The Alerian MLP Index broke its 7-day losing streak in a big way on Monday with a 2.1% pop, the best day for the MLP Index all year. That huge day was followed by the first day of the year that all 50 MLPs were down on the same day, resulting in a 1.8% decline overall that erased most of Monday’s gains. The rest of the week was much less volatile, with the MLP Index finishing up 0.7% for the full week. The broad market was volatile as well, finishing up 0.3%, while utilities were flat. Interest rates were lower, and the US 10 Yr now yields 2.42%, 61 basis points lower than at year end 2013.
Within the MLP Index, large cap MLPs outperformed the smaller ones, as evidenced by the disparity between the 0.3% price change for the Alerian MLP Index and 0.3% decline for the Equal Weight version.
On the commodity front, WTI oil price dropped to a six month low on Wednesday, before recovering to close out the week roughly flat. Natural gas prices bounced 4.5% this week, but that wasn’t enough to pull up ethane (down 2.7%).
Earnings: Exports in Focus
It was another busy week of earnings releases, with more than 40 MLPs reporting. Results were mixed, but when results failed to meet the Street’s expectations, research analysts were able rationalize the weaker than expected results in various ways. Below are some paraphrased examples of what analysts wrote about earnings.
- Despite miss, growth story intact
- Thesis unchanged despite miss
- Drop down timing issues lead to miss vs. expectations
- EBITDA miss, but DCF beat on lower than expected maintenance capex
- Miss, but guidance maintained as volumes are expected to ramp in 2H14
- Growth backlog building, giving us comfort despite weak quarter
On the conference calls, the clear focus was trying to figure out which MLPs might have the ability to join the condensate exporting party that Pioneer and EPD started last month. The consensus seems to be that PAA is closest to joining the party. Also notable, analysts pressed management for details on DPM’s small Chesapeake export terminal project to export butane from the Marcellus Shale.
The investment community is eager to identify future potential beneficiaries from exports of abundant U.S. resources, and with good reason. Firms that have the ability to provide export outlets today produced strong results in 2Q (EPD, NGLS, OILT and SXL all handily beat expectations). Further conflict in Iraq escalated over the weekend. Increased geopolitical conflict could potentially provide cover for approving further condensate exports under the rationale of providing secure supply to the global market. Worth monitoring, but likely something for the next administration to tackle.
There are a few final earnings announcements to come next week. Beyond earnings, and potentially an overnight offering or two between now and the end of the month, I expect the news flow to slow substantially by the end of this coming week. The IPO window is closed until after Labor Day, but it should be a very crowded capital markets calendar in the Fall.
Winners & Losers
LGP was the runaway winner this week after it announced the latest transformative M&A transaction in the MLP space. Read about the transaction below, but it was a combination of the ETP/SUSS deal and the DVN/XTEX deal that dramatically changed the expected growth profile of LGP. IPO HMLP was the second best performer for the week, which is consistent with last week when the 3 IPOs led the MLP sector’s returns. DKL popped 11% after posting results that blew away expectations and that included 2.0x quarterly coverage. HCLP and ENBL round out the top 5.
HCLP went from bottom 5 last week to top 5 this week. GLOP and BKEP went the other way, from the top 5 to the bottom 5.
For the year to date, BWP has caught and passed EROC, which means we have a new biggest losing MLP this week. MMLP joined the bottom 5 after its rough week. On the upside, GLOP dropped from 2nd to 5th, but the other top performers remained intact.
We had another successful MLP IPO launch this week, making it 10 MLP IPOs for 2014 so far. 9 out of those 10 closed their first day of trading up from IPO price. The one broken IPO of 2014 was coal producer Foresight Energy (FELP). Also, while MLPs didn’t get the cover of Barron’s this week, there were two articles relevant to MLP investors. One was the annual round table MLP discussion, which this year featured two research analysts (Michael Blum from Wells Fargo, Becca Followill from US Capital), one tax attorney (Tim Fenn, whose middle name might be MLP), and one buy side representative (Doug Rachlin of Neuberger Berman). The second article covered the topic of yieldco renewable spin offs from utilities, and how they were similar to MLPs.
