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December 29, 2013

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Week Thoughts: Merry M&A Moves MLPs

It was a Merry Christmas for MLPs and an even better few days after the holiday.  The Alerian MLP Total Return Index closed at a 52-week high on Friday, and rallied 2.9% from last Friday.  This week’s performance was the exact opposite of the week ended 12/28 of last year, when the Alerian MLP Index closed was down 2.3% and the total return index closed at 1204.1, a low point it has not reached again since.  The following trading session (12/31/12), the index was up 1.7%, in what started the massive MLP uptrend that continued through the first quarter of 2013.  
With the MLP Index up 4.4% since December 13th, MLPs are ramping up well in advance of the new year to cap off 2013, which may or may not portend anything about 2014.  MLPs well outperformed the S&P 500 this week, which was up just 1.3%, but the S&P 500 will very likely finish 2013 ahead of the MLP index, as its YTD total return is more than 30%, compared with 26.1% for MLPs with just two more trading sessions left.  Two more big M&A deals (to cap off a very active M&A year among and between MLPs) may have helped MLPs outperform this week.

Weekly MLP Review_12-27-13

A couple of landmark numbers were crossed this week. First, the interest rate on 10 year treasury notes closed above 3.0% for the first time since July 2011.  Below is a look at the 3 year chart of the TNX rate index, which shows the 10 year rate going from around 3.5% down to below 1.5% in mid-2012 and back up to 3.0% today on taper talk that began in earnest in May of this year, which is when rates first began to spike.  That 3.0% didn’t set off a firestorm of MLP selling this week, but the steady rise from below 2.0% in May has weighed on MLP returns in the second half of 2013.

10_yr last 3 years

The second landmark is $100/bbl oil, which was achieved for the first time in 2 months, and is up 9.1% year to date.  The benchmark natural gas futures price was roughly flat this week, but remains more than 28% higher (almost $1.00 higher) than at the end of 2012.
Winners & Losers
Leading the sector this week was EROC, which spiked 13.7% to $5.99/unit on news that it will be selling its midstream business in order to de-lever and become a pure-play upstream MLP.  EROC’s big week is a small victory for a stock that closed Friday down 42.2% from its 4/22 peak of $10.38/unit.  The enthusiasm from the deal on Monday and Tuesday waned by Friday as EROC dropped 5.7% from its Tuesday close of $6.35/unit.  RGP and PVR were up on the news as well. The market seems to like the idea of RGP pairing its recently-acquired (in the pending PVR acquisition) footprint in the Texas Panhandle with EROC’s nearby footprint.  There also may be a sense that these assets might perform better under new management.  Interestingly, RGP’s publicly-traded GP holding company, ETE, was basically flat week over week.
Recent IPOs DLNG and VLP were up sharply on no news to round out the top 5.  There was likewise no news among the bottom five this week.  There is a historical trend of MLPs that have been weak all year selling off in December in what has been described as tax-loss selling.  EVEP, the worst performing MLP in 2013 and among the worst this week, falls into that category.


Speaking of EVEP, its weak performance this week solidified its spot in the cellar among all MLPs for 2013.  EROC had been neck-and-neck with EVEP, but EROC’s reprieve this week effectively ended the race to the bottom.  On the green side of the chart, there are an incredible 4 MLPs that have produced more than 100% total returns for the year, and that doesn’t include variable distribution MLP EMES, which has produced total return of 161% since its IPO in early May.  It’s been a pretty good year to own MLPs with some issues that were largely discarded by the end of 2012, as several of the top 5 were involved in strategic transactions during the year that changed their trajectory.


News of the (MLP) World
There was some big news this week, especially for a short week with a major holiday right in the middle of it.  The dueling banjo MLP families of Kinder Morgan and Energy Transfer were at it again, each slipping a major acquisition announcement in before the 2013 finish line.
Energy Transfer Equity’s subsidiary MLP, Regency Energy (RGP), acquired the midstream business of Eagle Rock Energy (EROC), acquiring another set of midstream assets from another downtrodden MLP that had been operating a mash-up of MLP assets (similar to PVR’s dual-focus MLP).  In this deal, however, RGP will only be acquiring the midstream piece of EROC, leaving the upstream assets behind for EROC to manage. The EROC midstream sale is similar to Inergy’s 2004 acquisition of the propane assets of a distressed Star Gas (SGU) in late 2004, leaving SGU with just its heating oil business.  RGP also announced another substantial acquisition (Hoover) with built in growth projects.
Not to be outdone, Kinder Morgan Energy (KMP) branched into the tanker business, snatching up American Petroleum Tankers before it went public, but after it had filed an IPO registration statement.  I expect to see more deals like this in 2014, where a sponsor chooses to file an S-1 for an MLP IPO while simultaneously marketing the business for sale (the so-called “dual track process”).
Equity / Debt – No deals this week
M&A / Growth Projects

  • Kinder Morgan Energy (KMP) announces acquisition of Jones Act Shipping Tankers in US for $962mm (press release)
    • KMP to acquire American Petroleum Tankers (APT) and State Class Tankers (SCT) from affiliates of the Blackstone Group and Cerberus Capital for $962mm in cash
    • APT and SCT are engaged in marine transportation of crude oil, condensate and refined products in the US domestic trade
    • KMP will acquire 5 existing tankers and 4 scheduled to be delivered, each with 330,000 barrels of storage capacity
    • APT produced $55mm in annual EBITDA, implying an 8.4x EBITDA multiple
    • To “facilitate the transaction”, KMP’s sponsor Kinder Morgan Inc, has agreed to forego cash from its incentive distribution rights in KMP in the amounts of $16mm, $19mm and $6mm in 2014, 2015 and 2016, respectively
  • Regency Energy (RGP) announces acquisition of Delaware Basin midstream assets from Hoover Energy for $290mm (press release)
    • Hoover’s midstream services include crude oil gathering, transportation, and terminaling, condensate handling, natural gas gathering, treating, processing and water gathering and disposal services
    • RGP to issue $98mm of RGP common units to Hoover to fund the equity portion of the transaction, transaction expected to close in 1Q 2014
  • Regency Energy (RGP) announces acquisition of the midstream business of Eagle Rock Energy (EROC) for $1.3bn (press release)
    • EROC’s midstream business includes 8,100 miles of gathering pipeline and over 800 mmcf/d of processing plants in the Texas Panhandle, East Texas and South Texas
    • RGP expects immediate accretion from the transaction, and management will recommend to the board distribution increases that will result in 6-8% distribution growth in 2014
    • Transaction expected to close in 2Q 2014
    • RGP will finance the acquisition with:
      • $600mm in common units ($400mm issued to RGP’s sponsor Energy Transfer Equity and $200mm to EROC)
      • Assumption of $550mm of outstanding EROC senior notes
      • Borrowings on RGP’s credit facility
  • Energy Transfer Equity (ETE) announces stock split, buyback program, LNG milestone (press release)
    • ETE to execute a 2-1 stock split on 1/24/14
    • ETE to opportunistically buy back up to $1bn of its common units in a program that is effective immediatel
    • ETE also announced that its Trunkline LNG Export subsidiary has filed Draft Resource Report 13 with the FERC for the Lake Charles LNG export project, which clears the way for the LNG project to file formal applications for FERC authorization
  • Lehigh Gas Partners (LGP) announces acquisition of certain motor fuel supply contracts from Manchester Marketing, Inc. for $11.1mm (press release)
  • OCI Partners (OCIP) announces acquisition of additional ammonia tank storage capacity from Lucite International (press release)
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