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October 20, 2012

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Week Thoughts: IRS, PLRs, MLPs, IPOs (and other Acronyms)

Rather than break it up this week, I’m just going to do one big monster post.  Not that you care, but the reason is that I’m leaving Sunday night for another conference in Vegas, this one the OPIS Supply Conference.  It should be great timing and a chance to talk about refinery MLPs, logistics MLPs from corporations that own refineries (MPLX), and refined products distribution MLPs (like Lehigh Gas).
So, MLPs were down slightly for the week.  The S&P 500 was up for the week, despite being down 1.7% on Friday (24 points), the biggest single day drop for the index since June 21st, on weak earnings, and on investors rebelling against an overload of Black Friday talk on its 25th anniversary.  The Alerian MLP Index was down just 1.2% Friday.   Interest rates rose a bit, gold and oil were down, while natural gas scraped out a gain.  The only real winner was ethane this week, up 8.4%.

We’ve got two more new MLPs coming next week, which would make it 9 for the year, after we saw our 7th MLP IPO of the year.  Also, earnings season kicks into full swing.  Will be interested to hear what all the MLPs are seeing in terms of drilling activity in their areas, as well as an update on the ethane oversupply situation in the mid-continent.  KMP / EPB had good earnings this week, which is always a good sign.

News of the (MLP) World
The IRS has really staffed up it appears, as they have now issued 16 private letter rulings (PLRs) this year, up from a record 7 PLRs last year.  This week the PLR ruled that Ethylene crackers produce MLP-qualifying income (read Fitch’s comments via Bloomberg on the subject).
Williams was likely the one seeking the ruling so that it could drop its Geismer asset into WPZ.  But it paves the way for a new spate of pure play petrochemical spin-off MLPs, which would be fun, because the MLP IPO market was getting a little boring with all the frac sand, refinery and offshore drilling MLPs we’ve been getting lately…
For whatever reason, now is the time ask the IRS about your potentially MLP-able assets.  The situation evokes images of the Godfather and the parade of callers he had on his daughter’s wedding day.  Tom Hagen says: “Its part of the wedding, no Sicilian can ever refuse a request on his daughter’s wedding day.”  I don’t know what they’ve put in the coffee over at the cubicle that produces the PLRs, but its working.

Actually, its almost suspicious, like the IRS is trying to encourage dis-incorporation to usher in the demise of Section 7704, the MLP tax break…just kidding (obviously).

  • Copano Energy, LLC (CPNO) priced public offering of 6.0mm common units at $32.13/unit, raising $192.8mm in gross proceeds
    • Priced at 3.69% discount to prior close, priced into a rough market Friday, so aftermarket performance was weak.
  • Seadrill Partners, LLC (SDLP) priced IPO of 8.75mm common units at $22.00/unit, raising $192.5mm in gross proceeds
    • Priced at the top of the IPO price range of ($20.00 to $22.00), opened at $24.00 and closed its first trading day at $24.37, up 10.8% from its IPO price
    • First ever offshore drilling MLP, pretty compelling way to bet on the capex budgets of 4 super major oil producers
  • MPLX (MPLX) launched IPO with midpoint IPO yield of 5.25% (see below) (watch roadshow here)
    • CEO Gary Heminger on the roadshow said investors have wanted them to do an MLP for a long time, but he timed it just right to get potentially the lowest MLP IPO yield of all time.  Lowest so far is SEP in 2007 at 5.45% (not counting the GPs, AHGP was lowest ever at 2.75%, ok so I guess I am counting)
    • Really clean balance sheet also helps, basically no debt
  • Lehigh Gas (LGP) launched IPO with 8.75% midpoint IPO yield (see below) (watch roadshow here)
    • One of the few self-made MLPs we’ve seen in the last decade or so since PE firms and public companies started to dominate the MLP game
    • Wholesale distributor, owns convenience stores, from which it receives rental income (MLP qualifying)
    • 120k retail gas stations in the country, this is a rollup play, you’ve got to bet that they will be able to make acquisitions despite considerable debt at IPO
  • Mid-Con Energy (MCEP) priced public offering of 4.0mm (3.0mm secondary, 1.0mm primary) units at $21.20/unit, raising $21.2mm in gross proceeds and $63.6mm gross to selling unitholders (Yorktown)
    • 1 day bookbuild, file-to-price decline of 4.93%, up 0.9% from pricing the next day
  • MWE filed S-3 for $1.0bn in debt and equity securities

M&A / Growth Projects

  • Boardwalk Pipeline (BWP) announces acquisition of the remaining 65% interest in PL Midstream LLC from an affiliate of its GP Loews Corp for $269mm
    • Original purchase closed October 1, the speed of this remaining drop came faster than most expected, but so did that equity offering a few weeks back
  • Mid-Con Energy (MCEP) announces two acquisitions of oil properties in Oklahoma for a combined $24.1mm
    • Combined net production: 258 boe/day
    • Net proved reserves: 1.8 mmboe (64% PDP), 99% Oil, 19 year reserve life

Quarterly Per Unit Distribution Announcements
There were some very large distribution increase announcements this week, like TLLP’s 11% increase, which wasn’t too surprising.  NGL raised distributions quarter over quarter 9.1% though, after a 13.8% distribution bump last quarter, for a total of 24.1% growth in 2 quarters.  Despite that growth, NGL is only up 8.5% since July 24th, the day prior to its last distribution increase.
I was surprised by the EPB distribution bump, given that Kinder has conditioned us to expect 9% annual growth for EPB, not 5%+ a quarter.  He’s had some practice in the whole under-promising and over-delivering thing.

  • TLLP:    $0.455, +11.0% quarter over quarter
  • NGL:      $0.45, +9.1 qoq
  • EPB:       $0.55, +5.5% qoq
  • CLMT:    $0.62, +5.1% qoq
  • OILT:      $0.375, +4.2% qoq
  • GSJK:     $0.375, +2.6% qoq
  • KMP:     $1.26, +2.4% qoq
  • MCEP:   $0.485, +2.1% qoq
  • CMLP:   $0.51, +2.0% qoq
  • LRE:        $0.4775, +0.5% qoq
  • TLP:        $0.64, flat
  • NRP:      $0.55, flat
  • NMM:   $0.4425, flat
  • VNR:      $0.20 (monthly), flat
  • HCLP:    $0.2375 (pro-rated MQD), flat

Winners & Losers
SDLP is the big winner for the week, and only needed one trading day to do it.  OXF had an unusually strong week on the upside (maybe investors liked what Romney had to say on coal at the debates, but doubtful that had much impact), while ACMP finally took a pause and had an uncharacteristic decline week over week.
On the downside, MCEP and CPNO had equity deals this week that dropped them, NGLS pre-announced weak earnings and lowered expectations around guidance going forward, which helped drop it 3.4%.

As predicted last week (or at least as hinted at last week), OXF has climbed out of the cellar, a spot it has occupied seemingly forever.  But now BPL takes over at the bottom of the MLP pile on a year to date basis.  CLMT rallied back from its 12% beatdown last week on the back of a 4% distribution increased, and it has reclaimed its top spot.  None of the 10 names in the bottom and top 5 changed, just the order, a few more down days like today and we may see some more action in the YTD winners and losers.

Leap Frog
The charts below highlight the back and forth MLPs and broader stock have had over different time periods so far this year.  The S&P 500 won the first quarter and is winning for the year, but looking back just 6 months or 1 months and MLPs have S&P 500 beat.  But looking back 3 months, and the S&P500 is beating the Alerian.  Time periods are arbitrary, but I thought it was worth passing along to you this interesting game of leapfrog playing out with the indexes…




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