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April 25, 2015

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Week Thoughts: Friendly Trend Continues for MLPs

MLPs traded positively for the 6th straight week, with the Alerian MLP Index (AMZ) increasing 1.1%.  The AMZ is now 7.8% higher than its most recent low on March 16th.  MLPs seemed to be helped by positive MLP earnings releases, by positive production reports from results of producer corporations, and by strength in the broader U.S. equity markets (notably Amazon and Starbucks). MLPs underperformed both the S&P 500 (+1.8%) and utilities (+2.3%) this week.
Weekly Review_4-24-15
WTI oil was down slightly in the spot market week over week, but the front month futures price climbed over $57/bbl this week.  Natural gas dipped lower, but ethane prices were stable.  WTI oil price is now 27.2% higher than its 52-week low reached on March 17th.
MLP earnings have started strong with more end-market focused MLPs NS and EQM.  Last quarter started strong as well for MLPs, but tailed off as more of the producer-focused MLPs began reporting.  Expectations for gathering & processing names have been written down, but valuations have creeped higher that last few weeks, so it will be interesting to see how the next few weeks plays out.
MLPs are on a roll lately, but how historic is a run of 6 straight weeks?  As coach Lou Brown said in Major League 2: it’s called a winning streak, and it has happened before.

There have been 13 streaks of at least 6 straight positive weeks since 2000, with the last streak prior to this one ending the first week of June last year.  Returns during those streaks have averaged 12.2%, helped by two very large return streaks in 2009.  Overall average returns following such a streak are very positive, which may just be a function of most 6 month periods over the last 15 years being positive for AMZ.
Streaks Weeks
The longest ever streak spanned 18 consecutive positive weeks back in 1997.  But back then there were only 18 MLPs that combined had less than $10bn in market cap.  We have a long way to go before we break records with the current streak, and for now each week has coincided with oil price strength, but MLPs continue to edge higher.
Winners & Losers
Distribution announcements seemed to drive relative performance among MLPs this week.  NRP cut its distribution 74%, choosing to maintain some level of distribution and planning to use excess cash flow to reduce leverage.  NRP is basically running the same play BWP ran a few years ago.  HCLP struggled after fellow frac sand producer EMES reduced guidance and distributions this week.
On the positive side, marine transportation MLPs rebounded, helped by GLOP’s announcement that BG Group is chartering 9 newbuilds.  LRE was up on the announcement that it was being acquired by VNR.   GLP was up after announcing a distribution increase.
Not pictured below, NSH (+8.9%), NS (+5.1%) and EQM (+6.8%) all performed well this week after releasing results.
Looking at year to date performance, CAPL has dropped into the bottom 5 and LRE climbed into the top 5.  NRP took over the bottom spot after its distribution cut.
News of the (MLP) World
MLP follow-on equity has taken a pause for earnings season, but we still have $650mm of MLP paper in the market in the form of two unconventional MLP IPOs.  M&A was quiet again this week, but we did get a small E&P MLP consolidation and a drop down.  There are reports of assets packages for sale, being bid on in auction processes (like Pioneer’s Eagle Ford midstream assets and BP’s U.S. pipeline assets).  At some point those deals and the winners will be announced, but not this week.

  • Enviva Partners (EVA) launched IPO of 10.0mm units expected to raise $200mm in gross proceeds at the midpoint price of $20.00/unit, which represents an 8.25% yield (prospectus)
    • Expected to price 4/28
    • EVA is the world’s largest supplier by production of utility-grade wood pellets to major power generators
    • EVA sources and processes wood into wood pellets, then exports those pellets to utilities in Europe that are seeking to reduce their use of coal in power plants under long-term contracts
    • EVA is selling 42.6% L.P. interest (basically the maximum you can sell in an IPO, given that the 15% underwriters’ overallotment option would make the total 49% and there are 49% subordinated units and a 2% GP)
      • Implies equity value for the overall MLP of $485.9mm and enterprise value of $604.1mm including net debt
    • Black Stone Minerals (BSM) launched IPO 22.5mm units expected to raise $450mm in gross proceeds at the midpoint price of $20.00/unit, which represents a 5.25% yield (prospectus)
      • Expected to price 4/30
      • BSM is one of the largest owners of oil and natural gas mineral interests in the U.S.
      • BSM is selling 11.3% of the L.P. interest in this offering, implying equity value for the overall MLP of $3.8bn with no debt following the IPO
      • BSM will have no incentive distribution rights, but does have a novel structure that has a minimum quarterly distribution that increases each of the 3 years after 2016 that implies average annual distribution growth of 8.7%
    • GPM Petroleum (GPMP) filed initial prospectus to raise up to $100mm in MLP IPO (filing)
      • GPMP is a wholesale distributor of motor fuels to sponsor-owned convenience stores and to third parties on a fixed-fee per gallon basis
      • Sponsor controls more than 500 convenience stores in the Mid-Atlantic, Southeastern, Midwestern and Northeastern U.S.
      • In 2014, GPMP distributed 462mm gallons (CAPL by comparison did 888mm gallons)
      • Sponsor GPM operates stores under the following brand names: GPM operates under brand names including Fas Mart, Shore Stop, Scotchman Stores, Young’s, Li’l Cricket and BreadBox

M&A / Growth Projects

  • Vanguard Natural Resources (VNR) announced acquisition of LRR Energy (LRE) and its general partner in $539mm transaction (press release)
    • Transaction to be financed with $251mm in VNR units and the assumption of LRE’s net debt of $251mm
    • Exchange ratio equal to 0.55 VNR common units per LRE common unit valued LRE at $8.93/unit, or a 13% premium to the prior day closing price
    • LRE was backed by private equity group Lime Rock Resources, which has agreed to support the transaction
  • Exterran Partners (EXLP) announced drop down acquisition from Exterran Holdings (EXH) for $102.3mm (press release)
    • Assets acquired include 244 compressor units that represent 151,000 horsepower of compression and 179 compressor units that were previously leased from EXH to EXLP that represents an additional 66,000 horsepower
    • Acquisition funded with equity (4.0mm units issued to EXH)


  • It is widely reported that BP is seeking a buyer for $2bn worth of U.S. pipelines and storage terminals (Reuters)
    • Two batches of assets are for sale: interest in 4 pipelines along the Gulf Coast and 15 storage terminals in the Midwest and on the East Coast
    • BP’s partners in some of the pipelines include EPD and Enbridge, Inc.
  • Distribution Announcements:
    • Increases: SHLX +7.7%, MPLX +7.2%, TRGP +7.1%, SXCP +5.7%, EQM +5.2%, VLP +4.3%, ENLC +4.3%, TLLP +4.1%, DKL +3.9%, WES +3.6%, MMP +3.2%, QEPM +3.2%, RRMS +2.4%, GLP +2.3%, BKEP +2.2%, HEP +1.4%, ENLK +1.3%, NGLS +1.2%, NGL +1.2%, ENBL +1.2%, USAC +1.0%, SMLP +0.9%, CPLP +0.9%
    • Unprecedented 4 cuts in a single week: LGCY -43%, RNO -60%, LRE -62%, NRP -74%
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