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February 12, 2017

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Week Thoughts: MLP Recovery One Year In

MLPs were little changed this week overall, finishing down 0.4% overall, for a nice round 7.5% total return for the year overall, well ahead of the S&P 500, utilities and oil prices.  Oil prices were volatile this week, but remain comfortably above $50/bbl.  Gas prices remain above $3.00/mmbtu, but with much less of a cushion than at the beginning of the year.
Weekly_2-10-17
Time Has Passed
We are now getting to the fun part of the recovery, where the most painful point of the collapse is a full year behind us, and the pain is starting to fade (but the lessons learned are still front and center).  The MLP Index is up 77% year over year as of Friday, and the Cushing 30 of just midstream names equal weighted is up 92% not including distributions.  Both are up less than oil and propane prices at more than 100% each.  Staggering numbers that highlight the strong recovery, but also the violent selloff that preceeded it.
The sector continues to evolve and faces challenges to continue the recovery.  But, with this week’s post, I’m not going to whine about persistent equity overhangs, having to wait until the second half of the year for volumes to recover, or ongoing sub-1.0x distribution coverage for MLPs growing their distributions.
I’d rather pause and reflect on the positive.  The health of the sector is massively improved from this time last year, with a significantly brighter outlook given the ramp in drilling activity and ongoing MLP consolidation and rationalization.  Also, the equity capital market is functioning much better, and debt capital markets are wide open.  And yet, valuations remain at reasonable levels, considering trough volumes for basins outside the core of the core onshore basins.
 
Winners & Losers
AM was the best performing midstream MLP this week, even with an equity offering, due to its downstream integrating joint venture with MPLX.  On the downside, the reality of another weak winter for heating is taking its toll on FGP and NGL, both of which have propane distribution businesses.
Top5Bottom5_2-10-17
NBLX didn’t make the top five this week, which may be a first for the year so far, but its chart remains one of the most incredible ever for an MLP in its first several months of trading.
Top5Bottom5_2-10-17_chart
YTD Leaderboard
Year to date, the two Teekay MLPs are both in the top 5, with TGP on top.  OKS dropped a bit this week, but remains the best performing big cap MLP, even though it won’t be an MLP much longer.  EEP remains an outlier on the downside, with no other MLP down more than 10%.
Top5Bottom5_2-10-17_YTD
Top5Bottom5_2-10-17_YTD_chart
General Partners and Midstream Corporations
GPs and midstream corps underperformed MLPs this week (just 3 were positive), and they remain a volatile group week to week (ENLC and PAGP went from best to worst this week).  PAGP way underperformed PAA this week, bleeding off much of the premium that it has maintained consistently since closing the simplification in late 2016.  ETE didn’t make the top 5 despite its recent run of positive news on pipeline approvals, perhaps weighed down by the shelf filing this week.
Top5Bottom5GPs_2-10-17
Top5Bottom5GPs_2-10-17_chart
News of the (MLP) World
Very heavy capital markets week for the MLP sector.  We had two equity offerings for around $300mm total that priced and traded well, and $3.6bn of senior notes.  $1.4bn of those notes went to refinance more expensive term debt, insulating balance sheets from interest rate increases.  The high yield market appears to have healed substantially from this time last year when energy credit spread blew out to levels not seen since the global financial crisis.  The ongoing recovery of the capital markets bodes well for MLPs.
On the M&A front, we got more cooperative play with a new JV between AM and MPLX, and repositioning of assets among WPZ and WES.
News-of-the-World
Capital Markets

  • Antero Midstream (AM) priced public offering of 6.0mm units at $33.00/unit, raising $198mm (press release)
    • Overnight offering, priced at 2.6% discount, and traded up 6.5% from pricing in the following session
    • Transaction upsized from 5.0mm originally offered
    • Tightest discount for an MLP offering since 2014 and best after-market performance for a public offering so far this year
    • The strong demand for the offering was the result of a significant strategic positive announcement and limited float that expands with the offering
  • Golar LNG Partners (GMLP) priced public offering of 4.5mm units at $23.00/unit, raising $103.5mm in gross proceeds (press release)
    • Overnight offering, priced at 6.2% discount, traded up 0.9% from pricing in the following session
  • Energy Transfer (ETE) filed S-3 to register up to $1bn of common units for sale (filing)
    • On top of $924.5mm in IDR subsidies through 2019, it appears ETE may opt to raise equity as well to alleviate pressure on the complex
  • MPLX LP (MPLX) priced offering of $2.25bn of senior notes (press release), including:
    • $1.25bn of 4.125% notes due 2027 at 99.834% of par
    • $1.0bn of 5.200% notes due 2047 at 99.304% of par
  • Summit Midstream (SMLP) priced offering of $500mm of 5.75% senior notes due 2025 (press release)
    • Proceeds will be used to purchase all of SMLP’s outstanding 7.50% senior notes due 2021 and to pay down portion of revolving credit facility
  • Amerigas (APU) priced offering $525mm of 5.75% senior notes due 2027 (press release)
    • Proceeds will be used to repay its 7.00% senior notes due 2022
  • Suburban Propane (SPH) priced offering of $350mm of 5.875% senior notes due 2027 (press release)
    • Proceeds will go towards repaying all of its 7.375% senior notes due 2021

Growth Projects / M&A

  • MPLX announced formation of 50/50 joint venture with Antero Midstream (AM) for incremental processing and fractionation in the Marcellus Shale (press release)
    • AM agreed to contribute its processing dedication for 195k Antero Resources acres and $155mm in cash
    • MPLX agreed to contribute the next three processing plants at the Sherwood processing complex currently being developed
    • The JV will also own fractionation capacity at the Hopedale complex in Ohio supported by Antero and other producers
  • US Army officially granted easement to Dakota Access Pipeline (press release)
    • The decision came a day after the Secretary of the Army terminated the NOI to perform an EIS
    • Easement allows Energy Transfer (ETP) to complete the sale of a 37% interest in DAPL to Enbridge and MPLX and draw on the remaining project financing
  • Western Gas (WES) announced an acquisition of 50% interest in Delaware Basin Gathering System (DBJV) from Williams Partners (WPZ) (press release)
    • WES will acquire WPZ’s 50% non-operated interest in the DBJV in exchange for WES’s 33.75% non-operated interest in two natural gas Marcellus gathering systems and $155mm in cash
    • WPZ is also selling a 33.3% interest in a Delaware Basin processing plant to Anadarko (APC), WES’s sponsor, for $45mm
    • No EBITDA multiples were provided, but the net of the transactions is WPZ is selling higher growth assets in the Permian and buying higher cash flow assets in the Marcellus
  • FTC granted antitrust clearance for transaction involving MPLX and Enbridge Energy Partners (EEP) (FTC notice)
    • The sale of the Ozark Pipeline to MPLX is estimated to generate $300-350mm of proceeds for EEP

Other

  • More producer consolidation in top tier basins:
    • Parsley Energy (PE) acquired $2.8bn worth of acreage in Midland Basin from Double Eagle Permian, LLC (press release)
    • EQT Corporation (EQT) won a bankruptcy auction to acquire 53,400 core net Marcellus acres (press release)
      • The West Virginia acres, sold for $527mm from Stone Energy, include 174 Marcellus wells and 20 miles of gathering pipeline
      • Limited midstream implications for EQM for now, but EQT might re-negotiate agreements with WPZ like it did with Statoil acreage to get EQM a bigger piece of the pie

Distribution Announcements
Distribution announcements_2-10-17
 

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