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November 16, 2014

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Week Thoughts: MLP Neutrality

MLPs finished the week down 0.6%, saved from a worse print by a 1.3% positive move on Friday.  The equal weight MLP index lagged the cap-weighted version by 80 basis points, continuing the trend discussed here last week.  The MLP index remains 5.7% below its peak at the end of August, but 11.2% higher than its mid-October low.
But again, oil’s slippery slide was the big story.  The U.S. benchmark oil futures price was down another 3.5% this week, with futures closing the week just under $76.00/bbl, around 23% lower than the spot price at the end of 2013.  Natural gas gave back its gains from last week, and dragged ethane down with it, both were down more than 7%.  MLPs held up pretty well given oil’s continued decline, but they are stuck in neutral post-earnings.  The Energy Transfer family of MLPs is holding its highly-anticipated analyst day this week, which may provide some catalysts to get MLPs back in gear.
Weekly MLP Review_11-14
MLPs, Oil and Interest Rates
At the request of a reader, below is a 10 year chart of the MLP Index compared with the price of oil and the interest rate on 10-yr US treasuries.  Not sure there is much to glean from the chart below, particularly given how different the MLP sector is today as compared with even just a few years ago.  Over the long term, MLPs have been fairly consistently higher as interest rates bounced around and oil stagnated after an initial bounce coming out of the financial crisis.
MLPs Crude Interest Rates
Below is a chart that illustrates just how much the sector has changed.  It’s a histogram of the 121 MLPs based on how old they are.  While about 77% of the sector’s market cap is 5+ years old and the cap-weighted average age of all MLPs is 11.4 years, the median age of all MLPs is 3.6 years.  66 MLPs, more than half of the sector, has been public less than 5 years.  Growth rates of those newer MLPs are much higher and with all the drop downs, those newer MLPs will grow much larger in the coming years as the sector continues to evolve.
Winners & Losers
QEPM reversed its recent downtrend this week and led all MLPs higher.  QEPM’s strong week was likely a read through from the slightly better deal EPD gave to OILT when the final merger terms were announced this week.  TLLP already announced their intention to take out the remaining units of QEPM at some point following the close of the acquisition of QEPM’s general partner.  If OILT and ACMP got improved deals on their mergers, perhaps QEPM investors will get a reasonable premium when its special committee negotiates its merger.
Speaking of OILT, it made the top 5 this week as well, based on the aforementioned agreement to merger terms with EPD.  TCP also had a strong week on the back of its GTN drop down announcement (see news section below).
On the downside, IPOs GLOP and RIGP, both 2014 IPOs with drop down stories and foreign parent companies, both made the list.  This comes on a week when fellow 2014 IPO Abengoa Yield, a yieldco with a drop down story and a foreign parent company, was down as much as 35.2% this week and closed 17% down week over week.  Questions about that company may have bled over into some of the foreign-backed MLPs.
DM took a break from the top five this week for the first time since its IPO.  RNO made it 4 straight weeks in the bottom 5, down another 11.8%.
Year to date, OILT popped back into the top 5 this week, displacing EQM.  QEPM clawed out of the bottom five, while NKA and RNO sunk deeper.  Both leaders (PSXP and TEP) dropped this week, but maintained their substantial leads over the rest of the sector.
News of the (MLP) World
No big M&A and a lot fewer earnings releases made this week feel downright peaceful.
Two more MLP IPOs did file initial registration statements this week (Smart Sand and Azure), bringing the total number of MLP IPOs on file to 13 (see table below for complete list), to go with 17 MLP IPOs so far this year (not counting Landmark Infrastructure, which falls in the non-energy MLP category.  One of those 17 MLP IPOs came this week, and it was not very well received, pricing at a near record yield, but in the wrong direction.
IPO Backlog_11-14

