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January 7, 2018

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Week Thoughts: Hustle & Flows

It was a great opening week for midstream stocks, or almost any other kind of stock (ex-utilities and REITs). MLPs have traded up for 4 consecutive weeks, the first streak of 4+ positive weeks since April 2016.  4.5% is the best week for MLPs since late last January.  MLPs are also 13.9% off the late November bottom.  The MLP Index opened with consecutive 2%+ days for just the second time ever (2009 was the other time).

MLPs rallied through a very slow news and capital markets period the last four weeks, and got a big shot in the arm when new buyers showed up with the turn of the calendar, as expected.  From here, MLPs will be tested under more challenging conditions.  A billion-dollar equity deal and a negative oil day threw cold water on MLP euphoria Friday.
After hitting the reset button, we’re back to the hustle and bustle, back in the daily flow of M&A, project announcements and equity.  Another small cap MLP is getting rolled up (with a stealth distribution cut), TEP is still doing bolting on asset acquisitions, large scale midstream companies (OKE, EPD) are finding high-return growth projects to complement their integrated systems, and ETP continues to face setbacks on completion of its backlog of pipeline projects.  Also, self-funding doesn’t apply to everyone, especially if you can raise a ton of equity at a 3% discount.

Positive new year fund flows may help the sector’s metabolism for digesting equity issuance, to a point.  But if 2018 repeats 2017’s flurry of equity issuance, M&A announcements, expect MLPs to react negatively.
This week was a busy one for the MLP market, but it was also busy one for me and my snow shovel.  So, I’m going to sign off until next week before I choke on Duraflame fumes.  Stay warm out there.
Poll Question Recap
Just a quick note about the un-surprising results of last week’s poll question.  Optimism reigns among readers that 2018 will be a comeback year for MLPs relative to the S&P 500 (78% of respondents), which most of you also think will be positive for the year (76% of respondents).  So far so good.  Thanks for the clicks, good to be able to gauge sentiment from time to time.
Winners & Losers
APLP led all other MLPs on the sponsor rollup announcement, but there were 4 others with double digit returns this week too.  CNNX is now CNXM (and will be reflected as such next week), and the fresh start (plus the fresh acreage dedications) helped it pop on Thursday and finish in the top 5.

The biggest decliner was TEP, despite some small M&A.  Friday was bad for stocks like TEP (-3.0%) and SEMG (-6.4%) with oil pipeline assets in the Rockies, probably a result of OKE’s NGL pipeline announcement that makes converting an existing oil pipeline into NGL service perhaps less likely.  That may be a stretch when it comes to TEP, but it seemed to the driver for weak action Friday.  NGL was somehow immune to this phenomenon, despite significant oil pipeline exposure with Grand Mesa.

General Partners & Midstream Corporations
GPs and corps underperformed the MLP Index as a group this week, and the spread was wider between the winners and losers.  OKE was the big winner of the week.  Able to raise $1.0bn in fresh equity and end up with a 5% gain on the week.  AMGP continued its strong run lately after raising long-term dividend growth outlook higher on tax reform impact.  Other producer-sponsored GPs WGP and EQGP were also strong.

On the downside, OKE’s announcement and equity offering seemed to impact some of the weaker stocks in this group.  TRGP seemed to be impacted by rotation into OKE as stocks with similar NGL exposure (although fundamentally, OKE’s pipeline shouldn’t impact TRGP operationally in any way).  And as discussed above, Friday was rough for the Tallgrass family and SEMG.  AROC was the worst performer as the inverse of the APLP announcement.  Also, ETE didn’t participate in the rally after more roadblocks on Mariner East pipeline construction.

Canadian Midstream
Canada had a more muted week than the U.S.  All the stocks were up, with Gibsons and Enbridge up a bit more, all on no news.  For Gibsons it was the second straight 4% week.

