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August 13, 2017

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Week Thoughts: Low Energy

MLPs took it on the chin again this week, down 4.2%.  It was the worst weekly decline of 2017 and worst since the week before the election in November 2016.  MLPs are down 6.2% in the last 7 trading days.  Lower oil prices and abysmal results from PAA dragged the MLP sector down.  The stock market had its worst week since March, offering little help for energy stocks and MLPs.  Also, FERC approved no pipelines this week.

MLPs are down 4.3% year over year, despite positive year over year changes in all commodity prices, including much higher NGL prices. After a rough few weeks of trading to close out 2Q results, the silver lining is that volumes are headed higher from here and it will be another few months before another round of quarterly results
With the index back to levels from late June, MLPs have erased the gains from July and more.  The current yield (not counting any pending cuts) on the Alerian MLP Index is 7.8%, the highest level since May 11, 2016.
For MLPs to be valued on a yield basis again and for yield-oriented retail investors to get excited again, MLPs need to re-establish a level of confidence that current, re-adjusted distributions are sustainable.  It is tough to have confidence when some of the biggest MLPs in the sector are still talking about cutting their distribution (again) this late in the game (PAA – 10.8% yield), or are expected to execute a stealth cut of distribution via an internal merger (ETP – 11.4% yield).

I’m Tired, Boss…
ETP’s CEO responded to a question about big M&A appetite.  He cited fatigue (“We’re tired”) after DAPL woes and WMB drama of the last few years, not to mention ongoing challenges with the Rover Pipeline and SUN.  While investors are probably not going to sympathize with the billionaire CEO, I think we’re all a bit tired of MLPs reacting to a new world with old financial strategies.
We’d like to believe management teams when they say things will improve, we’d like to feel assured that actions taken are sufficient to secure the payout for the long-term, but we’re tired.  Tired of hearing about improving leverage and coverage, but not seeing per unit cash flow rising.
Two Tom Hanks movies have addressed two different types of fatigue.  In Forrest Gump, Hanks plays Forrest, who decided one day to start running, and he ran for a long time (except when he tired and slept, or was hungry and ate…).  People started running with him.  One day he just stopped and told his followers: I’m pretty tired, I think I’ll go home now.

In the Green Mile, Hanks plays a prison guard.  At one point in the film, Michael Clarke Duncan’s character Coffey tells Hanks’s character that its ok for Coffey to be executed because he’s tired of being alone and is tired of all the ugliness in the world.

Forrest Gump’s decision to stop running had much less finality than Coffey’s pending execution.  But we can see both versions playing out in the sector.  Some MLP investors are tired of waiting for MLPs to get on track, and are taking a break from the sector, but may return at some point.  Others are likely leaving for good, washing their hands of the MLP sector forever after one too many sudden 20%+ downdrafts.
The irony is that while we are all tired, that big M&A (which ETP is too tired to engage in) is maybe one of the few things that could bring investors back, before they go full Coffey and give up for good.
Winners & Losers
Results were positive for a few of the top 5 this week, including for BSM and PBFX, helping them stay positive.  But THE news of the week was another disappointment and potential distribution cut from PAA.  The other larger MLP in the bottom 5 was GEL.

PBFX made it two straight weeks near the top, while USAC bounced back from double digit decline last week.

Year to Date Leaderboard
OKS doesn’t trade anymore, and will be removed next week, but it re-entered the top five this week along with PBFX.  NBLX and GLOP fell out of the top 5.

General Partners and Midstream Corporations
GPs and corps outperformed the MLP Index as a group, but there were some very big companies down bigly this week, notably PAGP and KMI.  Good vibes from KMI’s accelerated return of capital program have faded, with British Columbia politics once again pushing to the forefront.  ETE avoided the worst of the carnage this week, on better than expected results from ETP.

News of the (MLP) World
Outside of earnings, news was limited to smaller growth projects and asset acquisitions.  PAA’s $250mm asset sale was the biggest deal announced.  Still no huge totally arms-length merger this year, but as some of the big cap names keep struggling it would not be a surprise to see consolidation start to accelerate through year end.
Capital Markets

  • Enterprise Products (EPD) priced public offering of $1.7bn of junior subordinated notes (press release)
    • $700mm of Junior Subordinated Notes D due 2077 that accrue interest at 4.875% per annum and are redeemable in 5 years
    • $1bn of Junior Subordinated Notes E due 2077 that accrue interest at 5.25% per annum and are redeemable in 10 years
  • MPLX filed S-3 to register $1.74bn common units, including $1.5bn new units and $240mm unsold units from a prior S-3 (filing)
  • DCP Midstream (DCP) filed S-3 to register $750mm worth of new common units (filing)

Growth Projects / M&A

  • Tallgrass Energy (TEP) announced the acquisition of Outrigger Energy LLC’s crude oil gathering system in the Powder River Basin for $36mm (press release)
    • The assets include ~34 miles of gathering lines and ~150,000 acres dedicated on a long-term fee-based contract
    • TEP estimates $7mm in additional capex this year on the acquired system
  • Holly Energy (HEP) announced acquisition of remaining interests in Frontier and SLC Pipelines from Plains All American (PAA) for $250mm in cash (press release)
    • HEP will purchase 50% of Frontier, a 289-mile crude pipeline, and 75% of SLC Pipeline, a 95-mile crude pipeline
    • Acquired interest in both pipelines is expected to generate approximately $23mm in EBITDA, implying an 11x multiple
  • DCP Midstream (DCP) announced the new 200 MMcf/d processing plant in the DJ Basin (press release)
    • O’Connor 2 will be DCP’s eleventh plant in the DJ Basin and is expected to be in service in 2019 for an estimated cost of $350-400mm
  • American Midstream (AMID) announced a joint venture agreement with Targa Resources (TRGP) creating Cayenne Pipeline, LLC (press release)
    • Cayenne will transport Y-grade NGLs from a Targa-operated gas processing plant to Enterprise Products’ pipeline at Toca, LA for delivery to EPD’s Norco Fractionator
    • The pipeline will have initial capacity of over 40,000 bpd with the ability to throughput more than 50,000 bpd
    • AMID and TRGP will each have 50% economic interests and voting rights, with TRGP serving as the operator
  • American Midstream (AMID) announced acquisition of Panther Asset Management for $52mm (press release)
    • Assets acquired are complementary to AMID’s core Gulf of Mexico assets as a substantial portion of Panther’s cash flows are generated by AMID’s joint ventures
  • SemGroup (SEMG) subsidiary, SemCAMS, announced plans to build new 280 MMcf/d sour gas facility in Pipestone region of the Western Canadian Sedimentary Basin (press release)
  • CrossAmerica Partners (CAPL) announced acquisition of assets of Jet Pep for $72mm (press release)
    • The Alabama assets include 102 commission operated retail sites, including 92 fee sites, 5 lease sites, and 5 independent commission accounts
    • Circle K Stores, CAPL’s general partner, has also agreed to purchase certain other assets from Jet Pep
  • Ferrellgas Partners (FGP) announced the acquisition of two Tennessee propane retailers, Lindsey Propane and Sevier County Propane (press release)
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