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April 2, 2017

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Week Thoughts: MLP Comfort Zone

MLPs caught some positive oil correlation this week, bouncing back 2.1%.  MLPs finished the week/month/quarter strong with a 1.4% gain Friday.  MLPs beat the S&P 500 and utilities for the week.
There’s a sappy quote I came across on the internet about comfort zone from an unknown source: “A comfort zone is a beautiful place, but nothing ever grows there”.  I guess its supposed to inspire you to get uncomfortable and challenge yourself.
MLPs have been challenged the last few years, but the environment for MLPs is something of a comfort zone right now, and it feels like MLPs can grow in this zone.  U.S. oil and gas production is certainly poised to grow.  Interest rates are still low, oil is above $50/bbl, natural gas is above $3.00/mmbtu, and MLPs have underperformed the market this year.  Also, one consistent message from the Trump administration is a pro-energy stance, with another executive order to that effect this week.  If the fundamental and regulatory environment stabilizes and remains comfortable, more investment dollars may join MLPs in the comfort zone.
Poll Recap
Last week’s poll was about MLP-specific catalysts, and whether you thought it possible for a specific catalyst to spark broad interest in MLPs.  The overwhelming response (72%) was that no such catalyst was going to drive interest with oil prices below $50/bbl.
But here we are just a week later, and oil is back in the green zone above $50.  KMI JV or IPO of Trans Mountain received some votes (14%), which is what I expected.  It was interesting to see “ENB/EEP/SEP strategic update” get 10% of the vote.
The caveat to the question was the part where the catalyst was positive relative to expectations, over the next few quarters, it will be interesting to see how the hit rate end up playing out.
Status Update: March
It was close, but MLPs finished March negative, down 1.3%.  That broke a 4 month positive streak.  The quarter was positive, making it 4 straight quarters of positive returns for the MLP Index off the bottom.
Looking ahead, the MLP Index has had positive returns in each of the last 12 Aprils, including 11% last year.  12 years is by far the longest streak of any month, in fact the only active streak (no other month has been positive for the last two years consecutively).  So, maybe April is due for a negative month.
Winners & Losers
The CONSOL family of MLPs don’t get too much attention, but this week they were both up double digits, maybe because sponsor CONSOL had a good week (+6.8%).  On the downside, AM’s general partner filing for an IPO weighed on AM, but none of the others in the bottom 5 had news.
CCLP and CELP both rebounded after last week’s weakness as small cap, higher beta names continue to get whipped around with directional moves in commodities and sentiment.
YTD Leaderboard
Turning to YTD numbers, every one of the bottom 5 last week were up this week.  On the upside, NBLX and OKS pushed higher, and WNRL joined the top 5.
General Partners and Midstream Corporations
Median returns among GPs and midstream corporations outperformed the MLP Index this week, with SEMG leading the way.  PAGP was the outlier on the downside, but PAGP was a strong relative performer in the recent oil price correction.
SEMG and ENLC went from worst last week to first this week.
News of the (MLP) World
The MLP and GP IPO machines are back online.  What looked like bad timing on Monday when HESM launched the IPO may turn out to be very good timing now that oil price sentiment seems to have turned positive again.
Capital Markets

  • Hess Midstream (HESM) launched IPO of 12.5mm units at midpoint price of $20.00/unit (6.0% IPO yield), for gross proceeds of $250mm at the midpoint (filing)
    • IPO represents 22.5% LP interest
    • Hess Corporation and Global Infrastructure Partners II will each own 50% of the remaining LP interest, GP and IDRs
    • HESM will have standard IDR structure and tiers
    • HESM assets consist of interests in entities that own Bakken midstream assets, and 4x the initial assets available for drop-down
  • Energy Transfer (ETE) invested $300mm in Sunoco LP (SUN) through preferred equity private placement (press release)
    • Initial distribution rate of 10% per annum, based on $25 liquidation preference to ETE, will change to an annual floating rate equal to 3-month LIBOR plus 8.0% after 5 years
    • SUN has the option to redeem the units for 5 years after the issue date at 101% of the liquidation preference plus any accrued quarterly distributions
    • SUN will use the proceeds to repay debt on its revolving credit facility
  • Antero Midstream GP (AMGP) filed initial registration statement for IPO of up to $100mm (filing)
    • AMGP will be structured as a partnership, but elected to be taxed as a corporation (TEGP structure, not EQGP or WGP structure)
    • AMGP owns the GP of Antero Midstream (AM) and will receive at least 94% of AM’s IDRs
  • Enbridge Income Fund (ENF) priced public offering of 15.1mm shares at C$33.15/share, raising C$500mm for sponsor ENB (press release)
    • Overnight offering, priced at 3.9% discount, and traded up 0.5% from pricing in the following session
    • ENB counted the sale of ENF shares as a non-core asset sale
    • Still no update on plans for EEP…or SEP or DCP for that matter
  • Williams Partners’ (WPZ) subsidiary, Northwest Pipeline, priced $250mm of 4.00% senior notes due 2027 at 99.641% (press release)

Growth Projects / M&A

  • Cheniere Energy (CQP) announced substantial completion of Train 3 of the Sabine Pass liquefaction project (press release)
    • The first commercial delivery is expected to occur in June 2017, upon which the 20-year sale and purchase agreement with Korea Gas Corporation will begin
  • Buckeye Partners (BPL) announced binding open season for a long-haul Permian-to-Corpus Christi pipeline and further development of its South Texas distribution capabilities (press release)
    • The pipeline, South Texas Gateway, is part of a series of potential investment projects BPL is pursuing in order to significantly enhance Permian Basin crude oil flows
      • Expected to have total capacity of up to 400k bpd with multiple segregations
      • Binding open season during 3Q 2017 with the expectation that it will be in service in 2019
    • BPL also announced Corpus Christi projects to expand existing capabilities and create new connectivity
  • Energy Transfer (ETP) announced binding supplemental open season for Dakota Access and Energy Transfer Crude Oil Company (press release)
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