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February 19, 2017

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Week Thoughts: Mercury Rising, MLPs Flat

MLPs have done a whole lot of nothing the last two weeks, including a marginal total return this week.  Oil hasn’t moved much either, hovering just above $53/bbl for 5 straight weeks.  The broad market continues to melt up, which hasn’t hurt MLPs or oil prices.  MLP specific newsflow did confirm 3 positive trends: (1) improving capital markets access, (2) improving regulatory backdrop for pipeline development, and (3) logical strategic transactions among MLPs (JVs, asset swaps, etc).
Unlike oil, natural gas has moved in the last few weeks…straight down.  Natural gas prices are down 24% already this year.  Natural gas pipeline approvals have continued and are great for their developers, but they also pull forward northeast natural gas supply, which doesn’t help prices in the face of another warm winter.  Propane has been supported by exports YTD, but dropped 10% this week.
Warm weather is bittersweet for us MLP investors living in areas that produce a lot of heating degree days (HDD).  Sure, it’s fun to take your kids for a catch outside in February in a t-shirt, but in the back of your mind, you’re aware that for the greater good, having to dig yourself out to reach a car buried in snow would be better.  Oh well, enjoy the weather and the holiday shortened week.
Poll Question: Losing the Spark
A number of positive sector catalysts have come through over the last few months: OPEC agreement, swift-ish resolution of DAPL situation, a number of other pipeline approvals, and positive IDR elimination transactions.  But with those catalysts behind us, and with most sector guidance pointing towards still challenging fundamentals until the second half of 2017, the recent pause may linger a bit.
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Winners & Losers
NBLX returned to its usual spot among the top 5 this week, while FGP can’t seem to escape the bottom 5. Coal-related MLPs NRP and CNXC were the best performers overall.  On the downside, SPH dropped 8.4% on persistent warm weather.
YTD Leaderboard
NBLX pulled further into the lead 1.5 months into 2017.  Only one MLP is down more than 10% for the year so far, a far prettier picture than this time last year.
CNXC and KNOP jumped out of the bottom 5, replaced by SXCP and SPH, and AMID dropped to second to last.
General Partners and Midstream Corporations: TEGP’s Day in the Sun
GPs and midstream corps median return matched the MLP Index exactly this week, and the group continues to lag year to date.  TEGP led the way following positive 4Q results and stout 2017 guidance (40%+ distribution growth).  Cheniere (LNG) was the worst performer of the group, despite a business model designed to benefit from cheap domestic natural gas, and gas prices were certainly not up this week.  ETE didn’t have quite the positive reaction some would have expected from another pipeline approval this week, but it was among the winners.
News of the (MLP) World
Capital markets continue to improve.  Overnight offering discounts have been tighter overall, but still fairly wide for larger transactions with no use of proceeds besides reducing leverage.  Also, the last high-profile MLP IPO remaining in the depleted backlog re-filed its prospectus and looks to be readying a launch soon.
In M&A, inter-sector M&A and joint ventures continue.  This week it was a Permian JV between an upstart producer-backed MLP (NBLX) and a large cap MLP with a large footprint (PAA), whereas last week it was a Marcellus JV between an upstart producer-backed MLP (AM) and a large cap MLP with a large footprint (MPLX).
Finally, improving pipeline regulatory environment trend continues to play out.  This week it was a final approval for Mariner East II and the denial of construction halt for DAPL.
Capital Markets

  • NGL Energy (NGL) priced public offering of 8.8mm units at $22.45/unit, raising $197.6mm (press release)
    • Overnight offering, priced at 7% discount, and traded up 3.6% from pricing in the following session
    • Offering was upsized from original offering of 8.0mm units
  • NGL Energy (NGL) announced public offering of $500mm of 6.125% senior notes due 2025 (press release)
    • Proceeds will be used to reduce borrowings under its senior secured revolving credit facility
  • Martin Midstream (MMLP) priced public offering of 2.6mm units at $18.00/unit, raising $46.8mm (press release)
    • Overnight offering, priced at 4.5% discount, and traded up 3.6% from pricing in the following session
    • Proceeds were to be used to finance drop-down transaction announced this week, and to reduce leverage
  • Hess Midstream (HESM) re-filed registration statement via S-1 for MLP initial public offering (filing)
    • HESM originally filed in September 2014 and last filed an updated S-1 in December 2015
    • No change to the standard MLP structure from HESM, with full IDRs to 50%
    • General partner is a 50/50 joint venture between Hess Corporation and private equity firm Global Infrastructure Partners
    • Initial assets include 20% interests in 3 Opco’s that own 3 types of assets: gathering, processing & storage, and terminalling & export
    • Assets are all in the Bakken, all backed by 10-year agreements that were put in place on 1/1/2014
    • HESM has a 10-year ROFO on the remaining interests in the Opco’s
    • HESM’s initial assets produced $62.5mm in EBITDA in 2016

Growth Projects / M&A

  • Plains All American (PAA) and Noble Midstream (NBLX) announced 50/50 joint venture and acquisition of Delaware Basin assets (press release)
    • The $133mm JV acquired Advantage Pipeline LLC, which owns a 70-mile crude oil pipeline with 150k bpd of capacity and three trucking stations with 490k barrels of combined crude storage capacity
  • MPLX purchased Ozark Pipeline from Enbridge Pipelines (press release)
    • After FTC granting antitrust clearance last week, MPLX announced purchased the 230k bpd crude oil pipeline for $220mm
  • Martin Midstream (MMLP) announced acquisition of Hondo Asphalt Terminal from sponsor Martin Resource Management (MRMC) for $27.4mm (press release)
    • The terminal cash flows will be supported by long-term contracts from MRMC with MMLP expecting to receive $5mm annually
    • MMLP plans to spend an additional $8.6mm to develop the terminal, implying a 7.2x multiple with capex costs factored in
  • Sunoco Logistics (SXL) received final approval for Mariner East II pipeline from the Pennsylvania Department of Environmental Protection (PA gov filing)
    • This was the last major permit for the $2.5bn NGL pipeline
    • Approval sets stage for creative financing solutions, including potential project financing or joint venture partners
  • Energy Transfer (ETP) and Sunoco Logistics (SXL) announced closing of previously announced project financing for DAPL and minority equity interest sale in the Bakken Pipeline, totaling $3.4bn in new cash (press release)
    • Transactions closed following denial of request by pipeline interveners to halt construction by U.S. court, clearing the regulatory path for DAPL completion
    • The project-level financing will unlock an additional $1.4bn of the project’s $2.5bn credit facility
    • Following completion of the 36.75% interest sale to a JV owned by MPLX and Enbridge (EEP), ETP and SXL received $1.2bn and $800mm in cash, respectively, which will be used to pay down debt and help fund current growth projects
    • Ownership in the Bakken Pipeline following the sale:
      • ETP/SXL: 38.25%
      • MPLX/Enbridge JV: 36.75%
      • PSX: 25%


  • Western Gas (WES)and Western Gas Equity (WGP) announced Benjamin Fink has been named President and CEO (press release)
    • Fink has been CFO of WES and WGP since 2009 and 2013, respectively
    • Retiring CEO, Don Sinclair, will continue to serve as Senior Advisor to Anadarko and the Partnerships
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