News of the (MLP) World

Capital Markets

  • ONEOK (OKE) raised $1.04bn in a public offering of 19.0mm shares, implying a per share price of $54.50 (press release)
    • Overnight offering, priced at 3.0% discount, and traded up 2.9% from pricing in the following session
    • Proceeds are used to fund capex, including the recently announced Elk Creek Pipeline (below), and to pre-fund additional projects which are in late stages of development

Growth Projects / M&A

  • ONEOK (OKE) announced plans to Elk Creek Pipeline, a $1.4bn NGL pipeline running from the Rockies to OKE’s existing Mid-Continent NGL facilities (press release)
    • Elk Creek will be a 900-mile pipeline with capacity to transport up to 240,000 bpd from near OKE’s Riverview terminal in eastern Montana to Bushton, Kansas
    • The project is expected to be completed by the end of 2019 and will have the capability to be expanded to 400,000 bpd with additional pump facilities
    • Elk Creek is backed by long-term contracts with terms between 10-15 years totaling 100,000 bpd and is expected to have a 4-6x EBITDA multiple
  • Tallgrass Energy (TEP) acquired stakes in two crude oil terminals, Pawnee Terminal and Deeprock Development Expansion (press release)
    • Pawnee: 51% membership interest from Zenith for $31mm
      • Injection point for the Pony Express in Colorado with 300,000 barrels of storage and backed by minimum volume commitments of 90,000 bpd
    • Deeprock North: 38% interest for $19.5mm, later merged into Deeprock Development in which TEP owns 60% of the new combined entity
      • Terminal in North Cushing, OK and a terminalling complex with storage capacity of 4mm barrels
    • TEP also concluded a successful binding open season on the Platteville Extension resulting in additional commitments of 10,000 bpd for a total of 37,500 bpd (press release)
  • Enterprise Products (EPD) announced plans to add 300 MMcf/d of incremental capacity at its cryogenic natural gas processing facility under construction in West Texas (press release)
    • The expansion would increase volume to 900 MMcf/d and would allow EPD to expand its NGLs extraction capabilities by an incremental 40,000 bpd to 120,000 bpd
  • Archrock (AROC) announced agreement to acquire remaining public stake in Archrock Partners (APLP) for a value $607mm (press release)
    • AROC will issue 57.8mm shares representing 44.9% of the total shares outstanding of the pro forma combined entity
    • Price represents 23.4% premium to prior day’s closing price
    • Transaction implies a 35% distribution cut and will eliminate IDRs
    • First MLP simplification of the year and it will result in one less MLP in the universe
  • Andeavor (ANDV) announced acquisition of Rangeland Energy II, with midstream assets in the Delaware and Midland Basins (press release)
    • Assets include 110-mile crude oil pipeline with capacity of 145,000 bpd and three crude oil storage terminals
    • ANDV expects a 9x and 6x purchase price on 2018 and 2019 EBITDA
    • ANDV expects to drop-down the pipeline assets to Andeavor Logistics (ANDX) at a later date, likely in combination with the Conan crude oil gathering system, currently under construction
  • The Pennsylvania Department of Environmental Protection (DEP) suspended construction activities on Mariner East 2 Pipeline being constructed by Energy Transfer Partners (ETP) following violations related to unpermitted stream crossing techniques (DEP order)
    • ETP will submit reports to the DEP within 30 days detailing techniques used in horizontal drilling activity, list of contractors, an updated operations plan, and other reports on water wells
    • DEP will review and upon written approval of the go-forward plan, ETP may resume activity
    • ETP has guided to an in-service in 2Q 2018, unclear what impact this will have on the timeline


  • CONE Midstream Partners (CNNX) renamed to CNX Midstream Partners (CNXM) following the close of the sale of Noble Energy’s GP interest in CNNX to CNX Resources (CNX) (press release)
    • Nicholas Deluliis, CNX’s CEO, will become CNXM’s CEO and Donald Rush, CNX’s CFO, will become CNXM’s CFO
    • CNXM’s board also agreed to amendments to its gas gathering agreements with CNX including CNX dedicating 63,000 dry Utica acres to CNXM and a minimum well commitment of 140 over the next four years
  • EnLink Midstream (ENLC/ENLK) appointed Barry Davis to executive chairman, Michael Garberding to president and CEO, and Eric Batchelder to EVP and CFO (press release)
    • Davis has been with Crosstex and EnLink since it was founded in 1996
    • Garberding has served as CFO since 2011
    • Batchelder was most recently a Managing Director at RBC Energy Investment Banking