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October 29, 2017

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Week Thoughts: Lower Low, Higher Hope

After a brief bout of panic early in the week, and a fresh 52-week low on Wednesday, MLPs bounced a combined 3.2% Thursday and Friday to finish the week down just 1.2%, a third straight weekly decline.  Oil had a very strong week, and is positive on the year for the first time in months.  Propane had an even better week, finishing at $1.00 for the first time in years.  Processing economics remain robust, another fundamental tailwind for MLPs.

Before the mid-week bounce, MLPs were on track to have one of the top ten worst months ever.  As it stands now, MLPs are likely to end up with just a bad, not historically bad, month.  While it is possible this fresh bottom will hold, two solid days of trading is a small trend to hang your hat on.
It’s like in the movie Over the Top, when Stallone’s character Lincoln Hawk meets his son for the first time after leaving him and his mom 10 years earlier and tells his son they are travelling cross country in his big rig for 2-3 days.
His son says to him, “Do you really think you can make up 10 years in two or three days?”  Stallone says no, but by the end of the movie it seems like he has.  Movie magic aside, MLPs have much to prove to the broad market, even after a solid week of results and commentary and a positive Barron’s article on EPD

The midstream sector has put a few headwinds behind it recently: oil price volatility, a large IPO, distribution cuts (expected and unexpected), distribution growth moderations, massive underperformance.  Looming potential pressures remain: seasonal distribution capture trading, tax loss selling, additional MLP operating results and potentially lower 4Q guidance.
The balance is starting to tilt positive, however, especially with the strong fundamental backdrop and current valuations, which are becoming increasingly hard to ignore relative to other yield-based equities (and equities in general).  If the balance continues to tilt, MLPs might even have a positive week of price action some day…
Winners & Losers
MPLX was the best performer in the AMZ this week, on the back of results ahead of expectations, less ATM issuance than expected and commentary suggesting lower expectations for 2018 equity issuance.  GLOP also reported results and guidance for 2018 distribution growth, helping its performance this week.  HESM reported solid results and raised guidance, but the stock continues to trade by appointment and didn’t bounce like some others late in the week.  BWP’s poor showing sets very low expectations for earnings Monday.

GLOP’s strong performance this week helped it climb into 3rd place on the YTD leaderboard.

General Partners & Midstream Corporations
GPs and midstream corps underperformed the MLP Index this week for a second straight week.  ETE was the only one in the group with material positive price action, due to ETE’s surprise distribution increase.  The high growth 1099 issuing GPs (TEGP and AMGP) were the worst performers, and OKE made a rare appearance in the bottom 5.

For the year overall, GPs and corps are still outperforming MLPs, but the race is tighter than it has been.  Only 3 out of the group have produced positive returns YTD, as both OKE and TEGP crossed into negative territory this week.

Canadian Midstream
Canada underperformed U.S. midstream this week and all 8 of the stocks were negative for a second straight week.  Smaller players Pembina and Keyera were well ahead of the others this week, despite no news for either.

TRP woeful week dropped it two notches on the YTD performance chart, but TRP remains with Pembina and KML in a group that has separated itself from the rest of the pack.

News of the (MLP) World
BPMP’s IPO proved tough for the market to swallow, not just because of its size.  With a tone-def IDR structure and very traditional (i.e. tired) drop-down strategy messaging, the reception is not surprising.  But the deal got done, and its likely we’ll get at least one more IPO before the year is over.  Energy Transfer family’s distribution increase announcement was notable, SPH’s distribution cut was not.  No new updates on potential pipeline joint ventures, but maybe that will change this week with TRGP, EPD, OKE, WES, TEP, AM and others reporting.

Capital Markets

  • BP Midstream Partners (BPMP) priced IPO of 42.5mm units at $18.00/unit, raising $765mm in gross proceeds (press release)
    • Priced below the initial offering range, at an implied yield of 5.83%
    • Largest MLP IPO since early 2015
    • BPMP opened its first trading session at $16.85/unit (-6.4%), and closed at $17.25, down 4.2% from IPO price on a positive day for MLPs
  • Golar LNG (GMLP) priced public offering of 4.8mm 8.75% Series A preferred units at $25.00/unit, raising $120mm in gross proceeds (press release)

Growth Projects / M&A

  • Valero Energy (VLP) announced acquisition of Port Arthur Terminal assets and Parkway Pipeline LLC from sponsor Valero Energy for $508mm (press release)
    • The assets are expected to contribute a total of $60mm in EBITDA in next twelve months (8.5x EBITDA multiple)
  • ONEOK (OKE) and Martin Midstream (MMLP) announced their jointly-owned West Texas LPG Pipeline LP plans to invest approximately $200mm to expand its NGL system into the Delaware Basin (press release)
    • OKE, the operator and owner of 80%, and MMLP, which owns 20%, expect to complete the project in Q3 2018
    • The extension includes the construction of a 120-mile pipeline lateral that will have an initial capacity of 110,000 bpd and the construction of two new pump stations and pipeline looping along the West Texas LPG system
  • TransCanada announced sale of its Ontario solar portfolio comprised of eight facilities with a total generating capacity of 76 MWs to Axium Infinity Solar LP for $540mm (press release)

Distribution Announcements
35 more distribution announcements this week.  A few notables: SPH announced a distribution cut that was well-telegraphed, ETE and ETP increased distributions.  No other surprises, although notable that CQP raised its distribution for the first time since IPO in 2007.

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