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October 19, 2014

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Week Thoughts: MLP Indiscrimination

After last week’s slaughter, MLPs dropped further to start the week, but snapped back Wednesday and Thursday.  MLPs were flat Friday and finished up 2.0% overall this week, well ahead of the S&P 500 and utilities.  The turnaround mid-week was extraordinary, reminiscent of a few years ago during the debt ceiling issue or during the global financial crisis.
Weekly MLP Review_10-17
After the snap back and a calm Friday, it’s tempting to say MLPs are back on their upward sloping track, but volatility like we saw the last few weeks created some big losers and some big winners, which may lead to more choppy MLP trading as we head into seasonal weakness from ex-dates in November and potential tax loss selling in December.
Year to date the equal weight index (+2.8%) has significantly underperformed the market cap-weighted Alerian MLP Index (+7.2%), which is probably the result of weakness in upstream MLPs and KMP/EPB outperformance since August related to their buyout.  All the MLP indices are ahead of the S&P 500 for the week, and for the year so far, and they are all under-performing the UTY utility index (+12.7%).
The interest rate on the US 10-year dropped 8 bps this week and finished Friday at 2.20%, but at one point Wednesday it dipped below 2% for the first time since June 2013, even with the end of QE looming.  Rates were going in the other direction around this time last year, and finished the year above 3%, but so far global (and European in particular) growth has pushed money into US bonds and sent rates lower this year.  WTI crude oil futures dipped below $80 this week, but seemed to find a bottom and ended the week back above $83/bbl.  Larger than expected natural gas inventory injections, along with general commodity malaise, helped to push natural gas and lighter NGLs down this week as well.
Recent Sector Volatility
It was indiscriminate selling on Monday and Tuesday, and indiscriminate buying Wednesday and Thursday.  Driving some of that action was probably some forced unwinding of total return swaps and hedge funds needing to get out at any price.  Also contributing were negative fund flows out of open-end funds, which saw 4 straight days of negative outflows, ending Tuesday.  To fund redemptions, open-end funds have to sell whatever they can the day after the redemptions come through.
MLPs declined 5.0% on Monday, which was the 15th worst single day decline ever for the MLP index.  It was the worst day in an 8 day streak that saw the index decline 13.0%, making it one of the worst streaks we have seen in MLP land in terms of the number of consecutive down days and the depth of the selloff.  The good news is that MLPs have been extremely resilient after corrections in years past.
Speaking of resilient: out of the 4734 trading days of data we have on the Alerian MLP Index, there have only been 17 days of 4%+ performance.  This week, two such days happened back-to-back.  The list of all such days is in the below table.  Two other times the MLP Index was up 4%+ on back-to-back days, both in October of 2008.  Each of those times the index was down on the third day.  This week, day three was slightly positive.
4 Percent Moves Chart
Below is a chart of the last 30 days of the Alerian MLP Index (click to enlarge).  There are some stock specific charts that look much wilder, but this one is pretty wild for a whole sector.  As shown below, the Index is down 7.5% in the last 30 days, including some substantial downdrafts and spikes along the way.
Alerian Last 30 Days
Below is a chart of the Alerian MLP Index year to date.  MLPs started an uptrend in late March, which faded in late July up until the announcement of the KMI/KMP/KMR/EPB deal that sent MLPs up to new all-time highs at the end of August, and it corrected from there.  The bottom appears to be in, but a ways to go (another 8.4%) before we get back up the levels of late August.
Alerian YTD Chart
Winners & Losers
Dominion Midstream was up 32.5% over its first 3 days of trading, and was by far the best performing MLP this week.  Other small-cap, services and upstream MLPs CELP, HCLP and EROC made the top 5 as part of the bounce back in those subsectors.  Recent IPO VTTI rebounded 14.2% this week, and is actually the best performing MLP in the sector since the end of September (+3.9%), not counting DM.  On the downside, recent IPOs JPEP and HMLP performed the worst this week.
Top5Bottom5_10-17-14
Top5Bottom5_10-17-14_chart
For the year so far, SUSP returns to the top 5 this week.  On the downside, JPEP is already down 21.5% since its October 1 IPO and is now 4th worst for the year.  MCEP joins the bottom 5 for the first time this year, while VNR and CMLP moved out of the bottom 5.
Top5Bottom5_10-17-14_YTD
Top5Bottom5_10-17-14_YTD_chart
News of the (MLP) World
The capital markets story of the week was DM’s ability to price its IPO at the high end of the range and the strong after-market trading it saw.  No MLP IPO has ever priced in an environment as bad as the market environment faced this week.  During the financial crisis, there were no MLP IPOs from May 2008 until April 2010.  I don’t want to overstate its impact, but the DM IPO seemed to reassure the market of the demand from institutions for high-growth MLP IPOs.  The resilience of this offering will keep the IPO pipeline going (at least for name brand, high growth MLPs) for those in the queue like Shell Midstream, Antero Midstream and Hess Midstream.
The M&A story of the week was Targa announcing the acquisition of Atlas (ex-upstream).  Over the summer, Targa played the role of the target when ETE was in discussions to buy it.  This time, Targa plays consolidator.  Targa gets assets that fit with its current footprint, highlighted by APL’s strong footprint and processing plant pipeline in the Permian basin.  MLPs continue to find value in buying other MLPs, which should continue, and speculation on who might be next should continue as well.
News-of-the-World
Equity

