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April 10, 2016

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Week Thoughts: MLP Melt-Up Continues

MLPs made it two straight positive weeks with a 1.9% gain.  This time MLPs de-coupled from the broader stock market and re-coupled with oil.  Oil prices are the headline, rallying 6%+ on Friday alone.  But NGL prices had a strong week as well, particularly ethane which is up year-over-year even as everything else is down big (its only $0.02/gallon, but still).
Weekly Review_4-8-16
MLPs have now traded up in 7 of the last 9 weeks since hitting rock bottom in early February. Despite the 32% bounce off the bottom, MLPs are still down 5% overall this year, including distributions.  The down weeks have been bigger than the up weeks, which is keeping a lid on investor enthusiasm a bit, especially ahead of earnings season that will showcase still challenging conditions for volumes and commodity prices.
Less enthusiasm is probably healthy for the sector right now.  MLPs staying under pressure is necessary to have a hope of real structural changes to the way the sector has heretofore operated.
I thought we were done with the 30s?
Oil prices are about as fickle as the weather these days.  Back in early March, there was a week straight of 70-degree plus days in Philadelphia.  By the end of that week around my house, all the winter clothes were packed away, stacks of mulch bags materialized in the backyard, and the lawnmower was being prepped for action.  Then today (in the second week of April!), we have lows below 30 degrees and a blizzard that dumped several inches of snow.  We’ve had to scramble to pull the winter gear back out while those bags of mulch remain untouched.
Oil prices broke $40/bbl a few weeks back.  The market seemed to be warming up, but once the short covering dried up, familiar questions about oil fundamentals returned and oil was back in the mid-$30s again.  Was this latest trip down to the mid-$30s the final cold snap of this long winter for oil prices?  Maybe so.
My backyard looks bleak right now, and there may be another snow storm somehow before its all over, but we can all agree that at some point by the middle of the summer, I will be able to spread this mulch while comfortably wearing a t-shirt.  Most people probably have similar thoughts with regard to an eventual recovery in oil prices.  The problem is most people probably had similar thoughts this time last year.
Poll Question
Earnings season is fast approaching.  MLP correlation with oil prices remains very high, so MLP investors remain in the awkward position of rooting for macro production declines and hoping it doesn’t translate into volume declines on the micro MLP level.  This week’s question tries to get a sense of whether MLP investors are ready to look through bad results if commodity prices point towards an eventual recovery in U.S. production.
Sorry, there are no polls available at the moment.
Winners & Losers
RRMS and SDLP went from worst to first this week on the oil rebound and fickle extreme daily volatility.  WPZ made it two straight weeks in the top 5 with another 10% gain.  CEQP didn’t repeat last week’s rally despite a positive resolution with Bluestone Energy, probably due to the lack of details and clarity on distribution strategy.  The bottom 5 included 3 high multiple MLPs in CPPL, PSXP and AM.  If commodity prices continue higher, expect further rotation out of insulated MLPs that have held on to high multiples over the last 18 months.
On a year to date basis, NGL climbed a few notches within the bottom 5, helped by the sale of TLP units.  MPLX joined the bottom 5 despite a positive week.  Not much change among the top 5.
General Partner Holding Companies
General partners outperformed MLPs, as is typically the case in a commodity-led positive week.  ETE looked to benefit from speculation that the merger may not be on firm footing, given WMB’s initiation of litigation.  Unwinding of whatever merger arb traders were still involved with the merger may have helped ETE spoke 17%, without a corresponding rally for WMB.  The cleanest GP stories with the most stable MLP subsidiaries, TEGP and EQGP, went from first to worst among GPs this week on no news.  Thin floats for each tends to exagerrate selling pressure of any kind.
News of the (MLP) World
Capital markets continue to show signs of healing, with the help of creative alternatives. Spectra’s “Human Centipede” and NGL’s final divestiture of its TLP stake combined to raise more than $600mm without tapping the traditional retail MLP investor base.  Debt capital markets deals were executed.  Also, the market sidestepped a potential negative contract rejection headline from the new Quicksilver owners.  Finally, WMB put their foot down on recent ETE behavior, and the market seemed to take that as a good sign.  So, it was a busy week, but news was positive overall.