- Hoegh LNG Partners (HMLP) priced initial public offering of 9.6mm common units at $20.00/unit, raising $192mm in gross proceeds (MarineLink.com)
- Priced at midpoint of filing range, or at 6.75% yield
- Opened at $22.00, traded as high as $22.40, before closing at $22.25 (+11.3% from pricing) on its first trading session
- HMLP’s initial assets consist of 50% interests in 2 vessels, and a 100% interest in a third vessel
- All 3 of the vessels are floating storage and regasification units operating under long-term charter agreements with average remaining contract life of approximately 17 years
- HMLP plans to grow via drop downs from its parent company, also named Hoegh LNG
- Energy Transfer (ETP) sold 1.2mm of its units of Amerigas (APU) for net proceeds of $55mm (buried in earnings press release)
- ETP sold $377mm worth (8.5mm units) in June
- SunCoke Energy (SXCP) files equity distribution agreement to sell up to $75mm worth of common units at the market (prospectus)
M&A / Growth
- Regency Energy (RGP) announces JV with American Energy – Midstream, LLC for construction and operation of RGP’s previously announced Utica Ohio River Project (press release)
- RGP and American Energy Utica, LLC (AEU) will enter into a gathering agreement for gas produced from the Utica
- RGP and AEU will contribute all previously signed agreements to the JV, including volume commitments and acreage dedications
- The project will be upsized to accommodate more than 2 bcf/d of firm volume commitments
- Total project costs expected to be $500mm, with RGP contributing 75%
- Lehigh Gas Partners (LGP) announces sale of GP interest and IDRs to CST Brands for $85mm (press release)
- CEO Joe Topper and other investors to retain subordinated and common units representing 44% L.P. interest in LGP
- Creates a sponsor-backed, growth-oriented MLP vehicle
- CST to pursue long-term drop down strategy of its US wholesale fuel supply business and newly constructed real estate into LGP
- Given the early stage nature of LGP and its IDR tiers, the multiple paid for the GP interest was more than 650x current annualized cash flow
- Allows CST to bypass IPO route and gain control of an existing MLP with some scale in place
- CST has 1900 locations throughout the Southwestern US and Eastern Canada
- LGP operates a wholesale distribution business and owns real estate used in the retail distribution of motor fuels (distributes fuel to more than 1,050 locations and owns/leases 625 sites in 16 states)
- Blueknight Energy (BKEP) announces plans to build $300mm crude pipeline linking East Texas resources to Oiltanking Houston (press release)
- 160-mile, 16-inch diameter pipeline backed by long-term shipper commitments, including an agreement with Vitol, which owns 50% of BKEP’s G.P. and an agreement with SEI Energy, LLC
- EnLink Midstream (ENLK) announces two new growth projects for $200mm+ (press release)
- ENLK to expand Bearkat System in West Texas by constructing a new natural gas processing plant, supported by Devon production, for $200mm
- ENLK to construct NGL pipeline extension from Existing Cajun-Sibon system in South Louisiana in a JV with Marathon Petroleum
- With earnings, DCP Midstream (DPM) announced $160mm of smaller organic growth projects (press release)
- Sand Hills pipeline lateral lines extending DPM’s footprint into new areas of the Permian
- Eagle Ford condensate handling, expanding capabilities at two Eagle Ford plants
- Marysville liquids handling
- Chesapeake terminal upgrade for butane exports
- Linn Energy (LINE) announces $340mm acquisition (press release)
- LINE to acquire assets in the Hugoton Basin from Pioneer Resources
- Details of assets acquired:
- 40 MMcfe/d current production, 60% natural gas
- 6% decline curve, 23 year reserve life
- 340 bcfe of reserves (95% PDP), 235,000 net acres, all held by production
- 51% operating interest in the Satanta natural gas processing plant with 240 mmcfe/d of capacity
- To be partially funded by sale of undeveloped acreage in the Anadarko Basin for $90mm
- Vanguard Natural Resources (VNR) announces $278mm acquisition (press release)
- VNR to acquire assets in North Louisiana and East Texas for $278mm from Hunt Oil
- Details of assets acquired:
- 23,000 net acres, currently producing 17.5 MMcfe/d (67% natural gas)
- Estimated reserve life of 23 years, based on reserves of 150 bcfe, which are 57% proved developed
- Mid-Con Energy (MCEP) announces $19.4mm acquisition of Waterflood reserves in the Gulf Coast region (press release)
- MCEP to acquire oil properties with 658,000 barrels of reserves
- Properties are currently producing 154 bbls/d, with annual decline rates of 8% for the next 3 years