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February 21, 2016

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Week Thoughts: Intelligent Investors Break MLP Pain Cycle

MLPs saw a sustained rally on a flurry of non-negative news and finished the week up 10%+.  Including last Friday, MLPs have bounced 17% off the lows, but remain down more than 15% for the year.  The bounce wasn’t so strong for the Equal Weight Alerian MLP Index, up just 7.7%.  The disparity was due to large cap MLPs rallying hard, led by WPZ and MPLX.
Weekly Review_2-19-16
MLP sentiment improved with the announcement of midstream purchases by broad value investors Berkshire Hathaway and Appaloosa Management.  MLP sentiment was also helped by several producer equity offerings (totaling ~$5bn, including preferred from HES) that should improve liquidity for some MLP customers.  In addition, broad market strength and positive oil price movements contributed to the MLP rally.
This week’s rally was the 5th best ever for the MLP Index, in just 4 trading days.  If the last 5 trading days happened from Friday to Friday, the 17.1% return would rank 3rd best all time.  We got 3 straight 5%+ return days for MLPs starting last Friday, before oil and MLP prices took a breather late in the week.  There have only been 19 days with 5%+ returns ever for the index and never 3 such days in a row, until this week.
5% days
Its also noteworthy that of the 19 days of 5%+ returns for MLPs ever, 8 occurred since the beginning of December.  There have been roughly the same number of 5% decline days over that period, but none this week!
MLP action this week was encouraging, as sentiment appears to have retreated from maximum negativity last week.  Fund flows seem to be turning positive again with positive flows into open end funds reported in January.  Oil prices remaining below $30/bbl may prevent escape velocity necessary for MLPs to finish February positive, but earnings season has restored some confidence in the levers MLPs can employ to stabilize their businesses.
Poll Question
Moody’s concluded reviews of a large group of producers and their MLP subsidiaries this week, announcing several downgrades.  MLP credit ratings are in focus like never before.  There are 17 investment grade MLPs at the moment, including WES which was downgraded to junk at Moody’s this week, but remains investment grade per S&P.  Since December, one investment grade MLP has been downgraded to junk by both agencies (ENBL on 2/2/16).
9 of the 17 investment grade MLPs are just one credit rating notch away from dropping out of investment grade.  3 of those MLPs have long-term bonds trading at less than 70% of par value today (ENLK, WES, WPZ).  Ratings agencies appear to be drawing harder lines on leverage and cash flow as MLP cash flows have become more uncertain.  This week we seek your opinion on how the increased ratings agency scrutiny of MLPs plays out by year end.
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Bloodsport: Outlook Hazy for G&P
This week’s earnings included several gathering & processing MLPs, the results of which highlighted limited visibility into producer activity and volume trends.  G&P MLPs are beholden to producers, many of which don’t know how their drilling programs will turn out, or even how much liquidity they’ll have throughout the year.
Midstream providers dependent on producer activity have even less visibility than producers, which makes forward expectations hazy.  An example of the impact its having on MLPs is ENBL, which in 3Q included 2016 and 2017 EBITDA guidance, but this week’s 4Q results included lower guidance for 2016 and no 2017 guidance.
The situation reminds me of the 1988 movie Bloodsport with Jean Claude Van Damme (JCVD).  I’m sure you are all familiar with the plot: an old sensei trains JCVD, a martial arts tournament, some crazy montages and fight scenes.  The tournament comes down to a fight between JCVD and Chong Li (the bad guy, who has killed several opponents already).  JCVD is too good for Li, so Li throws some powder in JCVD’s eyes to gain an advantage.  Eventually JCVD is able to channel his inner Jedi or Ninja or whatever and beat Li without the use of his eyes, but for a while in the middle of the fight, JCVD is stumbling around the ring blind and getting beat up pretty badly.
On the other hand, at least one gathering MLP, CNNX, produced strong results and guidance with improving visibility even with no drilling rigs operating within their footprint.   Having appropriately high coverage and low leverage to account for uncertainty is critical in this segment, but very few have those elements in place right now.  Next week we’ll get more results from G&P MLPs, including CEQP, OKS, WES and SMLP.  Expect similarly uncertain long term outlooks and volatile price action.
Winners & Losers
Some very large MLPs made the top 5 this week.  Both WPZ and MPLX were up 28%, but that was only good for 3rd and 4th best, way behind small cap deep value plays JPEP and RRMS, which were both up more than 45%.  Earnings and outlook updates exacerbated declines for CLMT and MEP.
The year to date table shuffled around a bit this week.  CLMT and MEP joined the bottom 5, while KNOP replaced EVA in the top 5.
General Partner Holding Companies
GPs underperformed MLPs overall this week, but there were some big winners.  This will be TRGP’s final week on this chart as it closed the acquisition of its MLP and is no longer a GP, but it was quite a finale, up 31.3% recovering a bit from last week’s 28% drop.  In other non-GP action, KMI was up 16%, getting a boost from Tepper and Buffett.  ENLC disappointed with guidance for 2016, making it the worst performing GP for the second consecutive week.
News of the (MLP) World
While there were no equity offerings for MLPs this week, the market’s willingness to fund E&P public equity offerings is a clear positive for MLPs because it adds liquidity and on the margin helps MLP customers with leverage and liquidity.

  • Targa Resources Corp (TRGP) announced private placement of $500mm worth of 9.5% Series A preferred stock (press release)
    • Stonepeak Infrastructure Partners, infrastructure private equity firm, was the buyer, acquiring 500,000 of new preferred shares at a net price of $1,000 per share
    • The shares can be redeemed in whole or in part at TRGP’s option after 5 years, and can be converted into TRGP common stock in 2028 by Stonepeak
    • Stonepeak will also receive 7.0mm warrants with a strike price of $18.88/ share and 3.385mm warrants with a strike price of $25.11/share
    • Warrants have a 7 year term
  • GasLog Ltd (GLOG) and GasLog Partners (GLOP) announced refinancing of 6 vessels, representing all debt maturities for both entities due 2016 and 2017 (press release)
    • Pushes out maturities on 5 vessels that had maturities in 2016 and 2017 with a combination of senior and junior tranche mortgage facilities
    • Next maturity that needs to be re-financed is now 2018

Growth Projects / M&A

  • Phillips 66 Partners (PSXP) announced acquisition of fractionation and storage assets from sponsor Phillips 66 (PSX) for $236mm (press release)
    • PSXP will acquire 25% interest in newly-constructed Sweeny Fractionator One and Clemens Caverns in and around PSX’s Sweeny Refinery Complex in Texas
    • The fractionator has 100,000 bbls/d of capacity and the Clemens Caverns consist of 5 newly-developed caverns with combined NGL storage capacity of 7.5mm bbls
    • In connection with the acquisition, PSXP will enter into a 10-year agreement with PSX that includes minimum fractionation volume and minimum storage commitments
    • The assets are expected to generate $25mm in annual EBITDA, which implies a 9.7x acquisition multiple inclusive of $7mm of additional capex
    • Transaction funded with $24mm of PSXP units issued to PSX and $212mm of notes payable to PSX
  • JP Energy (JPEP) announced $5mm worth of projects, including ethanol unit train project and pipeline system interconnection agreement for its North Little Rock refined products terminal (press release)


  • Berkshire Hathaway discloses new position in Kinder Morgan (KMI) with a value of $395.9mm as of 12/31/15 (filing)
    • This news combined with the news Friday that Tepper’s Appaloosa added midstream bets was a confidence boost for MLPs this week, and was likely a driver of at least some marginal retail buying across the MLP sector
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