  • Mid-Con Energy (MCEP) priced public offering of 5.8mm units at $17.27/unit, raising $100.2mm in gross proceeds (press release)
    • Overnight offering, priced at 4.0% discount to prior close, and closed down 4.8% from pricing in the next session
  • Plains GP Holdings (PAGP) priced secondary offering of 60.0mm units at $25.00/unit, raising $1.5bn in gross proceeds for selling unitholder (press release)
    • Selling unitholder is a subsidiary of Occidental (NYSE: OXY)
    • 3 day marketed offering, with file-to-price decline of 7.4%
    • PAGP traded up 11.3% in the next session following pricing
    • Offering upsized from 55.0mm units
  • EnLink Midstream (ENLK) priced public offering of 10.5mm common units at $28.37/unit, raising $297.9mm in gross proceeds (press release)
    • Overnight offering, priced at 3.6% discount to prior close
  • Cheniere Energy Partners LP Holdings, LLC (CQH) priced public offering of 10.1mm shares at $23.25/share, raising $234.8mm in gross proceeds (press release)
    • Overnight offering, priced at 2.8% discount to prior close
  • Navios Maritime Midstream Partners (NAP) priced IPO of 8.1mm units at $15.00/unit (11.00% yield), raising $121.5mm in gross proceeds (filing)
    • NAP is a spinoff from Navios Maritime Acquisition (NYSE: NNA) that will own and operate crude oil tankers under long-term charter agreements
    • Priced well below the initial filing range
    • 0% yield was the worst for a non-variable distribution MLP in more than 2 years (since HCLP’s IPO in August 2014)
    • NAP opened at $13.20 and closed at $13.45, down 10.0% in its first session
  • Azure Midstream (AZUR) filed initial registration statement for MLP IPO to raise up to $175mm (filing)
    • AZUR will operate natural gas gathering and processing assets in North Louisiana and East Texas under long-term, fixed fee contracts with producers
    • Backed by PE-firms Energy Spectrum and Tenaska Capital Management
    • AZUR expects to have $37.0mm of EBITDA in 2015
  • Smart Sand Partners (SSLP) filed initial registration statement for MLP IPO to raise up to $100mm (filing)
    • SSLP produces Northern White frac sand from its sand mine and processing facility near Oakdale, Wisconsin
    • SSLP has contracted 96% of its production capacity under fixed price contracts with weighted average remaining contract life of 2.7 years
    • Has full IDRs up to 50% tier


  • Sunoco Logistics (SXL) priced $1.0bn worth of senior notes (press release)
    • $200mm of 4.25% senior notes due 2024 sold at 101.772% of par
    • $800mm of 5.35% senior notes due 2045 sold at 99.331% of par

M&A / Growth Projects

  • Enterprise Products (EPD) and Oiltanking Partners (OILT) announce merger agreement (press release)
    • OILT unitholders will receive 1.3 EPD units for each OILT unit
    • Ratio implies a 5.6% premium to OILT unitholders based on 9/30 stock prices, one day prior to announcement of the merger, and a 10.4% premium to OILT unitholders based on 11/10 price
  • White Cliffs Pipeline, LLC (owned by RRMS, PAA, WES and Noble Energy, Inc.) announced plans to expand capacity on the pipeline from 150,000 bbls/d to 215,000 bbls/d by adding horsepower, modifying pumps and adding stations (press release)
  • TC PipeLines (TCP) announced plans to acquire remaining 30% interest in GTN from parent TransCanada (press release)
    • Gas Transmission Northwest LLC (GTN) is a 1,353 mile pipeline that transports natural gas under long-term contracts from the Westrn Canada Sedimentary Basin and the Rocky Mountains to Oregon and California
    • TRP highlighted that it expects to drop down $1bn of worth of assets to TCP annually going forward

Hamm History

  • Harold Hamm’s divorce settlement was announced to be approximately $1.0bn (Forbes)
    • Hamm is worth around $14bn today, but before he became King of the Bakken (and the SCOOP), he was the chairman of an MLP that almost 10 years ago priced one of the smallest MLP IPOs ever ($45mm) Hiland Partners
    • A short 19 months later, Hiland Holdings GP, LP (HPGP) priced its IPO. HPGP owned L.P. and G.P. Interests (and IDRs) in Hiland Partners (see deal gift pictured below)
    • It was (and for now, it still is) the quickest GP IPO post MLP IPO
    • In June 2009, Hiland Partners and HPGP announced that it would be taken private by Harold Hamm, Hiland at $7.75/unit and HPGP at $2.45/unit
    • Speculation is that at some point Hamm’s midstream business might go public again someday, and it may even continue to be called Hiland


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