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October 28, 2013

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Week Thoughts: MLP Buddy System

The MLP Index surged 2.5% this week on expectations of continued easy money from the Fed and on excitement around continued MLP consolidation from the huge announcement that Devon and XTXI / XTEX will be joining forces.  The S&P 500 was up just 0.9%, but hit a fresh all tiem high and has well outperformed the MLP Index on a year over year basis (not including dividends / distributions).Josh Brown wrote a funny piece at his blog on the state of current market psychology and where we are in the general market euphoria lifecycle (link).  I recommend reading it as a little heat check.  Oil was down 2.9%, dropping well below $100/bbls, while natural gas is still bouncing around in the $3.70-$3.80 range.
Weekly Chart AMZ_10-25
Just in the last 3 weeks, we’ve seen 3 MLP consolidation transactions announced (RGP/PVR, PAA/PNG, DVN/XTEX), and we’ve seen several others already this year (CMLP / NRGM, KMP / CPNO, Alinda / MMLP).  But, the latest one featuring XTEX and the $26bn+ market cap DVN was the first one that seemed to lift the sector as a whole in the days following its announcement.  There is an element of the “buddy system” that you may have used in the army (“battle buddies”), in the cub scouts or during free swim at a summer camp.  MLPs that may not be the best swimmers or fighters (or whatever analogy you like) find it useful to buddy up with stronger financial backers.  CPNO, NRGM, MMLP, PVR and XTEX have all found their bigger, stronger buddies.
Buddy System
The XTEX transaction is a shortcut for DVN to skip the IPO process and jump right in with an existing MLP with an attractive backlog of projects that could be financed more attractively with a cheaper cost of capital that DVN can provide.  Its a very smart move that you don’t see very often by those considering forming an MLP.  The combined DVN/XTEX MLP (to be re-named, how about DevTex Midstream?) will be modeled on the successful midstream subsidiaries of other large upstream corporations, such as Western Gas (WES) and EQT Midstream (EQM).  The model is for the midstream subsidiary to have access to drop downs, but also for the upstream parent to continuously develop fresh drop down inventory through midstream assets built around their expanded drilling operations, which are in turn funded by the drop down sales and IDR payments.
The deal is great for XTEX because they get assets today at an accretive price, a big backer with a suite of drop downs and growth projects, and a cheaper cost of capital that will enhance its competitiveness.  For XTXI, its a home run.  As is often the case, owning the GP was better than owning the MLP for this week at least.  XTXI closed the week 50% higher than last week.  The deal didn’t come totally out of the blue.  I speculated in my XTEX reports following the NRGM / CMLP announcement earlier this year that XTEX might be bought soon, as one of the few independent midstream MLPs left with less than $5.0bn in enterprise value, unless you start looking at very recent IPOs.
The market seemed to be speculating that perhaps because NSH / NS is the closest structural comp to XTXI / XTEX that it might be next (both are independent MLPs GPs with subsidiary MLPs that have languished in recent years despite owning midstream portfolios with some very attractive assets, and some not so attractive).  NSH and NS were both up more than 11% this week.  I don’t think NS gets consolidated by some other MLP or corporation next, but the potential target list continues to shrink.  Other potential buyout candidate that folks mentioned here just a few weeks ago was TLP.  Other logical candidates as they mature would be those MLPs with private equity GPs, like Summit Midstream (SMLP) or NGL Energy (NGL).  If this year is any indication, the MLPs that have been struggling are the best candidates.  Perhaps EROC figures out a way to sell at least half its business and make NGP happy simultaneously.  EROC would be my bet for next up. Regardless of who is next, there is real money out there placing bets on who will be next and its lifted the sector as a whole this week…
Weekly AMZ_10-25
However, in the last 3 months, MLPs have lagged the S&P 500, which has reached new heights on persistently goldilocks situation of U.S. economic expansion, balanced by political gridlock that threatens to slow that expansion, which keeps the easy money flowing from the Fed…
3M AMZ_10-25
Winners & Losers
XTEX was the clear winner this week, up 28.1%.  XTXI, not picture below, was up 50% on the Devon Midstream / Crosstex announcement.  EROC did well Monday and Tuesday, but fell back to earth as the week continued, which may imply that my guess above regarding EROC getting bought is not held by many other MLP speculators.


Year to date, XTEX jumped up into the top 5 list this week, up 86% since 12/31.  Despite leading the losers this week, PSE maintains its overall lead for the year, followed closely by HCLP.  


News of the MLP World


Outside of the big M&A announcement, a few other press releases were published this week.  The record-breaking 15th MLP IPO of 2013 quietly priced on Thursday below the range.  Additionally, another company filed for an MLP IPO, CMLP priced debt and equity deals, and Berry disclosed information in its 10-Q that is being interpreted as a negative for the likelihood of the LNCO / LINE / BRY merger.  There were also several earnings releases, highlighted by EQM’s better than expected results, as well as a boat load of distribution announcements.  And Bluegrass moves ahead with an open season to for customer committments.

