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April 8, 2017

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Week Thoughts: Market Lacks, MLPs Luster

MLPs ticked up 0.8%, beating a flattish market in a week where not much moved, including utilities and interest rates.  Commodity prices did move up, helping nudge MLPs higher and keep momentum from last week going.  Oil broke through $52.00, finishing the week on a high note, but still down 2.8% for the year.  The broad market was eerily quiet this week, despite an employment report and some serious geopolitcal developments.
1Q distributions and earnings will start trickling out in the next few weeks, but I bet we see a few more stock-specific catalysts in the meantime.  One of those came through this past week (SUN asset sale), but there are others out there, as discussed here in recent weeks.  I’m on Spring Break this coming week, which probably means those catalysts will come through while I’m out…
IPO Market Open for Quality
The HESM IPO was important for the sector.  It priced at a higher multiple and lower yield than NBLX, was upsized and had a solid pop of 11.3% on its first day of trading.  Producer-backed midstream MLPs have been some of the more successful MLPs in recent years, and the model has been well established by WES, ACMP, EQM, CNNX, AM, RMP, NBLX.  The HESM IPO was a slight step-out from recent IPOs in that its underlying assets are not in the Marcellus or Permian, which required some additional MVC structuring.
There are clear synergies and a competitive advantage for HESM of having a supportive producer that can direct volumes across existing assets, provide commitments that can support a project, which also attracts third party volumes.
Producer IPOs
In the next few weeks, we’ll see Antero roll out a different structure, the super high growth GP IPO, with TEGP as the closest comp.  With IDRs being taken out for more mature MLPs, it seems like GPs are going public earlier in their life cycle to extend the high growth, high multiple phase of the GP’s life.  Or they are just eager to monetize the GP as early as possible.
Encouraging News Flow Continues
It was a pretty eclectic mix of news that highlighted some ongoing positive trends in MLP land.   We had a major asset sale, an IPO, a drop-down, growth projects and a buy-in announced this week.   The trends touched: healing capital markets (HESM), asset sales continue to be viable self-help (SUN), drop-downs when available still work (TEP), growth projects are returning with production (ENBL) and demand visibility (EPD), and finally some of the smaller MLPs that went public the last few years need to be rationalized over time (WPT being the latest).
Winners & Losers
SUN was clearly the big winner, up nearly 22%.  WPT rallied after its sponsor revealed a take-private bid for the small cap MLP.   Refinery-sponsored MLPs like MPLX traded well (DKL being the exception).  HESM (not pictured, will fix for next week), finished its first 3 trading days up 12.6% from pricing.  NBLX, the sector’s most recent MLP IPO prior to HESM, sold off, which is perhaps a coincidence.
CELP went from top 5 to bottom 5 week over week.
YTD Leaderboard
NBLX remains the top performing MLP so far this year, but the range of returns tightened up (if you ignore SDLP), as this week saw some rotation from winners.   EEP moved up while winners mostly moved lower.  There are now only four MLPs with 20%+ returns.
General Partners and Midstream Corporations
Median GP and midstream corporation returns were 0.0%, led by MLPs with higher sensitivity to natural prices like AROC and AHGP.  Beyond those two, the range of returns in this group was tight.
News of the (MLP) World
Capital Markets

  • Hess Midstream (HESM) priced 14.8mm-share IPO at $23.00/unit, raising $339.9mm in gross proceeds (press release)
    • Initial offering was upsized from 12.5mm shares
    • HESM traded up 11.3% to close at $25.60/unit
  • Alliance Resources (ARLP) priced $400mm of 7.5% senior notes due 2025 at par (press release)
    • ARLP originally launched a $500mm offering

Growth Projects / M&A

  • Sunoco LP (SUN) announced the sale of 1,110 convenience stores in continental US to 7-Eleven for total consideration of $3.3bn in cash (press release)
    • SUN entered into a 15-year take-or-pay fuel supply agreement in which SUN will supply 2.2bn gallons of fuel annually, increasing to 2.7bn over the next four years, to a 7-Eleven subsidiary and in return SUN will receive guaranteed annual payments
    • About 200 more convenience stores will be sold in a separate process
    • SUN will use total proceeds to reduce debt and potentially buy back units to bring distribution coverage to long-term target of 1.1x
    • The market was pleased, sending SUN higher on renewed faith in the ongoing nature of its current distributions
  • Tallgrass Energy Partners (TEP) announced acquisition of additional 25% interest in Rockies Express Pipeline (REX) from Tallgrass Development for $400mm in cash (press release)
    • Increases TEP’s ownership interest in REX to approximately 50%
    • Also, Ultra Resources announced that its Chapter 11 reorganization plan was confirmed and plans to pay REX’s $150mm claim within three months after Ultra emerges from bankruptcy, expected to be during April, and no later than 10/30/17
  • Enterprise Products (EPD) announced customer commitments supporting two expansion projects to further their ethylene infrastructure (press release)
    • EPD plans to repurpose a high-capacity ethylene storage well at its Mont Belvieu complex and build a new 24-mile ethylene pipeline from Mont Belvieu to Bayport, TX
  • World Point Terminals (WPT) sponsor submits preliminary going-private proposal at $16.80/unit (filing)
    • WPT originally went public at $20/unit, in a $175mm offering in August 2013 at a 6.0% yield
    • WPT has not raised its distribution since IPO, resulting in $4.20/unit in distributions, which when added to the buy-in price, results in a total return of 5% since IPO in 3.5 years, seems fair enough
  • Enable Midstream (ENBL) announced new 10-year contract with Newfield Exploration pipeline to support recently announced Cana and STACK Expansion project (press release)
  • Navios Maritime (NMM) announced acquisition of two Panamax vessels for $27mm (press release)
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