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June 5, 2016

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Week Thoughts: Half Full Glasses Back On

MLPs traded up 3 out of 4 days this week to resume the rally that paused last week, finishing up 2.9% over last Friday.  MLPs rallied despite lower oil prices, helped by a surge in natural gas prices, supportive interest rates, MLP conference enthusiasm and an MLP rollup that the market actually likes.
MLP Conference
The hot topics at the conference this year were: attendance (as always), investor sentiment, and operating leverage from here.
Attendance. Attendance is always a hot topic at the MLP conference.  This year was no exception, and it seems everyone was talking about the reduction in attendance year-over-year (I saw estimates of 30% fewer registrants).
It’s easy to understand why attendance would be down.  Many generalists have been burned by the sector and haven’t returned.  Upstream investors don’t need to pay as much attention to MLPs anymore.  A few MLPs are no longer MLPs and therefore didn’t participate (TRGP, KMI).  Also, the number of MLP conferences in New York each year may have reduced the attraction of this conference way down in Florida.
Also, the number of viable MLPs is much smaller than the number that gets thrown around all the time.  Investors and management teams will often make the comment that we have too many MLPs and that 120 MLPs is too many.  Breaking that number down a bit though reveals the number isn’t quite as large as it used to be once you remove micro-cap MLPs, variable distribution MLPs and recent mergers.
The number of viable MLPs, the pool of MLPs on which to base a sector-wide conference, is much less than 120, its more like 79.   That number is set to drop even further with the RRMS merger announcement.  We can expect a few other consolidations or rationalizations in the coming year.  In light of that, it isn’t surprising that attendance was down this year.
Investor Optimism.  Investors in attendance seemed to be in good spirits, partially due to the huge rally off the bottom.  It’s also a result of statistical bias: those investors that did attend the conference were overwhelmingly die-hard MLP investors, the base of MLP investors whose livelihoods rely to some degree on the health of MLPs (a.k.a. the MLP Mafia).  That group is more likely to have an optimistic view of MLPs.  The next leg of the MLP recovery will necessitate the spread of that optimism beyond the base.
Operating Leverage.  Production is declining and will continue to decline at least through the first half of 2017.  Volume declines haven’t fully shown up in midstream assets yet.  Most MLPs have prepared for volume declines by reducing operating costs and improving balance sheets.  Despite the challenging and competitive expected volume environment, management teams are starting to quantify the cash flow impact of improved utilization across their asset bases.
DPM disclosed $75-100mm EBITDA uplift from a reduction in ethane rejection.  EPD has said 5-10% upside to EBITDA, OKS Every MLP I met with was asked what level of upside they have to potential improvements in the NGL market.  On the oil side, PAA disclosed $1bn of potential EBITDA over time from improved utilization of their system at their analyst day.
MLP Investors thus far have been very receptive to the focus on upside, but the near-term challenges remain and will flow through in earnings the next few quarters.  The balance of near-term weakness and long-term positive outlooks will be the key conflict for MLPs in the back half of the year.
Status Update
We crossed another month-end this week, a third straight positive month for the MLP Index.  As of 5/31, A positive May is obviously encouraging, especially because last year a negative May kicked off one of the most painful 5-month slides of all time for MLPs.
Looking ahead, June has been positive for MLPs more often than not, with a major exception last year when the index dropped 8.3% in the worst June ever.  It is somewhat comforting to think that we could have a repeat of last June and still be positive year-to-date.
Winners & Losers
NGL led all MLPs with an 18% pop this week on follow through from last week’s earnings.  RRMS had the big news of the week: the widely anticipated rollup into its sponsor. Because of how other similar transactions played out, like TRGP/NGLS and CEQP/CMLP, it was surprising to see the market embrace this latest rollup.  The market also appeared to embrace the future rollup of PAA, which recovered from last week’s poor showing.  The downside was dominated by smaller MLPs, GLP was the only one among them with any news (another retail asset sale).
RRMS’s seemingly endless streak of landing in the top 5 continued.  On the downside, USDP repeated in the bottom 5.
Year-to-date, RRMS has almost reached 100%, while several others are above 70%.  CPPL and SHLX both rallied this week, but remain among the worst performers.
General Partner Holding Companies
There was no fresh news in the ETE/WMB saga, despite last week’s article suggesting a negotiation may be underway behind the scenes and out of the courts.  Read the latest on the transaction in a presentation WMB filed this week (filing). Speculation that the cash portion could be reduced was enough to send ETE up $1/unit on both Tuesday and Wednesday and to the top spot among GPs this week.
AHGP’s leverage to better natural gas prices was on full display this week, as the coal GP rallied 16%.  On the downside, the super growth / super multiple GPs (EQGP, WGP and TEGP) were laggards.  TEGP wasn’t part of the MLP conference enthusiasm because they didn’t attend.  Four of last week’s bottom five made the top five this week, all except TEGP.
News of the (MLP) World
We finally got our first MLP rollup of the year.  SEMG gets credit for collapsing its IDR structure even though it almost wasn’t necessary after the fierce rally by RRMS.  Another 50% move up and the math would have been much harder for SEMG to manage.  Other than that, not much news. No equity given the short week.  I wouldn’t be surprised to see an equity deal or two this week.
M&A / Growth

  • Semgroup Corp (SEMG) announced agreement to acquire Rose Rock Midstream (RRMS) in all equity transaction (press release)
    • RRMS unitholders to receive 0.8136 shares of SEMG per unit
    • No premium to last close, but 19% implied premium to 20-day volume weighted average trading price
    • SEMG targeting 8% dividend growth CAGR with 1.5x coverage through 2018 following accretive merger
    • Transaction to close in 3Q following votes by SEMG and RRMS shareholders
  • Magellan Midstream (MMP) announced expansion of Seabrook Logistics JV (press release)
  • Global Partners (GLP) announced sale and leaseback agreement for 33 New England Gas Stations for $67mm (press release)
    • Stores will be leased back to GLP for period of 15 years
    • Second sale transaction in 2 weeks as GLP continues to shed retail assets and raise cash
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