  • NGL Energy (NGL) announced sale of its remaining L.P. interest in Transmontaigne (TLP), a total of 3.2mm units, to ArcLight for $35.49/unit, raising $112.4mm in gross proceeds (filing)
    • ArcLight owns the general partner of TLP, purchased earlier this year from NGL
    • Back when NGL was still holding quarterly conference calls, NGL CEO stated he was not interested in selling the TLP units at $30/unit, but at a higher price he would be interested, so as TLP traded up, the sale made more sense
  • Spectra Energy (SE) priced public offering of 14mm shares at $30.00/share, raising $420mm in gross proceeds (press release)
    • Bought deal, priced at 0.96% discount to prior closing price
    • Proceeds were used to fund a private placement of 9.1mm new units of Spectra Energy Partners (SEP) at $45.96/unit (2% discount to prior closing price), resulting in $418.2mm in gross proceeds for SEP to be used to fund capital expenditures (press release)
    • SE disclosed that it has raised $383mm in equity on their ATM program so far this year, SEP has raised $82mm
  • Sunoco LP (SUN) priced offering of $800mm worth of 6.25% senior notes due 2021 at par (press release)
    • Upsized from original $500mm offering
    • Proceeds will be used to repay credit facility borrowings incurred to purchase assets from Energy Transfer
  • EPD priced private placement of $1.25bn worth of senior notes (press release), including:
    • $575mm 2.85% notes due 2021 at 99.898%
    • $575mm 3.95% notes due 2027 at 99.760%
    • $100mm 4.9% notes due 2046 at 95.516%
    • Proceeds to be used to cover maturities and repay other borrowings
  • Enterprise Products (EPD) reported sale of 66.8mm in common units through its at-the-market (ATM) program in 1Q for gross proceeds of $1.58bn (filing)
    • Issuance in 1Q was nearly double what EPD issued on its ATM throughout all of 2015 ($825mm)
    • The $1.6bn of issuance included $200mm issued to privately held affiliated entity EPCO, Inc.

M&A / Growth

  • Plains All America (PAA) announced the acquisition of Canadian NGL business from Spectra Energy (SE) for $150mm, and provided update on asset sales (press release)
    • PAA will acquire the Empress NGL extraction and fractionation facility, the PTC transmission pipeline, 7 NGL terminals and 2 NGL storage facilities in Western Canada
    • PAA now expects asset sales in 2016 of $500-600mm, up from guidance in January of $200-400mm following completion of $250mm of asset sales year-to-date
  • Magellan Midstream (MMP) and Transmontaigne (TLP) announced joint efforts to evaluate potential refined products pipeline development in South Texas (press release)
    • Potential to construct 150-mile, 16-inch pipeline with 150,000 bbls/d of initial capacity to transport refined products from MMP’s Corpus Christi terminal to TLP’s Brownsville terminal to meet market demand in Brownsville and other South Texas markets or for delivery into Mexico
    • Subject to permitting and approvals, the pipeline could be in-service by the end of 2018


  • Williams (WMB) announced litigation against Energy Transfer Equity (ETE) and Kelcy Warren (press release)
    • Lawsuit is in response to the private offering of Series A Convertible Preferred Units that ETE disclosed in March
    • Lawsuit seeks to unwind that private offering
    • WMB remains committed to the merger with ETE, and expects the merger to close in 2Q 2016, which seems increasingly unlikely
    • The WSJ published an account of the latest developments in the ongoing saga with a couple of quotes from me (read here)
  • Crestwood Equity (CEQP) announced new 10-year commercial agreement with BlueStone Energy in the Barnett Shale (press release)
    • CEQP also announced Quicksilver Resources has withdrawn its motion to reject CEQP’s gathering contracts in the Barnett Shale
    • The new agreement calls for a combination of fixed-fee and percent of proceeds fee structure
    • BlueStone has agreed to return currently shut-in wells to production by 7/1/16 and to not shut-in or choke back production for economic purposes through the end of 2018
    • The negotiated agreement avoids a potential negative ruling by the bankruptcy court and removes one potential negative headline risk that was looming for the whole midstream sector
  • PAA and PAGP announced flat distributions
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