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January 9, 2016

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Week Thoughts: Kite Eating Tree Strikes MLPs Again

MLPs started the new year strong on Monday and relatively strong on Tuesday, but faded amid another crushing oil price decline coupled with an epic, coordinated global equity selloff. MLPs declined nearly 10% in two days in an indiscriminate free fall reminiscent of the decline in early December, and finished down 7.7% for the week, despite two 1%+ positive days. This selloff seemed to be caused by oil prices, which seemed to be down due to concerns about China demand slowing due to its collapsing stock market. So, we now have our answer to what MLP prices have to do with the price of tea in China.
Weekly Review_1-8-16
Positive distribution announcements from EPD, GEL and TEP this week were met with fresh selling. Oil hit multi-decade lows, while the broader stock market had its worst opening week forever. Sentiment for equities is souring and volatility is peaking. Fresh blood is flowing on MLP streets already caked in leftover blood from last year. Resolve of MLP investors and management teams is being tested daily.
Over the holidays, I took my kids to see The Peanuts Movie. The movie rehashes many of themes from the classic comic strip and cartoons of my youth, involving Charlie Brown failing but never giving up hope that one day he will succeed. The two classic tropes that come to mind are Lucy pulling the football away from Charlie Brown at the last second and Charlie Brown trying to get his kite to fly. In the comic strip, the kite always ends up in a tree known as the “kite eating tree”. For a brief period this week, as late as Tuesday afternoon, it seemed like MLPs had a little wind at their backs, but again they ended up in the tree.
KiteTree
In the movie version, Charlie Brown eventually flies the kite and gets the girl (spoiler alert), a nice happy ending. A happy ending is still very possible for MLPs, or least a happier one than we’ve had the last 18 months, and there were some positive signs this week if you look close enough.
Themes: Volatility Breeds Creativity
Massive volatility continues as investors sort through the implications of closed capital markets and dire commodity prices for longer than most expected. Ratings agencies are sending shockwaves through the sector’s largest MLPs.
M&A has been slow to materialize, but one transaction from NGL energy highlighted that there may be greater value in some assets embedded within an MLP than in the MLP overall. Private equity stepping in to relieve MLP pressure with asset purchases and GP purchases may not reduce the overall number of MLPs, but the capital infusion is helpful on the margin. It will be interesting to see if other MLPs pursue asset sales to right their broken equities. NGL’s rally is also a reminder that not all MLPs that trade to yields above 25% have to cut their distributions, see 2008 for further evidence of that.
This week also saw the continued theme of sponsor support. TEP issued units back to its sponsor for a drop down, while EPD’s major holders stepped up to buy $100mm worth of units. A well-capitalized sponsor that is willing to provide support in the form of a lower multiple drop-down or by taking back equity can facilitate distribution growth and stability at their MLPs. There continue to be levers to pull for midstream MLPs. MLP management teams and their advisors are creative folks, and I’m sure this is just the beginning of what will be a wild year of creatively engineered transactions.
Winners & Losers
NGL’s 45.6% rally on Friday helped NGL lead all MLPs this week, and CNNX caught a bid to open the year up 9.2%. SXE’s 50.4% collapse after distribution suspension Friday helped it drop to the bottom of the sector. Several other MLPs were down more than 20%, many of them previous distribution cutters (TOO, FELP, NMM). Just 5 days in to the year and the spread between the top and bottom performing MLPs for the year is 80 percentage points.
Top5Bottom5_1-8-16
Top5Bottom5_1-8-16_chart
General Partner Holdings Companies
GPs were down with the MLPs this week, but outperformed slightly based on median. ETE and WMB selloffs were more dramatic with each down 20%+. Energy Transfer complex-wide leverage concerns, uncertainty about GP support, and noise around the merger seem to be disproportionately weighing on all MLPs affiliated with Energy Transfer, which is a lot of MLPs! I expect management is working on providing investors clarity on distributions and leverage, perhaps with IDR waivers, an asset sale or some other lever included.
Top5Bottom5GPs_1-8-16
Top5Bottom5GPs_1-8-16_chart
News of the (MLP) World
News-of-the-World
Equity

  • Enterprise Products (EPD) announced that its affiliate EPCO acquired 3.8mm units in a private placement via EPD’s ATM program, raising $100mm in gross proceeds (press release)
    • EPCO has committed to investing $200mm total in the first quarter of 2016

M&A / Growth Projects

  • NGL Energy (NGL) announced the sale of the GP interest and incentive distribution rights of TLP to private equity firm ArcLight Capital for $350mm in cash (press release)
    • NGL expects to close the transaction in January, and will use the proceeds to reduce borrowings
    • NGL does not anticipate needed additional equity or debt in the next 18 months
    • NGL says the sale will result in net increase in EBITDA of $12mm, consisting of cost savings and revenue enhancements of $20mm and lost IDR cash flow of $7.6mm
    • NGL had only acquired TLP stake in July 2014, and the implied value of the GP back then was around $50mm
    • There are not too many things in the energy sector that have produced a return of 6.5x since July 2014
    • Arclight has been active in the MLP space over the years, and owns a stake in the general partner of American Midstream (AMID)
  • Tallgrass Energy (TEP) announced acquisition of an additional 31.3% interest in Tallgass Pony Express Pipeline from Tallgrass Development (TDEV) for $743.6mm (press release)
    • Consideration will be a combination of $475mm in cash (borrowings) and 6.518mm common units issued to TDEV
    • As part of the transaction, TDEV granted TEP a call option to repurchase the 6.518 units at $42.50 at any point over the next 18 months
    • This innovative call option will allow TEP to pursue a marketed equity offering in the future once the market opens again
    • TEP announced expectations to grow distribution by at least $0.06/unit in 1Q (an additional 9.4% on top of 6.7% quarterly increase announced in December for 4Q)
    • TEP also affirmed 20% annual distribution growth through 2017
  • CrossAmerica (CAPL) announced acquisition of 31 retail locations in Wisconsin and Minnesota from SSG Corporation for $48.5mm (press release)
  • Westlake Chemical Partners (WLKP) announced project to expand Ethylene capacity at Westlake Chemical Opco’s facility in Calvert City, Kentucky (press release)
    • WLKP expects the project to help WLKP to continue low double-digit rate of annual distribution increases
  • Green Plains Partners (GPP) announced drop down acquisition of the storage and transportation assets of two ethanol production facilities owned by Green Plains Inc for $62.5mm (press release)
    • The assets are expected to generate $7.7mm in EBITDA over the next 12 months (8.1x implied multiple)

Distribution

  • Tallgrass Energy (TEP) – announced at least $0.06 increase (+9.4% quarter over quarter, after 6.7% increase in 4Q) for 1Q, re-affirmed 20% annual distribution growth through 2017
  • Genesis Energy (GEL) – 4Q distribution increase of 2.3% over 3Q, 10% annual increase
  • Enterprise Products (EPD) – 4Q distribution increase of 1.3%, 5.2% annual increase
    • EPD also announced 2016 distribution guidance of 5.2%
  • Spectra Energy (SE) – 4Q dividend increase of 9.4%, 14% annual increase
  • Southcross suspended distributions
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