Below is a chart of the MLP IPOs of the last 10 years.  The old record for MLPs was set in 2007, but 2006 was the most active if you total MLP and MLP GP IPOs (18).  2013 has now produced the most ever MLP IPOs, and 16 IPOs total.  Due to the very active 4Q 2012 of MLP IPOs, there have been more than 20 MLP IPOs in the last 12 months, perhaps the most active 12 months in the history of the MLP sector.  4Q is typically very active, and given the backlog of MLPs filed and shadow-filed, conceivably we could have another 5 MLP IPOs and break 20.

MLP IPOs by Year


  • American Petroleum Tankers Partners (JAT) MLP IPO filing (S-1 filing)
    • Jones act MLP that operates tankers that transport refined products and crude oil in the U.S. domestic trade
    • Initial fleet of 5 tankers with an average of 3.7 years
    • Backed by Blacstone, GSO and Cerberus that will offer additional tankers to JAT in the future
    • Traditionally structured MLP with IDRs
  • CMLP prices 14.0mm unit public offering at $21.19/unit, raising $296.7mm in gross proceeds (press release)
    • Proceeds to help fund the acquisition of Arrow Midstream
    • Multi-day marketing period, with a file-to-price decline of 5.2%
  • Sprague Resources LP (SRLP) prices IPO of 8.5mm common units at $18.00/unit, raising $153mm in gross proceeds at an IPO yield of 9.17%
    • Closed first day of trading down 1.4% to $17.75/unit


  • CMLP prices private placement of $600mm of 6.125% senior notes due 2022 (press release)
    • Upsized from $500mm initial offering size

M&A / Growth

  • DVN and XTXI / XTEX to form midstream MLP (press release)
    • DVN cancels MLP spin off plans, instead contributes assets valued at $4.8bn
    • DVN will contribute its equity interest in newly-formed subsidiary Devon Holdings and $100mm in cash
    • Devon Holdings will own DVN’s midstream assets in the Barnett Shale in North Texas, the Cana and Arkoma Woodford Shales in Oklahoma and DVN’s interest in Gulf Coast Fractinators in Mr. Belvieu
    • The MLP and the GP will each own 50% of Devon Holdings
  • PAA / PNG announce merger agreement, after PAA made public their proposal to purchase all PNG units in a 8/27 press release (new press release)
    • PNG public unitholders to receive 0.445 common units of PAA for each PNG unit, up from 0.435 in its previous offer
  • Berry disclosure sparks renewed deal fears for LINE / LNCO
    • Either party can walk away from the transaction if no deal is reached by 10/31, unless the deadline is extended

Distribution Increases This Week

  • ETE: $0.6725, +2.7%
  • ETP: $0.905, +1.3%
  • LGCY: $0.585, +0.9%
  • SXCP: $0.4325, +2.4%
  • MPLX: $0.2975, +4.4%
  • EQM: $0.43, +7.5%
  • TRGP: $0.57, +7.0%
  • NGLS: $0.7325, +2.4%
  • GSJK: $0.43, +1.2%
  • NSLP: $0.575, +4.5%
  • GLP: $0.60, +2.1%
  • SXL: $0.63, +5.0%
  • MEMP: $0.55
  • MMP: $0.5575, +4.7%
  • RGP: $0.47, +1.1%
  • MWE: $0.85, +1.2%
  • OKS: $0.725, +0.7%
  • OILT: $0.445, +4.7%
  • CEQP: $0.135, +3.8%
  • CMLP: $0.405, +1.3%
  • MMLP: $0.7825, +0.3%
  • USAC: $0.46, +0.4.6%
  • TLLP: $0.545, +6.9%
  • RRMS: $0.45, +2.3%
  • SMLP: $0.46, +5.7%
  • NGL: $0.51125, +3.5%
  • KNOP: $0.435, +16.0%
  • WPZ: $0.8775, +1.7%
  • DPM: $0.72, +1.4%
  • HEP: $0.4925, +1.5%
  • AMID: $0.4525, +4.6%
  • SDLP: $0.4275, +2.4%
  • BKEP: $0.1225, +2.1%
  • GMLP: $0.5225, +1.5%

Flat Distributions Announced this Week

  • RNO ($0.445), CPLP ($0.2325), CLMT ($0.685), STON ($0.60), CQP ($0.425), PSXP ($0.1548, equivalent to MQD), APU ($0.84), NRP ($0.55), SPH ($0.875), PVR ($0.55), VNR ($0.2075/month), MCEP ($0.515), QEPM ($0.13, equivalent to MQD), WPT ($0.1565, equivalent to MQD), PSE ($0.52), QRE ($0.4875), SXE ($0.40), TCP ($0.81), NMM ($0.4425)

Variable Distributions Announced this Week

  • RNF: $0.27, down 68% from $0.85 last quarter
  • PDH: $0.45, +50% from prior quarter
  • EMES: $0.86, +23% from prior quarter


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