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September 18, 2016

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Week Thoughts: Hot IPO, Cold MLPs

Correlation between oil prices and MLPs came back this week, shattering the recent relative calm for MLPs.  The index dropped 3.6%, moving in the opposite direction of yield-based equities (UTY +2.2%), equities in general (S&P 500 +0.5%) and natural gas prices.
MLPs either followed oil lower, or dropped on an increase in risk premiums across the sector to reflect the creeping unilateral environmental regulatory constraints on pipeline development. Or both.
Because existing pipelines appear to be growing in value vs. pipes under construction, last week, we polled readers on which of the non-WMB natural gas infrastructure MLPs was most likely to be acquired.  Recapping the poll, the most likely targets are BWP (38%), TEP/TEGP (30%), Cheniere (15%), EQM/EQGP (11%), and ETE/ETP (6%).  Very difficult to handicap which will go away in the next year, but it wouldn’t surprise me to see at least one of them get acquired within a year.
Return of the Hot MLP IPO
Even in the worst week for the sector since March, we did have one clear positive data point for the sector: IPOs are back and hot as ever!  NBLX’s IPO ends a drought of MLP IPOs that started in June 2015.
The success of this IPO in the face of a weak market means we’ll likely see further MLP IPOs this year.  But the filed backlog remains sparse. Of the 4 MLPs that remain on file today (at least 6 others have withdrawn their registration statements), only one has filed an update to their prospectus in the last 12 months: Hess Midstream.  Its logical to assume that HESM will be next up.  Beyond that, there are likely a few others that will feel more comfortable filing or re-filing in the wake of NBLX’s successful IPO.  Perhaps someone will even try a GP IPO.
That’s plenty on NBLX, which at the end of the day is still just another MLP with a sub-$1.0bn market cap.   There is big money to be made in the big MLPs with high trading volume.  Below is a chart of performance among the top 10 largest MLPs over various time periods.  The primary takeaway is that there continue to be massive opportunities for active management of positions in these large, highly-traded MLPs, given the wide ranging performance among the group.
EPD, which represents 20%+ of the Alerian MLP Index at the moment, is at risk of underperforming the index for the first time in more than 5 years.  In each month since January this year, EPD has underperformed, culminating in the its first last place finish in August.
Also notable, winners from last year through February (EPD, MMP, BPL) have largely been losers since (EPD, MMP, BPL), with the exception of OKS.  Losers from last year have largely been winners this year (WPZ, PAA, KMI), with the exception of MPLX.
Winners & Losers
SXL was this week’s biggest victim of the fallout around the Bakken Pipeline construction pause, down 8.3%.  FGP’s awkwardly disclosed contract cancellation a few weeks ago sparked a flurry of analyst notes and downgrades sent its shares lower this week.  EVA led the way after what appears to have been a successful round of investor meetings.  The rest of the action in the chart below seems like commodity-related noise.
NRP made it two weeks in a row in the top 5, helped by natural gas price strength and the read through into coal prices.
Year to Date Leaderboard
DM joined the bottom 5 year-to-date this week.  DM had a very rough summer.  Since peaking at $35.25 in March, its down 30.4% to well below the price at which it closed its first day of trading almost two years ago.  Over that time period, the AMZ has traded up 8.3%.
General Partner Holding Companies
G.P.’s overall outperformed MLPs, but only one posted a positive week (WGP).  WMB, TEGP and SE were among the best performers again.  ETE took the Bakken Pipeline news hard, dropping nearly 11%, by far the worst performing GP.
News of the (MLP) World
There was no MLP M&A this week, and there were no follow-on equity deals.  Focus was on fallout from the Bakken Pipeline construction halt, oil prices and the IPO.

  • Noble Midstream (NBLX) priced IPO of 12.5mm common units at $22.50/unit, raising $281mm in gross proceeds (final prospectus)
    • At $22.50/unit, the implied initial yield is 6.7%
    • Opened at $26.50/unit, traded as high as $27.32/unit before closing at $26.20/unit for a 16.4% IPO pop (good for 19th best of all time, see chart below)
  • Valero Energy Partners (VLP) filed equity distribution agreement to sell up to $350mm of equity at the market (filing)
  • Teekay Corporation (TK) filed equity distribution agreement to sell up to $50mm of equity at the market (filing)


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