  • Dominion Midstream (DM) prices IPO at $21.00/unit, raising $367.5mm in gross proceeds (press release)
    • IPO yield of 3.33%, lowest ever for an MLP (besting VLP and PSXP, which both priced at 3.70%)
    • DM opened its first trading day Wednesday at $22.50, and closed at $26.41 (+25.8%)
  • Memorial Production (MEMP) files S-3 to sell up to $250mm worth of common units (filing)
  • Ocean Rig Partners LP (ORLP) files initial prospectus for an MLP IPO to raise up to $305mm (filing)
  • Vanguard Natural Resources (VNR) announces $10mm common unit buyback program (press release)
    • Buybacks are very rare in the MLP space, but do happen from time to time (NRGY and ETE come to mind as other that have employed buybacks in the past)
    • The buyback was announced in a press release that touted VNR’s commodity price hedging program, distribution coverage sensitivities and other points to defend its unit price after it fell 24% over 30 days

M&A / Growth Projects

  • Targa Resources Partners (NGLS) announces acquisition of Atlas Pipeline (APL), Targa Resources Corp (TRGP) announces acquisition of Atlas Energy, L.P. (ATLS), after ATLS spins out upstream MLP interests (press release)
    • APL to be acquired in a unit-for-unit exchange, plus assumption of debt, for total value of $5.8bn
    • ATLS to be acquired for stock and cash, following spin-off of holdings not associated with APL. Transaction value of $1.9bn.
    • TRGP expects 35% dividend growth in 2015, NGLS expects 11-13% distribution growth in 2015, both up from current annual growth pace
  • American Midstream (AMID) announces acquisition of Costar Midstream for $470mm (press release)
    • Costar Midstream, a portfolio company of private equity firm Energy Spectrum, is an onshore gathering & processing company
    • Acquisition funded with 6.9mm AMID units and $272mm in cash
    • AMID calculates the EBITDA multiple for the acquisition to be 10.5x ($44.8mm implied EBITDA)
    • AMID expects to spend $70mm to $80mm over the next 12-18 months to complete growth projects that will drive the all-in multiple of the acquired assets down to 8.0x
    • AMID expects to be able to raise its quarterly distribution 3-5% for 1Q 2015, and 8-10% annually thereafter
  • Kinder Morgan Energy (KMP) announces $240mm expansion at Pasadena and Galena Park terminals (press release)
    • Includes construction of 2.1mm barrels of storage between the two terminals, and a new ship dock capable of handling ocean going vessels
  • Sunoco Logistics (SXL) announces binding open season for Delaware Basin Extension project (press release)
  • Mid-Con Energy (MCEP) announces $120mm acquisition (press release)
  • Westmoreland Coal announces acquisition of the GP of Oxofrd Resource Partners (OXF), announces asset contributions and restructuring transactions (press release)
    • GP interest and subordinated units and warrants of OXF acquired for $30mm
    • OXF to change its name to Westmoreland LP
    • Westmoreland intends to contribute assets to OXF after a series of restructuring transactions that include a 12-1 reverse split of common units, a reset of the minimum quarterly distribution and IDR tiers, and the reinstating of a $0.20/unit quarterly distribution (post reverse split)
  • NuStar Energy (NS) announced a JV agreement with a Pemex subsidiary (PMI) to develop pipeline infrastructure to transport propane and refined products from the Gulf Coast US into northern Mexico (press release)

Other

  • FISH (+1.4%), HCLP (+8.7%), KNOP (+12.9%), OILT (+4.8%), OCIR (+5.0%), KMI (+2.3%), KMP (+0.7%) all announced distribution increases
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