream news items.  NBLX executed a drop down and a PIPE that was well-received, expect other drop-down MLPs to look for alternative equity financing like PIPEs this summer.  ENLK and OKS announced an interesting agreement in the STACK that may portend future cooperation among midstream players to solve infrastructure needs without much capital.

Capital Markets

  • Noble Midstream (NBLX) priced private placement of 3.525mm common units of approximately $143mm, implying $40.57/unit, used to help fund drop down announced this week (press release)
    • Offering was priced at an 8.7% discount and traded up 4.1% from pricing

Growth Projects / M&A

  • EQT Corporation (EQT) announced acquisition of Rice Energy (RICE) for $6.7bn (press release)
    • EQT will acquire 92% interest in Rice Midstream GP Holdings LP, which owns 100% of the GP’s IDRs and 28% L.P. interest in Rice Midstream Partners (RMP), and retained midstream assets currently held at Rice
      • EQT intends to sell retained midstream assets to EQM in future drop-downs, which are expected to generate $130mm of EBITDA in 2018, creating uncertainty about RMP’s growth profile
    • Of the 5 ticker symbols involved in the EQT and RICE merger, EQGP was the second biggest winner and first among the subsidiary MLPs
      • More drop-downs for EQM, more units on the eventual consolidation of the entities means increased IDR value, which was likely a significant driver of the economics of the deal from EQT’s perspective.
  • Noble Midstream (NBLX) announced drop down of additional interests in Colorado River DevCo and Blanco River DevCo for $270mm from Noble Energy (NBL) (press release)
    • NBLX’s interests in the Colorado River and Blanco River DevCos will increase to 100% and 40%, respectively
    • Transaction value implies 8.2-9.2x EBITDA
    • Upon closing, NBL is expected to own a 50.1% LP interest in NBLX
  • ONEOK (OKE) announced plans to expand its Mid-Continent NGL gathering system and its existing Sterling III Pipeline to serve STACK growth (press release)
    • Expansion backed by a long-term contract with a EnLink Midstream
    • OKE expects to invest $130mm for these projects which are expected to be completed by YE 2018
  • Energy Transfer (ETP) announced approximately 12,360,503 common units of PennTex Midstream (PTXP) have been accepted for purchase (press release)
    • ETP now owns more than 80% of outstanding common units, allowing exercise of limited call right for remaining common units not tendered
    • PTXP will soon end its short life as a publicly-traded MLP as the sector continues to rationalize slowly
    • ETP continues to simplify (also slowly)
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